What Is the Founder Effect?

Startups are often associated with their founders, both when they succeed and when they fail. That’s no surprise: the level of expertise, experience, and resources that a founder brings to a new venture has an enormous impact on the success of a startup from the outset. 

So what kind of impact does a founder have on a startup’s future? The answer depends on the value of a founder’s contribution to the business, their willingness to take risks, and their ability to make the best of new opportunities. Risk-taking is a fundamental part of running a startup, and it requires a certain type of person who is willing to face the consequences, both good and bad. 

Startup founders, in fact, are risk-takers by nature. Otherwise, they would not take on the risk of founding a startup to begin with. They have the kind of confidence and can-do attitude that is needed to persevere in a tough, competitive market despite any business uncertainty. But there are downsides to this as well. Founders can grow overconfident and resistant to outsider advice, choosing to make decisions on their own and shut down any disagreement. That kind of behavior can end up limiting the growth and prospects of a startup, and damage its brand and potential. This is where the Founder Effect comes into play. 

What is the Founder Effect? This article will provide a comprehensive answer by looking at the advantages and disadvantages of the influential role that founders play at startups. The article will then discuss strategies for dealing with the Founder Effect to help startups navigate the relationship between the founder and the business at large. 

Definition of the Founder Effect

The Founder Effect describes the impact that a founder has on the company that they started. Specifically, the Founder Effect highlights a founder’s influence on the company at the early stages, and the way that influence lingers on even after a founder has left the organization. This influence can have both positive and negative effects on a business.

In situations where a startup has two or more cofounders, the Founder Effect can occur as well. Cofounder conflicts can seriously impact a startup in ways that can undermine the organization and damage its reputation. In those circumstances, the Founder Effect happens when one founder has a greater influence on the organization than the other founders. 

The Founder Effect is closely related to the idea of the founder’s syndrome. The founder’s syndrome describes the difficulty that startups can face due to the disproportionate influence and power of the founder on the organization as a whole. That influence can have a positive impact by increasing creativity and productivity early on, but it can also become destructive, limiting growth and future prospects for the business and even undermining the entire organization. 

In many ways, the Founder Effect is an inevitable part of starting a business. Entrepreneurs invest a lot of time, resources, and energy into getting their business started, and it takes a lot of dedication and commitment to keep a startup going. Many founders bring an inspiring passion and charisma to their job, which can attract valuable talent to their team. 

On the other hand, complications can arise when a founder becomes too protective of their vision for the company and limits the potential of the startup so it can remain under their control. Some founders refuse to accept the reality that running a successful company requires a different set of skills and much more teamwork than founding a startup. 

If the consequences of the Founder Effect are left unaddressed, they can seriously undermine the future of the startup and lead to the breakup of the organization. 

Positive Aspects of the Founder Effect

The Founder Effect is often discussed in terms of its negative consequences, but there are also several positive aspects to it. Smaller and medium-sized businesses, including startups, benefit greatly from strong leadership that is focused and concentrated. The team at such organizations tends to be tight-knit and in sync with each other, so that cooperation between the founder and others is easier to manage.

It’s also important to remember that the founder is responsible for the main idea behind the startup in the first place. There is no one more qualified than the founder in expressing the vision and purpose of the company during the initial stages. From that viewpoint, the founder is able to assess several important factors such as the kinds of opportunities available to the business, what kind of products to focus on and develop, and what type of solutions are needed in the market. Ideally, the founder will bring in the right people who can execute on that vision. 

The founder is therefore responsible for the initial organization and culture of the startup. It’s to be expected that a startup’s culture will reflect the founder’s values and business approach. The key challenge is how to develop and change the startup’s organization and culture as the business grows and expands beyond the founder’s personal approach. 

The Key Issues with the Founder Effect

As a startup develops and grows, the issues and challenges connected to the Founder Effect can impact the company in serious and often negative ways. Here is a list of key symptoms and issues related to the Founder Effect:

• A startup can become so strongly identified with the founder that it impacts its business reputation and brand in the eyes of customers and business partners. This can make it difficult for startups to move on and grow even if the founder steps back or leaves the company. 
• The decision-making process that many founders have is subjective and focused on their own interests, which they align directly with that of the company. However, that is not always the case, and a startup’s divergent needs require a more objective approach to decision-making.
• Founders may respond to changes by minimizing risks and tightening their grip on the business in order to maintain control. This can limit growth and lead to wasted opportunities.
• Since founders end up making most of the big decisions during the initial stages of a startup, they can end up developing an autocratic style of management. 
• Founders can also end up putting too much focus on controlling the decision-making process of their employees and co-partners. This type of micromanagement can undermine trust in the startup’s leadership. 
• A lack of a succession plan or transition plan can also be detrimental to the business. Some founders may be so possessive of their company that they refuse to plan for the possibility if not outright likelihood that the company can function without them in the future. 
• Certain founders experience difficulty embracing adaptation in response to the changes that every startup has to experience as they grow and scale up. This refusal to adapt can lead a founder to hold the business back to maintain control. 
• Founders often hire familiar people, such as friends or relatives, to take up important positions in the organization early on. This kind of concentrated power means that the individuals in those positions are often expected to support the founder’s plans rather than run the business, which would inevitably involve some disagreement with the founder’s approach. 
• A lack of checks and balances can lead the founder into a misconception of their role and opinions. Without constructive criticism, this can end up blinding them to the reality of the situation, making it hard for founders to identify and solve problems before they can overwhelm a startup. 
• The long-term prospects of a business can be seriously undermined by any tendency in the founder to change their mind on a whim without facing consequences. Such rash decision-making can lead to confusion and uncertainty in the startup itself and among its investors and board members. 
• The founder’s overbearing presence can lead to lower morale among employees and a feeling that their opinions and input are not as valued and will not make a difference. This can lead to talent leaving the business. 

