Top management team restructuring in pre-IPO high technology startups: The influence of TMT characteristics and firm growth

Journal of High Technology Management Research 19 (2008) 59–69

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Journal of High Technology Management Research j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / h i t e c h

Top management team restructuring in pre-IPO high technology startups: The influence of TMT characteristics and firm growth Jun Li ⁎ Department of Management, Whittemore School of Business and Economics, University of New Hampshire, Durham, NH 03824, United States

a r t i c l e

i n f o

Available online 15 August 2008 Keywords: Top management team restructuring High technology startups IPO

a b s t r a c t 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 preIPO management team restructuring and contributes to research on managerial turnover, new venture teams, and IPO firms. © 2008 Elsevier Inc. All rights reserved.

1. Introduction 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, Shrader, & Tompson, 2006; Ensley & Pearson, 2005; Ensley, Pearson, & Sardeshmukh, 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 & Stockley, 2000; Chandler, Honig, & Wiklund, 2002). This is typical at the point of professional management (Clifford, 1973). With only a few exceptions (e.g., Beckman, Burton, & O'Reilly, 2007; Chandler, Honig, & Wiklund, 2005; Forbes, Borchert, Zellmer-Bruhn, & Sapienza, 2006; Ucbasaran, Lockett, Wright, & Westhead, 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 & Puri, 2002; Jain & Tabak, 2008; Lester, Certo, Dalton, Dalton, & Cannella Jr, 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. ⁎ Tel.: +1 603 862 3365; fax: +1 603 862 3383. E-mail address: [email protected]. 1047-8310/$ – see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.hitech.2008.06.005

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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 & Cannella, 2002; Zajac & 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 preIPO 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 preIPO 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 & Cannella, 2002; Zajac & 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. 2. Theory and hypotheses Largely influenced by agency theory (Jensen & Meckling, 1976), current large-corporation studies on managerial change usually take a governance perspective, suggesting that the primary force of managerial change comes from the disciplining actions of owners taken to align the interests of the agents with their own (Kesner & Sebora, 1994). However, applying agency theory in entrepreneurial ventures may provide limited explanation power because of the marked differences existing between large corporations and entrepreneurial ventures (Wasserman, 2003). For example, executives in technology startups usually hold large proportions of ownership, thus the risk of managerial opportunism, which is a major concern of agency theorists for public corporations, may not exist to the same extent in the entrepreneurial firms (Wasserman, 2003). In addition, managers in technology ventures may not have a unitary set of interests and share the same motivations with each other (Pfeffer, 1981; Timmons, 1999). These differences imply that simply extrapolating agency theory to explain management team change in technology ventures may not be effective and adequate. Instead, I employ a TMT power perspective (Finkelstein, 1992) to explain management team restructuring in technology startups. Building on Pfeffer's (1981) definition, TMT power refers to the TMT's capacity to exert influence on the behavior of other groups within the organization. Studies have shown that preparing an IPO is a process in which power contests among different parties can rise up since these parties often have different goals and motivations in the firm's IPO (Espenlaub, Garrett, & Mun, 1999; Higashide & Birley, 2002). A pre-IPO stage firm imposes a problem of information asymmetry (Rock, 1986). That is, the success of technology venture is uncertain, and it is very difficult for potential investors to fully assess the capability of the executives before investing in the IPO firm. To solve this problem, the initial investors (usually venture capitalists) frequently require the management team to address the perceived weaknesses, in which case the investors may push for a change of management team (Wasserman, 2003). On the other hand, pre-IPO managers may not want to leave the venture as they have developed personal attachments to the company and may think replacement humiliating (Hellmann, 1998). As such, it is expected that power contests and struggles over the control of the firm are inevitable in the pre-IPO stage. The role of power in managerial turnover has been a major focus in the literature (e.g., Boeker, 1992; Cannella & Lubatkin, 1993; Ocasio, 1994). Finkelstein (1992) has analyzed and validated four sources of TMT power: structure, ownership, prestige, and expertise. In this study, I pay special attention to two relevant sources — structure and expertise, which importantly influence TMT power in pre-IPO technology startups. Structural power is referred to as hierarchical or legitimate power (Daily & Johnson, 1997; Hambrick, 1981). Formal positions grant top managers high structural power within the organization (Brass & Burkhardt, 1993; Finkelstein, 1992). For example, executive power is enhanced when the executive holds multiple titles, such as jointly serving as chairman of the board (Ocasio, 1994), or holding special positions such as founders. The source of expert power comes from TMT human capital (such as knowledge, experience, and skill sets, etc.) which enables them to address the fundamental problems at the specific stage of the firm (Hambrick, 1981; Kazanjian, 1988). For a pre-IPO technology startup, whether the current TMT has possessed necessary knowledge and skill sets for managing a new public firm becomes an important factor influencing its power within the firm. The following section develops a TMT power model to explain the team level antecedents of pre-IPO management team restructuring in technology startups. I investigate three TMT characteristics that reflect TMT power at the pre-IPO stage and subsequently impact the extent of management team restructuring. They are: (1) TMT tenure, (2) TMT founder percentage, and (3) TMT functional heterogeneity. I also investigate potential moderating effects of firm growth on the TMT characteristics — management team restructuring relationships. The full model is depicted in Fig. 1.

