Every would-be entrepreneur wants to be a Bill Gates, a Phil Knight, or an Anita Roddick, each of whom founded a large company and led it for many years. However, successful CEO-cum-founders are a very rare breed. When I analyzed 212 American start-ups that sprang up in the late 1990s and early 2000s, I discovered that most founders surrendered
management control long before their companies went public. By the time the ventures were three years old, 50% of founders were no longer the CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies initial public offerings. Other researchers have subsequently found similar trends in various industries and in other time periods. We remember the handful of founder-CEOs in corporate America, but theyre the exceptions to the rule.
Founders dont let go easily, though. Four out of five entrepreneurs, my research shows, are forced to step down from the CEOs post. Most are shocked when investors insist that they relinquish control, and theyre pushed out of office in ways they dont like and well before they want to abdicate. The change in leadership can be particularly damaging when employees loyal to the founder oppose it. In fact, the manner in which founders tackle their first leadership transition often makes or breaks young enterprises.
The transitions take place relatively smoothly if, at the outset, founders are honest about their motives for getting into business. Isnt that obvious, you may ask. Dont people start a business to make pots of money? They do. However, a 2000 paper in the Journal of Political Economy and another two years later in the American Economic Review showed that entrepreneurs as a class make only as much money as they could have if they had been employees. In fact, entrepreneurs make less, if you account for the higher risk. Whats more, in my experience, founders often make decisions that conflict with the wealth-maximization principle. As I studied the choices before entrepreneurs, I noticed that some options had the potential for generating higher financial gains but others, which founders often chose, conflicted with the desire for money.
ExhibitTitle The Trade-Off Entrepreneurs Make
ExhibitCaption Founders choices are straightforward: Do they want to be rich or king? Few have been both.
The reason isnt hard to fathom: There is, of course, another factor motivating entrepreneurs along with the desire to become wealthy: the drive to create and lead an organization. The surprising thing is that trying to maximize one imperils achievement of the other. Entrepreneurs face a choice, at every step, between making money and managing their ventures. Those who dont figure out which is more important to them often end up neither wealthy nor powerful.
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