houston voices

Houston research: Why venture capital firms might change a startup's leadership

Here's what factors a VC will consider when evaluating a startup's leadership, according to Rice University research. Photo via Getty images

Consider the 21st century's most storied CEOs: Steve Jobs, Bill Gates, Jeff Bezos. All have one thing in common – not only did they run their companies, they founded them.

Each of these corporate leaders, in other words, had to deal with venture capital firms to find critical resources for their firm's success. And it didn't always end well. Jobs was famously fired when Apple's board replaced him with the former CEO of a soft drink company – a disaster from which Apple took years to recover.

Even if changing CEOs doesn't always work out, however, it often does. And when VCs invest heavily in a company, they are proactive in making their investment pay off. Uber founder Travis Kalanick, for example, who cofounded the ride-sharing app Uber, was pressured to step down in 2017 after the company was rocked by scandals that included reported sexual harassment.

Though Kalanick's flameout drew global attention, being swapped out is actually commonplace for CEOs of startups, according to Rice Business Professor Yan "Anthea" Zhang. In a new study coauthored with Salim Chahine of the American University of Beirut, Zhang examined data on 1,156 venture-capital-backed U.S. initial public offerings between 1995 and 2013. Out of this sample, they found that 472 firms, or 40.8 percent, changed CEOs between the first round of venture capital financing and the IPO.

Venture capitalists often have strong reasons for swapping a CEO out, Zhang notes. Guiding a company from its startup phase to the initial public offering requires a huge learning curve. Attention must be paid to human resources, efficiency, public relations – hurdles that can stymie even the most successful startup leaders. Just as in public companies, CEO deficiencies in these areas can harm a company's IPO success and its stock value after the IPO.

A range of other factors, some subtle, lie behind VC decisions to change startup leadership, the researchers found. Distance between the startup and the venture capital firm's headquarters is one such factor. If a New York VC firm funds a company in Nevada, monitoring the day-to-day work of the startup is more difficult and costly than if the venture capital firm is based in California.

A CEO directly appointed by a venture capitalist is more likely to be seen as the venture capital firm's agent, allowing the VC firm to directly control the startup, the researchers write. Overall, VC firms unable to closely monitor the startups they funded were more likely to look for new leadership.

The CEO's past experience, described by the researchers as "human capital," is also pivotal. A CEO who has successfully led a prior IPO is much less likely to be replaced than one who hasn't been through the experience, Zhang's team found. Similarly, a CEO with finance/accounting experience, an MBA, or a graduate level degree is likely to be seen as more credible than one who lacks such experience or degree.

Chaotic as it might seem to swap horses midstream, replacing a CEO for one with more experience and education correlates to a better valuation of the public offering, the researchers found.

These findings are particularly timely now, in the era of COVID-19. As businesses turn to Zoom and other remote techniques, VCs may be questioning more than ever how well they can monitor their investments without frequent site visits and in-person meetings. Building a company has always been a heavy lift. When your funder can only measure your work through a screen, surviving as a startup CEO may be tougher than ever.

------

This article originally ran on Rice Business Wisdom and is based on research from Yan "Anthea" Zhang, the Fayez Sarofim Vanguard Professor of Management – Strategic Management at Jones Graduate School of Business at Rice University.

Trending News

Building Houston

 
 

A Houston expert outlines what startups and small business need to know about their communications strategy. Photo via Getty Images

Startup founders often focus on outward victories. However, if they look inward and get internal communications right, this can prioritize, inspire, and retain talent, which is the heart of the company.

Consistent internal communication helps employees to understand the company's core values and mission and the evolving internal policies and procedures — health care benefits, reorganizations, remote work — that accompany a young business. Investing in internal communications also supports external public relations efforts because the best company storytellers are well-informed employees.

Consider these tactics for effective internal communications.

Prioritize messaging

In any startup, internal procedures evolve as the company grows. Take control of the narrative while easing employees' minds by prioritizing internal messaging.

Whether transitioning to a more flexible work schedule, updating healthcare benefits, or rolling out a performance review process, planning messages in advance can help team members understand the change, the impact, and how they can contribute positively to the development.

Well-informed employees help mitigate uneasiness and tend to achieve business goals more quickly. Make sure to allow the employees time to reflect and react.

Support managers

Leaders and mid-level managers play an integral role in internal communications by cascading information throughout the organization. They regularly engage with their employees, so it is important that managers feel confident and supported in their communication skills.

Managers can benefit from a common company language, talking points, or communications training for more effective and productive conversations. By identifying, clarifying, and reinforcing common goals and key objectives for managers, companies can strengthen productivity and eliminate confusion, especially if the company changes teams' roles and responsibilities.

Be consistent

Make sure that the drumbeat remains steady, whether this includes a monthly town hall meeting or weekly CEO emails. Since communication is not necessarily one-size-fits-all, use a communication approach tailored to the workforce.

For example, there might be more effective communication methods than email for employees not behind a desk. As a smaller company, take that time to connect with the team directly because as the company swells, that one-on-one experience will become increasingly difficult to manage.

Listen to employees

Delivering top-down messaging that resonates with the workforce remains critical. However, internal communication is a two-way street.

Allow team members to give valuable feedback. Encourage team members to share their thoughts about the company, concerns, and how to improve communications. Issue internal surveys or hold face-to-face meetings to gain useful insight.

Understanding these critical proof points will enable more effective communication and quick action on any issues.

Be a human

Keep humanity at the heart of internal communications. Amid the company's transition, maintain transparency and recognize the emotional toll some changes can have on teammates. The best talent will remain when they feel connected, informed and listened to.

Greater employee engagement can help build a strong company culture of accountability, authenticity and communication, setting up the business for bigger success.

------

Melanie Taplett is a communications and public relations consultant for the technology, energy, and manufacturing industries.

Trending News