Founder/Chief Executive Officer Exit: A Social Capital Perspective of New Ventures

The founder/chief executive officer (CEO) exit is a significant event for all business organizations. However, a social capital perspective suggests that the exit of the founder/CEO may be more disruptive for new start-ups due to the critical role the founder/CEO plays in the new organization and the heightened potential chance for failure of a new venture. A social capital perspective suggests that the ability of the entrepreneurial firm to perform better is affiliated with the social capital within the organization. This study supports a social capital perspective of CEO exit and social capital's impact on performance. It helps establish a foundation of study of CEO exit and new ventures from this perspective. Introduction There has been a wide variety of research that has examined the impact of the departure of a chief executive officer (CEO) on firm performance (Jayaraman et al. 2000; Begley 1995; Daily and Dalton 1992). The evidence from these various streams of research has not provided a consistent set of findings (Jayaraman et al. 2000). Entrepreneurial start-ups present the opportunity to provide fresh insight on CEO turnaround by examining a setting where the performance impact of CEO exit is particularly profound; the impact of CEO exit is enhanced because there is a general absence of slack resources to help the organization overcome the CEO exit. However, to date, the impact of CEO exit from the perspective of entrepreneurial new ventures has not been extensively examined. This paper will examine such ventures, and how new ventures are able to respond to the loss of the CEO, from a social capital perspective, to understand how new ventures can successfully navigate such issues. A founder/CEO of a new venture is critical to that venture not only for their leadership but also for the web of relationships that they build. Such relationships form a critical part of the organization's social capital. Such social capital can be important in dealing with suppliers, obtaining new customers or employees, and navigating regulation relevant to the new venture. In a large mature organization, there are a variety of individuals throughout the organization that can do such activities. However, in a new venture due to its less intense staffing, the focus of such activities is on the founder/CEO and other top managers. The importance of social capital in new ventures to perform such activities has been discussed as part of the ability of the new firm to overcome its liability of newness (Li and Guisinger 1991; Freeman, Carroll, and Hannan 1983). Thus, when a founder/CEO leaves the new venture, the impact can be particularly dramatic because it directly impacts the social capital of the organization. To date, however, there has not been an extensive empirical effort to understand the role of social capital in CEO exit for either mature or new ventures. New ventures, in the same way as more mature businesses, have the potential to respond and seek to compensate for the loss of the CEO. In a new venture, however, the response to such a loss can also more immediately be examined because the new venture has less slack in the organization, which can be redirected to cover such a loss. Thus, it is more directly discernable when the new venture seeks to aid individuals with social capital to offset that lost when the founder/CEO left the organization. It could be expected from a social capital perspective that those organizations that are able to mitigate the loss of social capital will outperform those firms that are unable to do so. Therefore, this study also examines the mitigating factors available to the new venture to offset the loss of social capital associated with the loss of the founder/CEO. This empirical study will make three contributions to the literature. First, the paper provides fresh insights on the impact of the loss of a CEO in an environment where such an activity is particularly critical. …