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Fig. 1. The model of pre-IPO management team restructuring.

2.1. TMT tenure Tenure is associated with organizational power (Haleblian & Finkelstein, 1993). Prior research suggests that it is difficult to replace or dismiss long-tenured top managers from the firm (Kesner & Sebora, 1994). Long-tenured TMT members have developed understanding of the political structure of the organization (Bergh, 2001) and have more opportunities to develop social ties with other organizational leaders, therefore are able to accrue and institutionalize their power within the organization (Drazin & Rao, 1999; Ocasio, 1994). Research has shown that long-tenured managers have much power to resist external pressures (Meyer, 1975). In the context of new ventures, long-tenured TMTs tend to have less conflict and exhibit high level of group cohesiveness (Ensley, Pearson, & Amason, 2002),which further strengthens their structural power within the firm. For instance, in a study on 58 owner-managed ventures, Ucbasaran and her colleagues found that the longer the prior joint experience among entrepreneurial team members, the lower the likelihood of member turnovers (Ucbasaran, Westhead, Wright, Lockett, & Lei, 2001). Moreover, long-tenured TMTs possess high expert power in pre-IPO ventures as well. Technology ventures often have not developed formalized routines or practices for knowledge transfer and management, therefore much of the firm-specific knowledge are tacit (Athanassiou & Nigh, 1999) and resides only in founders and long-tenured TMT members. Research suggests that IPO investors value high on firm-specific knowledge, especially when they do not have full knowledge of the focal firm as the TMT members (Cohen & Dean, 2005). For example, Deeds and his colleagues found that in biotechnology industry, firm-specific knowledge such as scientific capability is positively associated with the amount of capital a firm can raise through IPO (Deeds, DeCarolis, & Coombs, 2000). The firm-specific knowledge possessed by long-tenured managers is important for post-IPO firm development as well. Firm-specific knowledge provides insights of the strengths, weaknesses of the firm, which are critical for post-IPO firm strategy and growth (Beckman, 2006; Kor, 2003; Kroll, Walters, & Son, 2007). Overall, TMT tenure sends positive signal to potential investors of the value of intangible assets of the firm, contributing to TMT expert power in the pre-IPO stage. Therefore, I predict that long-tenured TMTs will yield high structural and expert power within the pre-IPO venture and are likely to experience low degree of restructuring prior to the IPO. Hypothesis 1. TMT tenure is negatively associated with top management team restructuring in pre-IPO technology startups. 2.2. TMT founder percentage As creators of firms, founders play critical roles in startup and later development stages of the venture, taking various responsibilities such as acquiring necessary resources, building external networks and recruiting other executives, etc. Founders typically hold center positions of the management team in a private venture. The centrality of the founder is formed also because a startup's long-term success is dependent on the firm's vision, which in turn, is reliant on the founder's characteristics (Schein, 1991). Founders are more likely to have long-term horizons than non-founder managers, reflecting their greater concern with the long-range development and the survival of the organization (Schein, 1983). Founders have strong desire to oversee and control the activities of the startups (Mintzberg, 1984). Clearly founder managers enjoy great power in their ventures' management due to their roles and responsibilities. Founders' ownership tends to insulate and protect their positions as well (Jensen & Meckling, 1976). In an IPO stage firm, founders help smooth the transformation process by reducing conflict

