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Founder Replacement and Startup Performance

Ewens, Michael and Marx, Matt (2018) Founder Replacement and Startup Performance. Review of Financial Studies, 31 (4). pp. 1532-1565. ISSN 0893-9454. doi:10.1093/rfs/hhx130.

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We provide causal evidence that venture capitalists (VCs) improve the performance of their portfolio companies by replacing founders. Using a database of venture capital financings augmented with hand-collected founder turnover events, we exploit shocks to the supply of outside executives via 14 states’ changes to non-compete laws from 1995 to 2016. Naive regressions of startup performance on replacement suggest a negative correlation that may reflect negative selection. Indeed, instrumented regressions reverse the sign of this effect, suggesting that founder replacement instead improves performance. The evidence points to the replacement of founders as a specific mechanism by which VCs add value.

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Additional Information:© 2017 The Author. Published by Oxford University Press on behalf of The Society for Financial Studies. Received January 16, 2016; editorial decision August 3, 2017 by Editor Francesca Cornelli. We recognize the support of the Kauffman Junior Faculty Fellowship. We thank John Bauer, Russell Beck, David Denis, and Matthew Rhodes-Kropf; the participants at the Duke Strategy Conference, Duke Finance department, Georgia Tech strategy department, the Northeastern entrepreneurship department; and the NBER Entrepreneurship Working Group for their comments. The VentureSource data were provided by Correlation Ventures, to which Ewens is an advisor and investor.
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Kauffman Junior Faculty FellowshipUNSPECIFIED
Issue or Number:4
Classification Code:JEL: L26; G24; G34; M12
Record Number:CaltechAUTHORS:20180319-140841345
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Official Citation:Michael Ewens, Matt Marx; Founder Replacement and Startup Performance, The Review of Financial Studies, Volume 31, Issue 4, 1 April 2018, Pages 1532–1565,
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:85363
Deposited By: Tony Diaz
Deposited On:26 Mar 2018 22:18
Last Modified:15 Nov 2021 20:28

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