When A Company Founder Is Replaced - What Are The Outcomes?

Research and analysis from Bouchard Fintech
For a variety of reasons, companies may choose to raise funds and seek capital infusion into their businesses. Some of those reasons include the need for capital investments, research, development, new equipment, and hiring of additional staff. At times the need for capital is urgent due to external market forces and where the infusion of added capital can be a make it or break type of situation. Still, the added funds may bring with them a different set of problems. This is especially noticeable when the funds are from a venture fund.
Often times, a company seeking capital is led by its founder. More often than not, the founder is the one that had the vision and is the one that worked hard to bring the company from an initial idea stage to where it is established as a going concern. With the injection of capital, financial problems may be addressed, at least in the short term, but other problems may arise. Founders, who may have been sole owners or majority shareholders, suddenly find themselves in a weakened position and their ownership percentage significantly lower. For some, it may mean the end of the road as the venture partners seek other professionals to manage the company.
Bouchard Fintech has taken a closer look. The research has shown that a fair portion of company founders end up being replaced post financing. In some cases, founders of companies that raise funds with venture capital get replaced 25% of the time. Venture capital partners are usually more focused on getting a return on their investment and they are typically not too interested in projects that will only yield profits many years down the road. Ideally, venture capital partners are looking for rapid growth, huge profits and major improvements in share values. Habitually, venture capital is seeking a profitable exit strategy. They may be very keen on seeing the company, that they invested in, either acquired or go public.

This brings us to the question: What happens when a company founder is replaced?

Interestingly, the research shows that when a company founder is replaced, the results tend to show that a company will not do as well. However, that is taking the pulse of the company very soon after the founder is replaced. Additionally, many founders are replaced when their companies are not doing well to begin with. Meaning that the company was not doing well before, during and after the founder was replaced. As such, replacing a company founder may end up being good for a company but many factors affect the eventual outcome. What if an average manager is replaced by a brilliant one? But, what if an average manager is replaced by one that is even worse?

A notable challenge has been identified and it has to do with finding professionals from the same field of business. At first that may sound simple enough but a closer look has revealed that for many executives their non-compete clauses, in their employment agreements, would exclude them from accepting a position at a competing company. This factor is so significant that in places where non-compete clauses are less strict, the data would tend to show more executives being replaced.

In the end, a company may be forced to hire a professional from another field, possibly one that has at least some key business similarities.

Studies have found that by changing their founder, companies, on average, tend to do a little better. In fact, one study showed that, on average, a company tends to do at least 10% to 15% better after the founder is replaced. In some studies, the profitability of companies that have had their founders replaced jumped by as much as 25%.

Additional factors gleaned by Bouchard Fintech shed some interesting statistics. Companies that replaced their founder but kept the founder at the company, in some other capacity, tended to be negatively impacted. In some cases, the presence of the founder caused divisions in the company and in other cases founders tended to create more problems than they solved.

In conclusion, companies that seek venture capital should be forewarned about the fact that their founders may well be replaced. Still, for many company founders, the fact that they will eventually be replaced is well understood. For some, they welcome the opportunity to grow their businesses, achieve greater success with the new venture capital and see their idea blossom and mature. For many, the fact that they will get replaced comes with a silver lining in the form of significant financial rewards and higher valuations for the company that they founded.
Written by Bouchard Fintech

Finance

info@bouchardfintech.com

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This release was published on openPR.