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and political wrangling within the firm through their political and social bonds within the organization (Fischer & Pollock, 2004). A TMT with high percentage of founders therefore possesses high structural power within the venture (Finkelstein, 1992). In addition, a TMT with high percentage of founders enjoys high expert power as well. For technology startups, a major purpose the firm is to capitalize on the specialized knowledge of founders. As inventors of technology used by the firm, founders contribute to the venture by their in-depth understanding of firm-specific resources and capabilities. Their unique visions are absorbed into the dominant mental framework of the firm (Baron, Hannan & Burton, 1999). Founders also develop problemsolving routines that are specific to the strengths and weaknesses of the entrepreneurial firm. It is shown that founder-CEO presence enhances firm valuation in the IPO market (Nelson, 2003). Given these unique roles founders play in the IPO-stage firm, I argue that a TMT with high percentage of founders has high power within the firm therefore having low degree of restructuring before the IPO. Hypothesis 2. TMT founder percentage is negatively associated with top management team restructuring in pre-IPO technology startups. 2.3. TMT functional heterogeneity Executives obtain operational experience, skills and knowledge from their dominant functional areas (Hambrick & Mason, 1984). TMT functional heterogeneity indicates the range of human capital residing within the team. In a functionally diversified team, the weaknesses of individual managers can be offset by the strengths of others. For IPO firms, going public significantly changes the knowledge and skill requirements for the TMTs as the focus of the firm shifts from viability and survival to challenges with managing complex organizational systems (Boeker & Karichalil, 2002; Fischer & Pollock, 2004; Rubenson & Gupta, 1996). Specifically, in early stage, the focus of a technology venture is on the technical issues involved in developing the company's initial product or service. At this stage leading the organization requires a relatively narrow range of skills, because the tasks to be accomplished are predominately in research and development; general management, marketing and financial skills are less critical. However, as the venture goes public, a broader range of human capital is required for the management team. In particular, public company financial and management skills are of increasing importance because of increased financial scrutiny and managerial complexity (Boeker & Karichalil, 2002; Fischer & Pollock, 2004). Scholars studying entrepreneurial teams have concluded that TMT functional diversity provides more complete knowledge which integrates technical, managerial, market familiarity and financial control abilities in the venture (Chandler & Lyon, 2001). As a technology startup transforms to a public organization, having a team with heterogeneous functional backgrounds becomes more imperative. However, the issue is often complicated by the fact that most technical managers have little or no prior experience in managerial or financial contexts. Therefore, under this situation, a functional heterogeneous TMT which represents diversified functional knowledge and experiences will enhance the appeal of the firm to potential investors. Evidence shows that TMT functional heterogeneity is positively associated with raising funds through an IPO (Zimmerman, 2008). The higher the level of TMT functional heterogeneity, the greater the level of confidence investors should have in the venture's ability to address multiple problems arising after the IPO. On the contrary, a narrow range of functional backgrounds suggests limited and overlapping expertise of managers. The managers with similar functional expertise will have relative low power within the firm as their skills are redundant and replaceable, which increases the chance for TMT restructuring in the pre-IPO stage. The above arguments lead to: Hypothesis 3. TMT functional heterogeneity is negatively associated with top management team restructuring in pre-IPO technology startups. 2.4. Moderating effect of firm growth Research on executives of large corporations has shown that firm growth is one of the most important reasons behind managerial turnovers (Datta & Guthrie, 1994; Fredrickson, Hambrick, & Baumrin, 1988). High rate of growth may outstrip a firm's ability to develop internal talent, resulting in external hires for executives (Pfeffer, 1983). Under turbulent environment, executive succession acts as one of the most important mechanisms for organizational learning and adaption (Virany, Tushman, & Romanelli, 1992). Technology ventures operate in high velocity and high growth environment (Eisenhardt, 1989). As the venture grows rapidly, the competencies and behaviors required for managers are likely to change, necessitating augmentation and transition in the initial entrepreneurial team (Birley and Stockley, 2000). The transition from a private venture to a public company shifts the dominant problem of the firm from technological experimentation to developing a task system or organizational infrastructure for future development (Flamholtz & Randle, 2000; Kazanjian, 1988). The faster the firm's growth, the more urgent the need is for looking for new managerial expertise in preparing for the IPO transition. Meanwhile, rapid growth requests quick and efficient knowledge integration and fast decision making from the current TMT (Eisenhardt, 1990; Nonaka, 1994). A TMT with long-tenured managers or high percentage of founders will be more valuable in this situation due to their deep understanding of firm-specific knowledge. Therefore I expect a TMT with longtenured managers or high percentage of founders will have even higher power within the firm under high-growth situation than under low-growth situation. Similarly, a TMT with higher level of functional heterogeneity is more valuable because the diversity of TMT knowledge and skill sets better equips the team in carrying out its major tasks. Accordingly, a TMT with high level of functional heterogeneity will have even higher power when firm growth is high than when it is low. In other words, the negative

