EXTENDED ABSTRACT

Our primary argument is that the recent rise in unrealistic valuations of technology based startups with a high infusion of funding from the venture capital firms (Zörgiebel, 2016) may have created conditions that gives rise to misbehaving startups. Ritholtz (2020) reports in an opinion piece appearing in Bloomberg Publication, that Grubhub bought up domain names of restaurants (of its partners) without their permission or knowledge so that if these restaurants wanted to start their own delivery business they would be blocked by Grubhub. Same report suggests Yelp is engaging in an extortion of its clients by manipulating the reviews. DoorDash, another food delivery firm was found to retain the tips that were given to the delivery person by the customers.

Although such prevalence of the misbehavior is at the organizational level, our focus in the current research paper is the founder of the firm. Popular media has created a myth that in the early startup phase the firm is identified by its founder, such as Mark Zuckerberg and Facebook, Elon Musk and Tesla, Travis Kalanick and Uber. Lowrey (2019) in the Atlantic magazine, states: “In tech, it is taken as a given that genius companies start with genius founder… Such founders tend to come with a singularity of vision, a disregard for entrenched business practices, and boundless creativity. They are disruptors, their businesses earthquakes that change how things are done…  Such disruption, obsession, and creativity often translate into real, outsize returns for investors, studies have found.” However, she also suggests that “countervailing research shows that founders tend to make terrible managers, leading to worse business performance.” An extreme example of such behavior resulted in Elizabeth Holmes being indicted with respect to defrauding the investors of Theranos, a firm that she founded when she was 19 years old (the trial is delayed due to the COVID pandemic). Prior to these charges, according to Ableson (2018), in a New York Times article, reported that federal regulators have in the past charged Ms. Holmes, too. For instance, “Last March, the S.E.C. charged Ms. Holmes with widespread fraud, accusing her of exaggerating — even lying — about her technology while raising $700 million from investors. In announcing the charges, the S.E.C. said that Theranos and Ms. Holmes had agreed to a settlement, with Ms. Holmes agreeing to pay a $500,000 penalty. She and the company did not admit nor deny the allegations.”

Existing literature in the management field has tried to explain such behavior using a variety of lenses. Mishina et al (2010) suggest that such behavior may arise due to one of three aspects: a) loss aversion, b) house money effect, and c) executive hubris. We build on these concepts and argue that investors themselves may have a high levels of expectations with respect to returns on their investment and therefore are driven by loss aversion. Their loss aversion leads them to not tie down or restrict the genius founders who are supposed to be disruptive in creating innovative firms and thus resulting in poor governance practices by the investors. Whereas the founders themselves may be so enamored by the pouring of VC money for their ideas that they get into the spell of playing with “house money” (a term used in gambling, where a situation that requires little or no financial risk incurred by the founder). And we also suggest that executive hubris may be related to narcissistic tendencies.

On the other hand, while highlighting negative aspects of  Narcissism in general, Grijalva and Harms (2014) suggest that narcissism does have some potential benefit when it comes to entrepreneurship, because narcissism might be the generator of motivation and the requisite will power necessary to support the entrepreneurial activity. Narcissism may be seen as a personality trait includes behavior focused on “excessive self-admiration, arrogance, perceptions of entitlement, and hostility toward external criticism” (Navis and Ozbek, 2016:110). In summary, narcissistic individuals, when operating as entrepreneurs or founders may express risk taking and motivation to create an enterprise and these may be considered as positive aspects of entrepreneurship  and sometimes they express more negatives traits such as arrogance, and a sense of entitlement.

Additionally, in innovation and entrepreneurship literature, researchers have linked the construct of locus of control (LOC) with CEOs’ need for achievement and flexibility, an increase product innovation, risk taking with respect to new product development or reorienting the business models (Hoskisson et al, 2017). As such we combine the narcissistic trait with locus of control (external  or internal) to understand which founders might be likely to misbehave and which one will not. We suggest that if the LOC and narcissistic tendencies are combined together, we can create four distinct types of founder entrepreneurs. Once the typology is explained in the detail, it will become  easy to identify specific governance plans to provide a better monitoring/controlling of the founder entrepreneurs. Such a typology will also allow to manage the conditions that have created a breeding ground for misbehaving entrepreneurs (founders) because the investors (particularly VC backed investments) are interested in receiving unrealistic higher rates of return of their investment, particularly among technology firms. These high returns come at the cost of monitoring and supervision of the founders who might have a bright idea but also have a very limited life experience in managing high expectations. The case of Ms. Holmes of Theranos reflects this very clearly as discussed in the introduction section. As the next steps towards the development of the full manuscript, based on our typology of four types of founders (provided on the next page), we will offer different governance approaches for each different types of the founder(when the full manuscript is ready, not presented in this abstract). Propositions will be offered to suggest how to manage the corporate governance o that a founder’s negative impact due to the narcissistic tendencies be managed and restrained.

REFERENCES

Ableson, R. (2018). Theranos Founder Elizabeth Holmes Indicted on Fraud Charges. New York Times. Downloaded on June 30, 2018 [Available at https://www.nytimes.com/2018/06/15/health/theranos-elizabeth-holmes-fraud.html]

Grijalva, E., & Harms, P. D. (2014). Narcissism: An integrative synthesis and dominance complementarity model. Academy of Management Perspectives, 28(2), 108-127.

Hoskisson, R. E., Chirico, F., Zyung, J., & Gambeta, E. (2017). Managerial risk taking: A multitheoretical review and future research agenda. Journal of management, 43(1), 137-169.

Lowrey, A. Curse of the Cult of the Founder in The Atlantic Magazine.  Downloaded on June 29, 2020. [Available at https://www.theatlantic.com/ideas/archive/2019/09/curse-cult-of-the-founder/598753/]

Mishina, Y., Dykes, B. J., Block, E. S., & Pollock, T. G. (2010). Why “good” firms do bad things: The effects of high aspirations, high expectations, and prominence on the incidence of corporate illegality. Academy of Management Journal, 53(4), 701-722.

Navis, C., & Ozbek, O. V. (2016). The right people in the wrong places: The paradox of entrepreneurial entry and successful opportunity realization. Academy of Management Review, 41(1), 109-129.

Ritholtz, B. 2020. Why So Many Tech Startups Misbehave. Bloomberg L.P. Downloaded on March 31, 2020. [Available at https://www.bloombergquint.com/view/why-tech-startups-like-grubhub-yelp-and-doordash-misbehave]

Zörgiebel, S. (2016). The Rise of the Unicorns-How Media Affects Start-up Valuations. Available at SSRN 2808458.