September 30, 2014

Stay Alive. It’s Good for Business

Default-Image-20

Entrepreneurs: here’s something to add to the list of things academics have found will enhance the performance of your business.

Staying alive.

In a bit of novel research coming out of the United Kingdom, Professors Sascha Becker of the University of Warwick and Hans Hvide of the University of Aberdeen compared 341 private Norwegian companies where the majority owner passed away within the first ten years of company founding with similar companies started at the same time in which the owner remained alive. They found that the companies where the entrepreneur died performed worse in subsequent years.

The analysis showed that the companies whose founders passed away were 20 percent less likely than the others to be in operation two years later. Moreover, four years after the entrepreneur’s death, those companies whose founders had perished had only 40 percent of the sales of the businesses whose owner-operators were still kickin’.

The authors figured out that poor company performance didn’t kill the founders. (We await some other enterprising academics to explore that question!) The sales and employment of the companies whose founders passed on were just as good as the others before the entrepreneurs died. The death of the founder was the cause of the company’s problems, not the other way around.

The adverse effects of the founder’s demise weren’t the same for all businesses. The performance drops triggered by the founder’s passing were worst for the youngest companies and for the businesses where the deceased entrepreneur had a large ownership stake.

In short, the study shows clear evidence that entrepreneurs matter for the performance of their companies.

But how?

Unfortunately, this study doesn’t tell us about the impact of entrepreneur death. However, other studies suggest the myriad of ways that entrepreneurs matter. In some cases, company founders are very good leaders. Their passing is problematic because it puts someone less charismatic in charge of the company.

In other cases, the entrepreneur is a great sales person. Without him or her, the company just isn’t as good at generating revenue.

In still other businesses, the founder has better control over costs or operations and keeps the business humming along more efficiently than those who follow in the CEO slot.

The performance decline documented in this study, however, needn’t have occurred because the founder was more talented than the people who followed him or her. The founder’s death could simply have disrupted the business in ways that made it hard for the companies to recover. Competitors might have swooped in and taken away customers while the firms were transitioning to new CEOs. Or creditors or suppliers might have become jittery and imposed stricter terms on the companies, raising their costs and hurting their performance.

You know, Apple’s stock price has dropped a lot since Steve Jobs passed away. Maybe that’s just the typical performance effect these authors found, just with a lot more zeros tacked on.

6 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

6 Reactions

  1. Scott,

    This is an interesting finding, especially with the emphasis in business to network, build sustaining systems within a business, and the idea to “work on your business, not in your business”, so to speak.

  2. Scott,

    Very interesting. Trying to ponder about the reasons, I come up with the idea that the deceased entrepreneur is the visionary of the company. Without vision, a company won’t be able to move forward.

    This also happens in succession planning – when the 2nd generation took over the leadership role of the company, it’s like that the sales will decline and morale will be all-time low. I don’t have stats to back this, but I’ve seen enough in my community some examples with similar outcome – dropped sales, poorer performance.

  3. I can agree with this because most of the time the person that takes over is not properly qualified to not only maintain but let alone improve the business.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>



Compare your business to the industry - Try our new tool