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impact of these TMT characteristics on pre-IPO management team restructuring will be stronger when firm growth is high than when it is low. Hypothesis 4.1. The negative relationship between TMT tenure and pre-IPO management team restructuring will be stronger when firm growth is high than when it is low. Hypothesis 4.2. The negative relationship between TMT founder percentage and pre-IPO management team restructuring will be stronger when firm growth is high than when it is low. Hypothesis 4.3. The negative relationship between TMT functional heterogeneity and pre-IPO management team restructuring will be stronger when firm growth is high than when it is low. 3. Methodology 3.1. Data and sample I focus the analysis on the U.S. biotechnology industry. IPOs made between January 1, 1991 and December 31, 1999 were identified from the Securities Data Corporation database (SDC). Using the global new issues database (U.S. public common stock only) within the SDC and restricting the IPO firm's primary industry to biotechnology (the Standard Industry Codes are 2836 and 8731, representing biological products, except for diagnostic substances, and commercial physical and biological research respectively), a total of 156 companies were identified as dedicated biotechnology IPO firms in the initial sample. Several steps were taken before the final sample was obtained. First, as the study is focusing on independent entrepreneurial firms, IPO firms that are either spin-offs or subsidiaries of large firms were excluded, as these firms are not really start-ups (this step excluded 12 firms from the original sample). Second, to restrict the analysis to small venture firms, those with 500 (or above) employees or assets of over 500 million, or those that had been established for more than eight years at the time of IPO were excluded (this step excluded 23 firms from the original sample). These sampling criteria are in line with previous studies on new ventures (McDougall, Shane, & Oviatt, 1994; Robinson, 1999; Welbourne & Andrews, 1996). In addition, 31 firms had to be dropped because their IPO prospectuses are not available, leaving 90 firms in the final sample. A key data source for this study is the prospectus the firm registered with the SEC prior to the IPO. The prospectus contains a wealth of information regarding the firm's management, its business, the risks it faces, and the capitalization of the offering. For the current study, a large portion of data about the pre-IPO firm, such as executive demographics, management team composition, pre-IPO firm growth, and VC data were collected from prospectus. The executive exit and entry events were double checked with the “history of executive change” section in the investor reports listed in the Business and Industry Research Center Database. 3.2. Measures 3.2.1. Pre-IPO management team restructuring Pre-IPO management team restructuring measures how frequent the management team changes its members (adding or dropping executives) prior to the IPO. To test the immediate effect of the upcoming IPO event on the top management team, in this study, pre-IPO period is defined as the two-year-period before the firm's IPO. Pre-IPO management team restructuring is calculated as: ðNumber of Executive EntriesÞ þ ðNumber of Executive ExitsÞ ðManagement Team Size at IPOÞ

