Saturday, February 6, 2016

The Myth Of The Founder Who Could Be Replaced Early On

It is not uncommon for venture capitalists to replace a startup founder with an experienced CEO. Typically this happens during the rapid growth phase in the startups life when the original founder does not ‘scale’ to manage the larger business.

Disconnecting ideas and founders may succeed after initial viability and desirability have been proven. But replacing a founder before achieving product/market fit (PMF) leads to disaster. If the initial idea is just average, the absence of a great founder almost certainly ensures that improving on the initial idea will not happen. Handing over the idea to a hired manager results in the well studied principal - agent problem.
The two archetypical examples where investors have uncoupled ideas and founders before product/market fit have resulted in below average returns
  • In the 1990s, venture capitalists funded ideas irrespective of founders. Management consultants produced reams of powerpoint decks for new startup ideas, and investors went on a binge to found these ideas.  

  • At large companies, new ideas which originate from one inventor are often handed over to another team to execute before product market fit has been achieved. Except for incremental innovations, the typical outcome has been business failure and has been well researched and documented in the Innovator’s Dilemma.

Theoretically, an investor could bet on the initial idea and on the market at the expense of the team, subscribing to the hypothesis that great markets always win.

I don’t know of any examples when this worked in practice. Do you?

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