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Leadership in start-ups

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2017, Vol. 35(2) 157­–177
Leadership in start-ups © The Author(s) 2016
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DOI: 10.1177/0266242616676883
https://doi.org/10.1177/0266242616676883
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Simon Zaech
GS1 Switzerland, Switzerland

Urs Baldegger
University of Liechtenstein, Liechtenstein

Abstract
This article explores the role of leadership in start-ups and outlines a model of when, why and
how leadership behaviour of founder-CEOs influences start-up performance. The model has
been tested using a sample of 102 start-ups and their founder-CEOs and includes feedback from
372 employees, rating their leadership behaviour of founder-CEOs. The results indicate that
transformational leadership has a significant and positive effect on start-up performance. However,
no significant, direct effects on start-up performance were found for transactional leadership or
laissez-faire leadership. Furthermore, the size of the start-up has a significant, positive, moderating
effect on the relationship between laissez-faire leadership and start-up performance, as well as a
significant, positive, moderating effect on the relationship between the transactional leadership
dimension, management by exception and start-up performance. Results indicate that for start-ups
and their performance, leadership behaviour is as important as their context. Today, leadership is
neglected by most entrepreneurs and is not considered a motivation for founding a business. The
results show that founders should focus more on leadership behaviour.

Keywords
founder-CEO, laissez-faire, leadership, size, start-up, start-up performance, transactional
leadership, transformational leadership

Introduction
While leadership research in general has a long tradition (Bass and Bass, 2008; Day and Antonakis,
2012), entrepreneurship research is a fairly new field of research (Cornelius et al., 2006).
Accordingly, only a few theoretical and empirical studies address the interface of both domains.
This is surprising, as leadership is of high relevance for the success of start-ups. The foundation
and development of start-ups is inevitably connected with leadership. As a result, leadership is

Corresponding author:
Simon Zaech, GS1 Switzerland, Monbijoustrasse 68, Bern 3007, Switzerland.
Email: simon.zaech@gs1.ch
158 International Small Business Journal 35(2)

increasingly becoming part of the sphere of action of founder-CEOs and represents an essential
factor for successful venture development (Cogliser and Brigham, 2004).
In the current literature, the interface between leadership and entrepreneurship is often called
entrepreneurial leadership. This can be defined as the role a founder-CEO takes in the new business
in order to create the flexibility needed to attend to, and contend with, an uncertain environment
through the conception and realization of new transaction sets (Gupta et al., 2004). Most defini-
tions of entrepreneurial leadership focus on specific entrepreneurial behaviour or their exceptional
abilities, such as recognizing and exploiting entrepreneurial opportunities (Renko et al., 2015), or
the discovery and exploitation of strategic value creation (Gupta et al., 2004).
Our adaptation of the term ‘leadership’ in the specific context of start-ups is slightly different
from that described above. Our leadership perspective is influenced more by traditional leadership
theories, which have a more general understanding of leadership behaviour. One of the most widely
used definitions is that of Bass and Stogdill (1990):

Leadership is an interaction between two or more members of a group that often involves a structuring or
restructuring of the situation and the perceptions and expectations of members … Leadership occurs when
one group member modifies the motivation or competencies of others in the group. Any member of the
group can exhibit some amount of leadership. (pp. 19–20)

According to this definition, we see in entrepreneurial leadership a common form of leadership