3.2.2. TMT tenure TMT tenure is measured by the sum of the years that TMT members had worked for the firm up to two years prior to the IPO. This information was collected from the company's prospectus. 3.2.3. TMT founder percentage This variable measures the percentage of retained founders in the top management team two years prior to the IPO. Founders are those managers who have been involved in the venture since its inception and whose names are identified as founders in the IPO prospectus. I measured the percentage of founders in the TMT rather than the absolute number of founders, which is in accordance with prior research (Kor, 2003). 3.2.4. TMT functional heterogeneity To measure TMT functional heterogeneity, each top manager was identified with one of the following primary functional categories: (1) general management (2) finance/accounting (3) science/technology (4) marketing/sales (5) human resources (6) manufacturing/operation (7) legal, and (8) administration and others. Blau's index was used to compute functional heterogeneity for each team (Blau, 1977). That is, TMT functional heterogeneity is calculated as: 1 − ∑PI2 , where p is the proportion of team members in a functional category and i is the number of different categories represented in the team.

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Table 1 Means, standard deviations, and correlation matrix of the variables Variable

Mean

S.D.

1

2

3

4

5

6

7

1. Pre-IPO TMT restructuring 2. Firm developmental stage 3. Firm age at IPO 4. Pre-IPO firm growth 5. VC presence on the board 6. TMT tenure 7. TMT founder percentage 8. TMT functional heterogeneity

.60 .12 4.52 1.73 .28 16.50 .27 .34

.29 .32 1.77 .04 .19 9.49 .28 .30

−.18† −.64** −.01 .07 −.65*** .05 −.36**

.12 −.09 −.11 .11 −.04 .07

−.08 −.01 .70*** −.17† .29**

−.10 .06 .08 .12

−.09 −.03 −.02

− .23* .41***

.03**

N = 90. †p b .1, * p b .05,** p b .01,*** p b .001.

3.2.5. Pre-IPO firm growth Pre-IPO firm growth was measured by the average growth rate in revenue per asset during the two-year period prior to the IPO. Revenue generation is critical for early stage firms (Baum, Calabrese, & Silverman, 2000). Revenue and asset data were collected from financial reports in each firm's prospectus. 3.2.6. Control Variables To test our hypotheses, several control variables were included. VC presence on the board measures the percentage of VC representatives in the board of directors. This variable was used to control for VC power within the firm. Firm age was included to measure the age of the firm as of the IPO year. Firm developmental stage was created with a value of 0 for the firms in the pre-sales development stage and 1 for the firms that have commenced sale. 3.3. Analysis and results Hierarchical regression models were used to test both the main and interaction effects. First, control variables were introduced to a base regression model. Then the independent variables and moderating variables were subsequently introduced to full models. Chi-square tests were conducted to test the significance of the difference between these models. The means, standard deviations and the Pearson correlations of all the variables are presented in Table 1. I checked the variance inflation factors (VIFs) of independent variables, and none of them exceeded the value of 4, suggesting there was no threat of multicollinearity (Greene, 2000). Table 2 presents statistical results for the pre-IPO management team restructuring models. Model 1 includes only the control variables. Model 2 includes both the control and the independent variables. Model 3 (the full model) includes the controls, independent variables, and the interaction variables. Hypothesis 1 predicted that TMT tenure would be negatively associated with pre-IPO management team restructuring. This hypothesis is supported in both Model 2 and Model 3. The coefficients for TMT tenure in both models are negative and significant (b = −.01; p b .01, and b = −.01; p b .001 respectively). This result shows that top management teams with longer tenure have lower degree of pre-IPO management team restructuring. Hence Hypothesis 1 is strongly supported. Hypothesis 2 predicted that TMT founder percentage would be negatively associated with pre-IPO management team restructuring. This hypothesis is supported in Model 2, where the coefficient for TMT founder percentage is negative and significant

