Frontiers of Entrepreneurship Research 1994

Frontiers of Entrepreneurship Research


Abstracts from the 1994 Edition


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    CEO DISMISSAL AND THE ROLE OF THE VENTURE CAPITALIST

    Garry Bruton

    University of Tulsa
    College of Business
    Tulsa, Oklahoma 74104

    Telephone
    (918) 631-2476

    Fax
    (918) 631-2142

    Vance Fried

    Oklahoma state University
    College of Business
    Stillwater, Oklahoma 74078

    Robert Hisrich

    Case Western
    Weatherhead School
    Cleveland, OH 44106

    Introduction
    In the venture backed firm, it is commonly recognized, the venture capitalist plays an active role in the management of the firm. This active role is typically larger than that associated with a member of the board of directors in a mature firm. However, despite the Recognition of this expanded role researchers are yet to significantly investigate it. Particularly, the nature of one of the most significant actions that a board of directors of a venture backed enterprise can take, the replacement of the CEO' has yet to receive any significant investigation. This paper will fill that void by examining the nature of the motivations for venture capitalist seeking to replace a CEO, who the venture capitalist then typically seeks out as a replacement for the CEO, and the impact on the venture's performance of the replacement.

    Methodology
    As part of a larger study the researchers surveyed by mail 383 venture capitalists in the United states. An initial 51 responses were received. A second survey request was then sent to all non-respondents which produced 17 additional surveys. An examination between the results of the two waves of surveys demonstrated no significant differences between the responses of the two groups. The sample of 68 useable surveys represents a response rate of 18 percent. However, the specific study here is concerned with the replacement of CEOs by the venture capitalist. Thus, it was further required that the VC had been involved the last three years in replacing a CEO at venture backed enterprise on which they served as a board member. This reduced the sample of 68 respondents to a final sample of 53 venture capitalists. The survey instrument was developed to address three central questions: first, what was the reasons for the dismissal of the CEO; what was the nature of the individual which replaced the CEO, and what was the impact on firm performance of replacing the CEO. In developing the survey it was assumed that the CEO would be replaced for either not performing or performing incorrectly some activity valued by the venture capitalist. Mintzberg (1975) argued that a manager of an established organization had interpersonal, informational, and decisional roles that had to be fulfilled to be successful. The role of the venture capitalist is unique from that of a manager of a mature firm. Therefore, building on Mintzberg's initial identification of 10 different aspects of the three roles the researchers developed a list of 17 activities conducted by the CEO of a venture backed enterprise. To validate this list of activities they were presented to two academics familiar with entrepreneurship but unfamiliar with the research. They each accepted the list as an acceptable summary of the activities conducted by the CEO of a venture backed enterprise. The survey asked the respondents to evaluate these seventeen activities on a Likert type scale from 1 (unimportant) to 7 (very important). The respondents were then asked to identify from the seventeen activities the three areas of CEO shortcoming that lead to their dismissal. The survey also ask the respondents to identify where the individual chosen to be the new CEO came from (inside the venture, outside the venture but from the same industry, outside the venture's industry). Finally, the survey asked the respondent to summarize the impact of the new CEO on the firm. Again a Likert type scale was employed, 1 was a strong negative impact, 4 no impact, and 7 strong positive impact.

    Results
    Table 1 summarizes the importance of various activities on the success of the new venture from the perspective of the venture capitalist. A review of the table illustrates that the most important activity in the success of the firm is the ability of the CEO to make Strategic Decisions. There then follows four activities that are approximately the same in importance, staffing the firm, motivating the employees, Dealing with crisis, and Strategic Planning. However, in reviewing the last column of Table 1, those activities whose failure lead to CEO dismissal, several differences are noted. The failure to make adequate strategic Decisions leads again as the principal activity. Additionally, motivating employees is prominent in its identification by the venture capitalist. However, the inability of the CEO to adequately allocate resources and to work with Board have a far greater impact on the dismissal of the CEO than their relative importance to the success of the new venture would indicate. Additionally, the inability to Deal with crisis was rated far less important in dismissing CEOs than was would have been thought from its rating an the impact of the success of the new venture. The replacement for the CEO came most often from the same industry but from outside the firm (49% of time). The next most common source of the new CEO was another employee from the venture (26% of time). However, obtaining the CEO from outside both the venture and the dominant industry of the venture was utilized almost as frequently (25% of time). The replacing of the CEO was found to have only a marginally positive impact on the new venture. The mean response of the impact of the new CEO on the venture was 4.9 cn a 7 Doint scale with 4 being no impact and 7 strong positive impact.

    Discussion
    This study has gathered for the first time information on the nature of the replacement of the CEO by the venture capitalist in a venture backed firm. It has been known that the venture capitalist in such venture typically plays an active role. The most obvious evidence of that role is in the replacement of the CEO. However to date, such activities have not been investigated. The evidence gathered here demonstrate "hat the ability of the CEO to make strategic decisions is critical. However, of equal importance in the survival of the CEO is the daily management of the firm including not only staffing the firm with good people but also working with the board and ensuring that the venture stays within its budget constraints.


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    Last updated November 19, 1996 by Cheryl Ann Lopez