When the going gets tough in a venture-backed startup, founders often find themselves on the chopping block: up to 18 percent of them are pushed out by the VCs who once supported them.

But do such draconian measures actually help a company’s performance? Founders have long been resistant to such measures, and top venture capital firms, including Andreesen Horowitz, often tout their founder-friendly cred.

A recent study coauthored by Questrom professor Matt Marx and California Institute of Technology’s Michael Ewens, however, suggests that VCs are typically making the right financial move when they ditch a founder.

To help illuminate the issue, Marx and Ewens dug into more than 20 years of data in a surprising area: state-based non-compete agreements. Depending on how such agreements are enforced, they can make it relatively easy—or remarkably difficult—to replace a founder. Marx and Ewens studied how startup companies perform when they’re essentially forced to stick with struggling founders instead of replacing them, and how companies perform when VCs have more or less free rein to replace the startup’s founder.  

The pair’s initial pass at the data suggested that VCs were making a mistake: a faltering company appeared to fare worse when VCs replaced the founder. 

But when Marx and Ewens used a more sophisticated regression with the data—recognizing that VCs typically replace founders when things are already going sideways, not when things are going well—the reverse proved to be accurate. By replacing a founder, VCs were more likely to be able to turn the company around in ways that allowed it to IPO or have a financially attractive acquisition.

Marx says that though the implications may be sobering to founders, they’re also essential for them to internalize. “For founders who want to give their company the greatest chance for success, what might be best for the founder personally might not be best for the company,” he says.

Read the complete study on Oxford Academic.

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