The Post Entry Growth and Survival of Business Startups: The Role of Founding Teams∗

We explore the role of founding teams in accounting for the enormous variation in post-entry dynamics of startups. We find that successful startups in terms of growth, survival, and productivity have founding teams with higher human capital. These correlations are difficult to interpret, however, given the endogenous nature of assortative matching between workers and firms and attrition dynamics. In addition, the contribution of the founding team to firm success may derive from the organizational capital that is created in the formation period of a firm rather than the ex ante human capital each founding team member brings to the business. To shed light on these issues, we use a difference-in-difference identification approach that exploits exogenous attrition in the founding team due to the premature death of founding team members. We find that the loss of a founding team member due to premature death has a persistently large, negative, and statistically significant impact on post-entry growth, survival, and productivity of startups. While we find that the loss of a key founding team member or those with high human capital have an especially large adverse effect, the loss of a non-key or average human capital member still has a significant adverse effect. The loss of a founding team member is greater for small founding teams but the results are present in both small business intensive sectors and in the High Tech sectors of the economy. ∗Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau, the Federal Reserve Board of Governors or its staff. Disclosure review number DRB-B0032-CED-20190315 and CBDRB-FR19-398. We thank Emek Basker, Shawn Klimek, Ron Jarmin, Martha Stinson, and participants at the 2019 Comparative Analysis of Enterprise Data and at the LSE 2019 Entrepreneurship Workshop for helpful comments. †Federal Reserve Board of Governors ‡U.S. Census Bureau §University of Maryland and U.S. Census Bureau ¶Wharton School, University of Pennsylvania and U.S. Census Bureau Startups and young firms contribute disproportionately to job creation, innovation and productivity growth (Haltiwanger, Jarmin, and Miranda, 2013; Decker, Haltiwanger, Jarmin, and Miranda, 2014; Acemoglu, Akcigit, Bloom, and Kerr, 2019, forthcoming). A hallmark of young firm dynamics is the enormous dispersion in outcomes. Most startups fail in their first five years but conditional on survival, young firms grow faster than their more mature counterparts. Amongst survivors, there is tremendous dispersion in post-entry growth rates. While most of the contribution by young firms to aggregate employment and output growth can be attributed to survivors that grow rapidly, relatively little is known about the sources of heterogeneity across young firms that generate up-or-out dynamics. In this paper, we combine data on new business starts and their founding teams to characterize the relationship between founding teams and young firm dynamics. After examining some basic facts about the relationship between key outcomes for young firms and founding teams, we use premature death shocks to identify the causal effect of an exogenous separation of a founding team member on firm outcomes. Moreover, we consider heterogeneous treatment effects based on the characteristics of the founding team members as well as the characteristics of the firms. We integrate administrative employee-employer payroll data with administrative tax information covering non-farm employer startups between 1990 and 2015 for a large sample of U.S. states. We focus on employer startups that organize themselves as sole proprietors or corporations where we can capture active business owners and other members of the founding team. Founding teams are identified as all workers with positive earnings in the first year after startup supplemented by business owners of sole proprietors. Using each founding team member’s most recent earnings prior to joining the startup as a proxy for human capital, we document new stylized facts about the relationship between human capital composition of founding teams and startup performance. Since the effects of the founding team may be concentrated among certain individuals, we decompose the founding team into two groups: key personnel and non-key personnel. Key personnel are identified as the founding team