Clearly, the Founder Effect can have serious and lasting effects on the way a startup is run. The Founder Effect often lingers on even if a founder departs the company, leading to continued difficulties that need to be addressed. 

How to Deal With the Founder Effect

Given the importance of the Founder Effect, how can startups mitigate its impact? Here are some key suggestions:

• Discuss the issue with the founder: It’s crucial for members of the organization to involve the founder from the start. Meetings should always be private and respectful. Many founders might be unaware of the potentially negative impact of their actions, especially since they are committed to helping the company succeed in the best way they know how. Holding them accountable and providing them with sometimes difficult but necessary feedback is important. 
• Create an action plan: A startup can’t fully cope with the Founder Effect without having an action plan. That involves identifying the problem, and then outlining the possible solutions to achieve an optimal outcome. The action plan should involve the founder, board of directors, and members of the organization, including the management team. The plan should outline how the company will develop and mature beyond the control of the founder. 
• Empower management team: The founder may take on many of the responsibilities for running the startup at the beginning, but the bigger the company grows, the more of the work needs to be delegated. Having a strong management team across the organization not only helps keep the company running smoothly, but can distribute the decision-making process beyond the founder, thereby limiting the Founder Effect. 
• Help overworked founders: Most founders go above and beyond their expected duties when running their business, which might give them an outsized influence on the company but can lead to burnout and exhaustion. Team members, including company employees and management, should look for ways to identify areas where they can help and take on some of the founder’s work.
• Consult board of directors: Almost all founders require help from external funding sources in order to achieve their goals for their startup. That often means looking for VC-backed funding. Accepting VC-funding, however, means accepting that control over the company and its future has to be shared. Founders are accountable to the board, which can hire or fire the company CEO and can therefore reign in the influence of the founder. An angel investor or the chairperson can be especially influential in this regard, as many of them serve in the role of mentors to the founder. 
• Champion collaborative work: Creating a collaborative work environment across the organization can help alleviate the Founder Effect. That includes facilitating meetings where team members can contribute agenda items, and including valuable input from various stakeholders when it comes to decision-making at the company. 
• Transition to new leadership: It happens sometimes that founders are simply unable to change their behavior no matter what the organization does, and despite the intervention of the board. The situation may reach the point where the actions of the founder put the future of the organization in jeopardy and prevent the startup from reaching the next stage. In those cases, the board of directors may decide to use its powers to replace the CEO. This is understandably a difficult decision that is not made lightly and should be done according to a clear CEO succession plan. 
• Keep the company protected: Startups and their founders are faced with many risks from the beginning, and those risks only increase when companies don’t have the right business insurance. For the leadership of a startup, directors & officers insurance (D&O) is especially important, as it’s a form of startup liability insurance that covers the directors and officers of a company against lawsuits. 

What Happens When a Founder Departs?

The outsized influence that founders have on startups means that if and when they leave, their absence can seriously impact the future of the business. Some founders may choose to leave on their own, having decided that they are ready for the next chapter in their life. But what happens when a founder suffers from a long-term illness, a disability, or in the worst-case scenario, death?

Startups have to be ready to respond to such serious scenarios. For businesses and their leaders, the best way to prepare is by ensuring that both the organization and the leadership are properly covered with the right insurance policies. The most significant coverage for companies in such situations is key person insurance, which protects the organization in the worst-case health events.

The purpose of key person insurance is to insure the life of a startup’s most important employee, such as the founder, board member, or other critical executive. The policy can help a startup recover from the loss of that important individual whose unexpected death or disability can impact the company’s value, operations, and future in a negative way. 

For startups that are impacted by the Founder Effect, having key person insurance is essential because the success and value of the company are so strongly tied to the health and well-being of the founder. 

The loss of a founder under such circumstances is devastating for personal reasons, of course, and it can also be devastating to the business. Some small businesses, in fact, might face bankruptcy due to the loss of the founder. For that reason, having key person insurance is necessary to keep the company financially protected from the fallout of a founder’s loss and help it recover and move forward. 

Conclusion: Beyond the Founder Effect

Startup founders deserve respect and recognition for their passion, innovative drive, and risk-taking. After all, without entrepreneurs willing to take risks and confront the challenges of starting a business, many of the most important companies in the world today would not exist. 

As startups develop and grow, however, some founders might find it difficult to adjust to changing circumstances. The Founder Effect is often an indication that organizations have to make necessary changes to help them thrive in the future. With the right action plan and cooperation between founders, board members, and employees, startups can overcome such setbacks and move beyond the Founder Effect.