Table 2 Results of regression analyses for pre-IPO TMT restructuring⁎ Variables Firm developmental stage Firm age at IPO Pre-IPO firm growth VC presence on the board TMT tenure TMT founder percentage TMT functional heterogeneity TMT tenure × firm growth TMT founder percentage × firm growth TMT functional heterogeneity × firm growth R-square F-value ΔR-square ΔF-value ⁎Regression with robust standard errors on centered variables. *** p b .001, **p b .01, *p b .05, †p b .1.

Model 1

Model 2

Model 3

−.11 −.11 *** −.01** .06

− .09 − .07 ** − .01 ** − .01 − .01 ** − .16 * − .13 *

.46 32.76 ***

.54 22.22 *** .08 2.21†

−.09 −.05 * .02† −.01 −.01 *** −.17 * −.17 ** −.00 * .03 −.10 * .57 35.05 *** .04 2.24†

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Fig. 2. The interaction effect of firm growth and TMT tenure.

(b = −.16; p b .05). The variable is also significant in Model 3 (b = −.17; p b .05). This evidence supports the argument that TMT founder percentage is negatively associated with pre-IPO management team restructuring. Therefore Hypothesis 2 is supported. Hypothesis 3 predicted that TMT functional heterogeneity would be negatively associated with pre-IPO management team restructuring. The coefficients for TMT functional heterogeneity are negative and significant in Model 2 and Model 3 (b = −.13; p b .05 and b = −.17; p b .01 respectively). This evidence suggests that TMTs with higher level of functional heterogeneity have lower degree of pre-IPO management team restructuring. Hence Hypothesis 3 is supported.

Fig. 3. The interaction effect of firm growth and TMT functional heterogeneity.

