How much do individual entrepreneurs really matter to their firm’s performance? We intuitively suspect and anecdotally hear about how hugely important the individual entrepreneur is to a firm. A working paper by Sascha O. Becker and Hans K. Hvide, “Do Entrepreneurs Matter?” (available here) puts some numbers and analysis behind intuition.
Becker and Hvide look at roughly 65,000 Norwegian firms established between 1999 and 2007, in particular studying firms where the entrepreneur dies before 2009 (so firms are between zero and eleven years old in this sample). In this case, an entrepreneur is defined as an owner with at least 50 percent ownership, though most of the analysis focuses on entrepreneurs with more than 50 percent ownership (341 instances).
They find that firm performance drops significantly after an entrepreneur’s death relative to other similar firms that do not experience a death event: on average, four years after an entrepreneur’s death, sales drop by about 60 percent, employment drops by about 17 percent, and firms have 20 percent lower survival rates two years after the entrepreneur’s death. The effects appear to be long lasting and firms show no signs of recovering from them.
We can say with some certainty that there is causality here—that the entrepreneurs have a causal effect on the growth of the firm—because the authors conduct a series of robustness checks to address many potential questions about the strength of their findings.
No significant differences:
- Are the negative effects of an entrepreneur’s death only for firms that were performing poorly and would have had poor performance anyways? No, the effects occur for firms across all levels of pre-death performance.
- Are the negative effects of an entrepreneur’s death temporary (i.e. a period of turbulence and then return to normal)? No, the immediate effects are small relative to sustained effects that accrue over time.
- Do more mature firms fare better; does the age of firm matter? No, the negative effects are largely independent of the age of the firm, although more mature firms fare slightly better with survival rates.
- Does the age or gender of the founder matter; does the death of an older founder (60 years or older at founding) have less of effect? No significant differences are found.
- Do family firms fare better or worse; does it matter if the entrepreneur was married? No significant differences are found.
- Do firms in urban areas, with a greater and denser supply of entrepreneurs, which could serve as replacements, differ from firms in rural areas? No.
- Does the size of the firm matter? Only minor differences are found for small firms relative to large firms.
- Is the reverse happening: does poor firm performance lead to the entrepreneur’s death? The authors do not have data about the health of the entrepreneur or cause of death. However, they can compare the pre-death performance between firms that experience a death and those that do not and find there are no pre-death differences in performance. This suggests that death comes unexpected or that health issues are not significant enough to affect firm performance.
- Does the firm having team ownership matter? Yes, negative effects of the death of an entrepreneur still occur but are lessened. When Becker and Hvide lower look at owners with just a 50 percent share (204 instances) or a less than 50 percent share (495 instances), they find similar negative effects, but just less severe. For 50 percent owners, the effects are about half as large relative to greater than 50 percent owners (majority owners; the main analysis); for less than 50 percent minority owners, the effects are quarter the size of the case of majority owners.
- The loss of greater levels of human capital has a more pronounced negative effect. The death of entrepreneurs that are highly educated (more than 12 years of formal education) have greater negative effects relative to other entrepreneurs; firms that are in sectors that have on average a higher education level experience greater negative effects from a death event relative to firms in other sectors.
Getting back to the main findings, the authors do not know why there is such a stark difference between the drops in sales (60 percent) versus employment (only 17 percent). They suggest as one possibility that the entrepreneur has spillover effects on employee productivity which would hurt sales proportionately more (i.e. leadership in sales, or was a great salesperson), but don’t have strong evidence to present. This will be an area for future research.
I think this research serves as a precautionary tale to startups that will unfortunately face unexpected life events. Besides an entrepreneur’s death, other unexpected life events could see an entrepreneur suddenly removed from their firms. I am not convinced this research extrapolates to founder removal due to internal firm conflicts where a decision is made (either by majority of co-founders or investors), because those decisions are made by choice.