Horses with Dead Jockeys

Is founder involvement integral to a company’s success, or is his primary contribution found in the company’s very formation? It’s the old horse vs. jockey argument, and has been taken in a new direction by Hans Hyde of the University of Aberdeen Business School.

Hyde examined a sample of 6,800 companies formed in Norway between 1996 and 2003, which led to a set of approximately 12,500 unique founders. He then broke the founder sample into two sets: Founders alive at the end of 2005, and those who were dead.

For starters, Hyde found that 181 such founders fell into the expired category. Apparently one takeaway is that entrepreneurs have a 1.7% chance of dying less than a decade into their company’s formation. That might sound morbidly high for twentysomethings in Silicon Valley, but the majority of Hyde’s Norwegian entrepreneurs was over 40.

Moving on, Hyde found that companies with deceased founders underperformed those with living founders – but just barely. The former was five percentage points less likely to be in business four years after formation, while the results are even six years out. There also was no statistically significant difference in annual OROA (operating returns on assets). Hyde suggests that such minor differentiation could mean that a founder’s death is more likely to cause an “adjustment cost” than a cataclysm.

He also considers that his initial study was unduly influenced by the existence of absentee founders, or minority holders. So he also did a sub-study of majority shareholder founders. The upside is that majority shareholders are slightly less likely to die (1.2%). The downside (for founders) is that majority shareholding founders are still operationally disposable. The six-year survival rate for living majority shareholders is 61%, compared to 60% for dead ones. The OROA was the same as in the larger sample (8% compared to 6%).

Hyde concludes: “Founder death has only a slight average negative effect on firm performance.”

Download the full study here