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Hypothesis 4.1 predicted that other things being equal, the relationship between TMT tenure and pre-IPO management team restructuring would be stronger when firm growth is high than when it is low. The coefficient for the interaction between firm growth and TMT tenure in Model 3 is negative and significant (b = −.00; p b .05), supporting our hypothesis. To facilitate interpretation, I followed Cohen and Levinthal (1990) and plotted this interaction effect in Fig. 2. First, all variables in Model 3 except firm growth and TMT tenure were constrained to their means. Then firm growth and TMT tenure took the values of one standard deviation below and above the mean. Two equations of predicted pre-IPO management team restructuring were then produced. As shown in Fig. 2, when firm growth is higher (+1 standard deviation), the effect of TMT tenure on pre-IPO management team restructuring is stronger than when firm growth is lower (−1 standard deviation). Therefore, Hypothesis 4.1 is supported. Hypothesis 4.2 predicted that the relationship between TMT founder percentage and pre-IPO management team restructuring would be stronger when firm growth is high than when it is low. I didn't find evidence for this interaction effect (the coefficient for this interaction variable in Model 3 is positive and not significant). Therefore Hypothesis 4.2 is rejected. Finally, Hypothesis 4.3 predicted that the relationship between TMT functional heterogeneity and pre-IPO management team restructuring would be stronger when firm growth is high than when it is low. The coefficient for the interaction between firm growth and TMT functional heterogeneity is reported negative and significant (b = −.10; p b .05 in Model 3). Following the same procedure described above, I plotted this interaction effect in Fig. 3, which shows that the relationship between TMT functional heterogeneity and pre-IPO management team restructuring is significantly negative when firm growth is high. However, when firm growth is low, this relationship becomes less significant. Hence Hypothesis 4.3 is supported. 4. Discussion Top management team in new ventures has received increasing attention from strategy and entrepreneurship scholars in recent years (Daily, McDougall, Covin, & Dalton, 2002). The present study is an endeavor to enrich this line of research by investigating the team level antecedents of management team restructuring in technology startups, particularly during their preIPO periods. A major thesis of this paper is that the degree of pre-IPO management team restructuring is depended upon TMT power during this special period when the team is subject to replacement and restructuring risk. Adopting Finkelstein's (1992) TMT power perspective, I argue that the power of a pre-IPO management team comes from two major sources: TMT structural position and TMT expertise. The focus of this study is to investigate how TMT tenure, TMT founder percentage, and TMT functional heterogeneity are associated with the extent of pre-IPO management team restructuring. The results of the study indicate that TMT tenure, TMT founder percentage, and TMT functional heterogeneity are all influential in determining the extent of management team restructuring during the pre-IPO period. Specifically, I found the three aforementioned TMT characteristics are all negatively associated with the extent of pre-IPO management team restructuring. First, the result indicates that long-tenured TMTs tend to have low degree of pre-IPO management team restructuring. This confirms the notion that tenure is associated with organizational power (Hambrick & Fukutomi, 1991). Long-tenured TMTs apparently enjoy high level of structural and expert power within the pre-IPO firm, therefore having low risks of restructuring. I also found that TMT founder percentage is negatively associated with management team restructuring before the IPO. Founders assume central positions in pre-IPO ventures and provide unique firm-specific knowledge to the firm. In matter of fact, research has suggested that when founders remain on the management team as the venture gets to the point of professional management, they tend to possess strong managerial and organizational capabilities (Rubenson & Gupta, 1992). TMTs with high percentage of founders therefore possess high level of structural and expert power, resulting in low degree of restructuring. The result indicates that TMT functional heterogeneity is negatively associated with pre-IPO management team restructuring. The transition from a private venture to a public firm significantly changes the requirements for TMT knowledge and skills sets. At this stage, a functional heterogeneous team will be more desirable as the team is more likely to address the new dominant problems facing the firm after the IPO. Recent study by Beckman et al. (2007) finds that top management teams with more background and affiliation diversity goes public faster (Beckman et al., 2007). The result from the present study show that a diversified team has low risk of restructuring during the pre-IPO stage, implying that TMT functional diversity is valuable to IPO investors at this particular stage. TMT literature has suggested that the impact of TMT characteristics on organization may depend upon the context where the TMT operates (Carpenter, Geletkanycz, & Sanders, 2004). I found that the effects of TMT tenure and TMT functional heterogeneity on pre-IPO management team restructuring vary with the rate of pre-IPO firm growth. Specifically, I found that the impacts of TMT tenure and TMT functional heterogeneity on management team restructuring are greater in high-growth firms than that in lowgrowth firms. Companies experiencing rapid growth need to accelerate the process to set up new organizational structure or management routines to accommodate such change (Flamholtz & Randle, 2000). For example, as sales grow fast, it is important for the company to add managers with marketing talent to the team. Hence a functional heterogeneous team is more valuable. In addition, rapid growth requires a deeper understanding of firm-specific or inside knowledge (Barney, 1991) to allow for successful commercialization process. As the firm grows fast, TMT tenure becomes more valuable and its impact on pre-IPO management team restructuring will be stronger. The unsupported hypothesis of the moderating effect of firm growth on TMT founder percentage — management team restructuring relationship is interesting and deserves discussion. Contrary to my prediction, the coefficient for this interaction variable is positive but not significant. A plausible explanation could be when firm growth rate is very high, founder presence may become more as liabilities than valuable resources for the IPO firm (Willard, Krueger, & Feeser, 1992). Founders have strong

