In genetics, the founder effect may be defined as a genetic variation that happens when a new population is established from a larger one in a new place, thus the former becoming different both geographically and phenotypically from the parent population.
In business, the notion is used to describe the impact the founder of the company may have in the early development of the business which may persist even after the former has left the organizations. Some of these effects are beneficial to the development of the company, while others may leave negative traits.
- It is easier to spot negative patterns in subsequent reorganizations, but only if there is a clear delimitation between the managing styles.
- The founder effect is more effective in small and medium sized companies as they tend to form a tight knit community in which the organizational norms are stricter and easier to pass on.
- In business, the term is used to coin prior knowledge has on the decisions taken by entrepreneurs and has an impact in risk management. There are two dimensions to previous experience:
- Managerial: it means acquired knowledge related to the side of how to operate a business, and it is mostly obtained through observation, study and developing different business scenarios, understanding patterns and the way organizations are structured.
- Industry: this type of empirical experience is obtained through real work in the particular sector or business.
- From this point of view, founders with more managerial experience had a higher level of performance with start-ups in sectors with a high degree of risk than managers with low level of managerial experience. However, greater industry experience was only an advantage in the low-risk sectors, and a disadvantage in high-risk ones.
- Founders tend to take a more subjective approach to decision-making. While those with managerial experience rather than industry one may engage in a more efficient and effective manner in high-risk situations, they might still be blinded by the vision they have for the future of the business.
- As related to investment, a founder might be more tempted to continue to invest in the same business rather than enlarging their portfolio as compared to a regular manager, and the former might be reluctant to share or delegate responsibility at the top tier of decision-making.
- Overprotection: a founder manager might not be eager to take risks or see long-term benefits from high-risk decisions.
Thus, it is very important to study and understand the structure of an organization from its early life, in which the founders may have had everlasting effects.