Based on research by Yan "Anthea" Zhang and Salim Chahine

Key findings:

• Venture capitalists have a huge stake in ensuring the firms they fund are run efficiently.
• Venture capitalists also tend to have more IPO experience than your average entrepreneur.
• Venture capitalists who can closely monitor a startup may tolerate CEOs with less experience.
• But when a VC firm can’t watch a startup closely it’s more likely to change unseasoned leadership.

Consider the 21st century’s most storied CEOs: Steve Jobs, Bill Gates, Jeff Bezos. All have one thing in common – not only did they run their companies, they founded them. 

Each of these corporate leaders, in other words, had to deal with venture capital firms to find critical resources for their firm’s success. And it didn’t always end well. Jobs was famously fired when Apple’s board replaced him with the former CEO of a soft drink company – a disaster from which Apple took years to recover. 

Even if changing CEOs doesn’t always work out, however, it often does. And when VCs invest heavily in a company, they are proactive in making their investment pay off. Uber founder Travis Kalanick, for example, who cofounded the ride-sharing app Uber, was pressured to step down in 2017 after the company was rocked by scandals that included reported sexual harassment. 

Though Kalanick’s flameout drew global attention, being swapped out is actually commonplace for CEOs of startups, according to Rice Business Professor Yan “Anthea” Zhang. In a new study coauthored with Salim Chahine of the American University of Beirut, Zhang examined data on 1,156 venture-capital-backed U.S. initial public offerings between 1995 and 2013. Out of this sample, they found that 472 firms, or 40.8 percent, changed CEOs between the first round of venture capital financing and the IPO.

Venture capitalists often have strong reasons for swapping a CEO out, Zhang notes. Guiding a company from its startup phase to the initial public offering requires a huge learning curve. Attention must be paid to human resources, efficiency, public relations – hurdles that can stymie even the most successful startup leaders. Just as in public companies, CEO deficiencies in these areas can harm a company’s IPO success and its stock value after the IPO.

A range of other factors, some subtle, lie behind VC decisions to change startup leadership, the researchers found. Distance between the startup and the venture capital firm’s headquarters is one such factor. If a New York VC firm funds a company in Nevada, monitoring the day-to-day work of the startup is more difficult and costly than if the venture capital firm is based in California.

A CEO directly appointed by a venture capitalist is more likely to be seen as the venture capital firm’s agent, allowing the VC firm to directly control the startup, the researchers write. Overall, VC firms unable to closely monitor the startups they funded were more likely to look for new leadership.

The CEO’s past experience, described by the researchers as “human capital,” is also pivotal. A CEO who has successfully led a prior IPO is much less likely to be replaced than one who hasn’t been through the experience, Zhang’s team found. Similarly, a CEO with finance/accounting experience, an MBA, or a graduate level degree is likely to be seen as more credible than one who lacks such experience or degree. 

Chaotic as it might seem to swap horses midstream, replacing a CEO for one with more experience and education correlates to a better valuation of the public offering, the researchers found. 

These findings are particularly timely now, in the era of COVID-19. As businesses turn to Zoom and other remote techniques, VCs may be questioning more than ever how well they can monitor their investments without frequent site visits and in-person meetings. Building a company has always been a heavy lift. When your funder can only measure your work through a screen, surviving as a startup CEO may be tougher than ever.

Chahine, S. & Zhang, Y. A. (2020). "Change gears before speeding up: The roles of Chief Executive Officer human capital and venture capitalist monitoring in Chief Executive Officer change before initial public offering," Strategic Management Journal. 41(9): 1653-1681.

Owl Have You Know

Season 1, Episode 11

Will Robertson ’05, Managing Member of Quintana Infrastructure and Development LLC, talks about investments ranging from energy and natural resources to data and infrastructure industries. Along the way, Will talks about philanthropy and why “if you’re not moving, you’re killing grass.”

Subscribe to Owl Have You Know on Apple Podcasts, Spotify, Youtube or wherever you find your favorite podcasts.

A year ago I was in your shoes — passionate about my career and eager to take the next step in my professional development. Becoming a Rice Business student had been a goal of mine since I moved to Houston, but I hadn’t made the leap to apply. Last year’s Women’s Preview Weekend, a series of women's leadership events, was just the nudge I needed to trust the process and submit my Rice MBA application.

It began with the Women in Leadership Conference (WILC), where I spent an inspiring day hearing from accomplished speakers, participating in meaningful breakout sessions, and networking with fellow attendees. (I enjoyed this experience so much that I joined the WILC Planning Committee to organize this year’s virtual event.)

I went home thinking, “Could this get any better?” and sure enough, day two delivered detailed information sessions regarding the application process and the student experience, faculty and student panels, and tours of both McNair Hall and the Rice campus. Best of all, I got to know other women just like me, with their own stories, experiences, interests, and desire to pursue something more.

Applying to Rice Business was the best decision I made in 2020. I can tell you now as a member of the Class of 2022 that the Women’s Preview Weekend was the turning point for me in realizing that I couldn’t wait another year to apply, join this community and begin making my mark at Rice. If you’re looking for a sign, this is it!

From one future female business leader to another, I encourage you to join us for Women’s Preview Weekend this February. YOU are ready!

Explore the Rice MBA

Owl Have You Know

Season 1, Episode 10

Scott Noel, BS ’02 and MBA/MEE ’04, Director of Enterprise Solutions at One Acre Fund, talks about how a single donation to a Sudanese refugee inspired him to move to Nairobi. He also discusses his current work, supplying smallholder farmers with the financing and training they need to grow their way out of hunger and poverty.

Subscribe to Owl Have You Know on Apple Podcasts, Spotify, Youtube or wherever you find your favorite podcasts.

HOUSTON – The MBA@Rice program at Rice University’s Jones Graduate School of Business is No. 9 on U.S. News & World Report’s Best Online MBA Programs rankings for 2021.

Rice Business also earned the No. 6 spot among the best online MBA programs for veterans and the No. 11 spot for business analytics in an online MBA.

U.S. News & World Report used five categories in ranking programs: quality of engagement, opinion surveys, faculty credentials and training, student services and technologies, and student excellence.

Intentionally small class sizes and a vibrant entrepreneurship ecosystem set MBA@Rice apart, according to Rice Business Dean Peter Rodriguez.

“All courses at Rice Business are taught by a team of dedicated, nationally recognized faculty who integrate insights from their own rigorous, peer-reviewed research to help students understand topics in accounting, finance, marketing, organizational behavior and strategy in the context of today’s business landscape,” he said. “Today’s rankings are a reflection of the school’s commitment to excellence in teaching and serving our students.”

Successful business leaders master a blend of creativity collaboration and real-world know-how, Rodriguez said, and MBA@Rice is built on the same combination of innovation and practicality – MBA@Rice prepares students to work, communicate and present work in an increasingly digital world.

Learn more at https://onlinebusiness.rice.edu/.

Owl Have You Know

Season 1, Episode 9

Rob Gaudette ’01, senior vice president of Business Solutions with NRG Energy digs into what it was like transition to the corporate world from the military and what he’s learned about leadership. He ends with what he what he sees for Houston’s future as the energy capital of the world.

Subscribe to Owl Have You Know on Apple Podcasts, Spotify, Youtube or wherever you find your favorite podcasts.