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psychological commitment to the firm (Gimeno, Folta, Cooper, & Woo, 1997) and are often narrow in their focus and knowledge base. They may focus too much on the technological side of the firm and do not have adequate managerial and organizational knowledge required for the commercialization process (Jayaraman, Khorana, Nelling, & Covin, 2000). Rapid growth of the firm challenges the founders' capabilities to adapt to new contingencies of the firm because fast growth demands more and quick adaptation for the founders (Rubenson & Gupta, 1992). Under this situation, founders may have to be replaced or supplemented by capable professional managers (Jain & Tabak, 2008). Therefore the negative influence of founder percentage on pre-IPO management team restructuring in high growth firms may not be as strong as that in low growth firms. This study makes several contributions to research on IPO firms, managerial turnover, and new venture teams. First, I believe this is the first empirical study on pre-IPO management team restructuring in technology ventures. Recent years have witnessed a growing body of research on CEO and founder succession in entrepreneurial firms (e.g., Boeker & Karichalil, 2002; Jain & Tabak, 2008; Wasserman, 2003), but study on pre-IPO management team change is still rare. This study helps to fill a void in the field. Second, this study enriches the literature of managerial turnover by employing a TMT power perspective (Finkelstein, 1992) in a special context — pre-IPO technology ventures. Majority of research on managerial turnover has employed agency theory (Jensen & Meckling, 1976) and has been conducted on large established corporations. The present study demonstrated that factors influencing TMT power have significant impact on pre-IPO management team restructuring, suggesting that the TMT power perspective is an appropriate and useful framework in explaining managerial turnover in entrepreneurial firms. Third, this study answered calls for more research on the formation and development of new venture teams (Kamm, Shuman, Seeger, & Nurick,1990) and extends the increasing research on IPO TMTs (Beckman et al., 2007; Carpenter, Pollock, & Leary, 2003; Cohen & Dean, 2005; Lester et al., 2006; Zimmerman, 2008). For entrepreneurs, this study provides important implications as well. Research suggests that total exits of entrepreneurial teams reduce the firm's likelihood of going public (Certo, Holmes, & Holcomb, 2007). The study suggests that TMTs with shorter tenure, less retained founders, and lower level of functional heterogeneity will experience higher degree of restructuring before the IPO event. While adding new managers is necessary and critical for the firm's IPO and future development, a TMT with more tenured managers, retained founders, and managers with higher level of functional heterogeneity seems to appeal investors in the pre-IPO stage. The results from this study suggest several dimensions, for example, TMT tenure, TMT founding status, and TMT functional heterogeneity, that entrepreneurs can choose to review their teams in preparation for the IPO. The present study has certain limitations. First, the two-year-window limits the ability to study the antecedents of management team restructuring in the pre-IPO stage. Although this limitation does not threaten the validity of the present study, it would be desirable to observe one or two more year(s) prior to the IPO. Second, the present study did not directly measure TMT power. Prior research has suggested that direct measurement of executive power is often difficult as power is a sensitive subject for many managers (Finkelstein & Daveni, 1994; Pfeffer, 1981). Due to the difficulty in obtaining direct measures of TMT power, the present study relied on publicly observable information to infer top management team power. Although this does not threaten the logic of the present study, it would be desirable if TMT power could be directly measured in pre- IPO stage ventures. Third, the present study focuses on biotechnology startups. The results reported here might not be generalizable to other industrial contexts. Including multiple high-technology industries might be desirable in future studies. Lastly, the current study focuses only on the antecedents of pre-IPO management team restructuring, future researchers might want to explore the restructuring process per se as well as the consequences of TMT restructuring. Research questions include but not limited to, which types of managers are likely to be hired or forced to leave during this restructuring process? If pre-IPO management team restructuring benefits an IPO firm, is the benefit symbolic or substantive? What is the cost–benefit analysis of pre-IPO management team restructuring for an IPO-stage technology venture? I believe answering these questions will further our understanding of pre-IPO management team restructuring and its impact on IPOs as well as long-term developments of high technology ventures. 5. Conclusion This study examines the influence of TMT characteristics and firm growth on pre-IPO management team restructuring. The results of this study suggest that TMTs with longer tenure, higher founder percentage, and higher level of functional heterogeneity experience lower level of management team restructuring during the pre-IPO period. 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