This study examines the influence of TMT (top management team) characteristics and firm growth on pre-IPO management team restructuring. Using a sample of U.S. biotechnology startups which went public between 1991 and 1999, the empirical results show that TMT tenure, TMT founder percentage, and TMT functional heterogeneity are negatively associated with management team restructuring in pre-IPO technology ventures. Further, the impact of TMT tenure and TMT functional heterogeneity on pre-IPO management team restructuring is stronger when firm growth is high than when it is low. The study extends understanding of pre-IPO management team restructuring and contributes to research on managerial turnover, new venture teams, and IPO firms.
Despite an abundance of top management team research, a review of this area reveals that much work has been conducted in the context of well-established firms, yet little has focused on top managers in young technology ventures. In recent years, there has been an increasing body of research on new venture teams (e.g., Amason et al., 2006, Ensley and Pearson, 2005 and Ensley et al., 2007). A common underlying assumption of these studies is that new venture teams are stable over time, i.e., the studies emphasize the initial team characteristics and do not account for changes in the team as the venture grows. Empirical evidence, however, has suggested that a new venture's growth is often accompanied by management restructuring in their entrepreneurial stage (Birley and Stockley, 2000 and Chandler et al., 2002). This is typical at the point of professional management (Clifford, 1973). With only a few exceptions (e.g., Beckman et al., 2007, Chandler et al., 2005, Forbes et al., 2006 and Ucbasaran et al., 2003), however, research on top management team restructuring in new ventures is still understudied.
To enrich this line of research, this study investigates top management team restructuring in high technology startups at their pre-IPO (initial public offering) stages. Pre-IPO stage, in this paper, is defined as two years immediately prior to the firm's IPO. This particular period provides an ideal setting for investigating management team restructuring because of the following reasons. First, IPO firms frequently change their ownership and corporate governance structure in preparation for going public (e.g., Aggarwal & Klapper, 2003). Since the quality of the management team is a very important signal to potential investors (Higgins & Gulati, 2006), private ventures often change their management teams (replacing original managers and adding new managers) to impress the investors at the time of IPO (Hellmann and Puri, 2002, Jain and Tabak, 2008 and Lester et al., 2006). Second, the transition from a private venture to a public company significantly changes the dominant problems of the firm as well as the resource and skill requirements for the management team (Kazanjian, 1988). Whether the current TMT can provide satisfactory solutions to new contingencies is closely associated with its power within the firm (Ocasio, 1994), therefore influencing the extent of management team restructuring during this period.
I build the theory upon insights from the literature of executive turnover (Kesner & Sebora, 1994) and the top management team power perspective (Finkelstein, 1992). Executive power has been studied as an important factor in explaining managerial turnover and CEO succession in large corporations (e.g., Boeker, 1992, Shen and Cannella, 2002 and Zajac and Westphal, 1996). I argue that TMT power has great impact on management team restructuring during the pre-IPO period, since the power interplay between the existing management team and the investors (most likely VCs) becomes more intensive at this stage due to the professionalization process (e.g., Higashide & Birley, 2002). In this study I examine factors that influence TMT power such as TM tenure, TMT founder percentage, and TMT functional heterogeneity and investigate their influence on the extent of pre-IPO management team restructuring.
This study makes several contributions. First, it adds to the literature of managerial turnover by looking at TMT change in pre-IPO technology ventures. Although a number of publications have explored the issue of managerial change in IPO-stage ventures (e.g., Boeker & Karichalil, 2002), little is known about what TMT factors influence management team restructuring during the pre-IPO stage. The study starts filling this gap. Second, this study extends understanding of the role of TMT power in managerial change. While large corporation studies on managerial turnover have employed the TMT power perspective (e.g., Shen and Cannella, 2002 and Zajac and Westphal, 1996), few has investigated the role of TMT power in managerial change in young technology ventures. Third, many existing studies examine the factors for managerial turnover independent of other possible moderating variables. It is highly conceivable that the impacts of TMT characteristics on managerial change may vary, depending on contextual conditions. In this study I explore the moderating effects of one important contextual factor — pre-IPO firm growth — on the relationships between TMT characteristics and management team restructuring. The following sections develop a theoretical framework and major hypotheses of the paper. Research methodology, empirical results, discussion and conclusion of the study are presented afterwards.