behaviour, applied to a specific context. So, entrepreneurial leadership describes a person influenc-
ing and directing another person towards a certain action or way of thinking in the context of a start-
up. While entrepreneurial leadership defines the specific behaviour of a founder-CEO, our definition
describes his leadership behaviour in a specific context, that is, the start-up context, which is in line
with previous research done on start-ups (Ensley et al., 2006a; Peterson et al., 2009).
In the literature, no generally accepted definitions of start-ups are evident. Most authors speak
of a company in its first stage of operations. However, the beginning and end of this first stage are
not clearly defined, and the number of stages is not finally determined (Levie and Liechtenstein,
2010). As a first step, we have evaluated existing definitions of start-ups and conclude that most
refer only to the age of the firms as an indicator for start-ups. Therefore, we have chosen a period
of time between 5 and 12 years, as this corresponds with other research studies (Bruneel et al.,
2010; Pellegrino et al., 2012; Salomo et al., 2008). We argue that especially in these young firms,
which have limited processes, structures and routines, the leadership behaviour of the founder-
CEOs plays a crucial role. They have to develop a vision in order to motivate all employees, stimu-
late them intellectually and guide them to achieve the company’s vision.
All these aspects are covered in the full-range leadership (FRL) model developed by Bass
(1995), which is one of the most widely accepted leadership theories (Westerlaken and Woods,
2013). The model focuses on the relationship between the leader and the follower. In doing so, it
distinguishes between three types of leadership – transformational leadership, transactional leader-
ship and laissez-faire leadership. Transformational leadership is considered to be the most effective
and active form of leadership behaviour, and transactional leadership focuses on medium effective-
ness and activity, while laissez-faire leadership describes the least effective and most passive
leadership behaviour (Bass, 1995).
Transformational leaders motivate their followers by communicating an inspiring vision of
the future, often through the use of symbols and appeals to emotions of the followers. In addi-
tion, these leaders show respect to their followers and are genuinely concerned with their per-
sonal growth and development (Bass and Bass, 2008), by providing them with opportunities
that challenge them to learn new skills and abilities and by encouraging them to think
Zaech and Baldegger 159

continually about situations differently than they might have previously (Ayman et al., 2009).
Their social interactions with their followers are based on coaching or mentoring relationships
in which the leader takes responsibility for facilitating the growth and development of the fol-
lower (Bass and Avolio, 1993). Transformational leaders explore new ways of working, seek
opportunities in the face of risk, prefer effective answers to efficient answers and are less likely
to support the status quo.
Transactional leadership is characterized by contingent reward and management by exception
(Avolio and Bass, 1995). Contingent reward refers to the degree to which a leader sets up construc-
tive exchanges with his followers (Judge and Piccolo, 2004). In other words, a leader clarifies and
communicates to the follower what is expected and what they will receive if these expectations are
met (Avolio et al., 1999). It can be regarded as a motivation-based system that is used to reward
followers who meet their goals of the leaders. However, management by exception is the degree to
which the leader takes corrective action on the basis of results of leader–follower transactions
(Judge and Piccolo, 2004) and can be divided into an active and a passive dimension. The former
focuses on monitoring task execution for any problems that might arise and correcting those prob-
lems to maintain current performance levels (Avolio et al., 1999). In contrast, the latter describes
leaders who react with corrective action only after problems have become serious and who often
avoid making any decisions at all (Avolio et al., 1999). Bass (1995) described laissez-faire leader-
ship as the total absence of leadership. It implies a lack of concern and guidance for guidance of
the followers. With such a leadership approach, feedback, rewards and involvement are non-exist-
ent, while decisions are slow or not taken at all which can impact negatively on motivations and
needs of the followers.
Many empirical studies have reported a positive relationship between transformational leader-
ship behaviour and different performance indicators, regardless of whether the analysed firms were
start-ups or established firms (e.g. Gumusluoglu and Ilsev, 2007; Walumbwa et al., 2008; Wang
et al., 2011b). At the organizational level, the results are partly ambiguous and not clearly interpret-
able (Wang et al., 2011a). These conflicting results may be explained by the different contexts in
which the various studies were conducted. Leadership success is likely to be influenced signifi-
cantly by context variables such as firm development or company structure (Lowe and Gardner,
2000; Porter and McLaughlin, 2006; Shamir and Howell, 1999). Accordingly, the context in which
leadership takes place should be incorporated in research.
This study aims to address this research gap and focuses on the leadership behaviour of founder-
CEOs in a start-up context. In doing so, the main objectives of this article are to improve the under-
standing of leadership in start-ups and present new insights concerning the influence of leadership
behaviour on organizational performance. We hope to address the ways in which leadership behav-
iour influences start-up performance and how start-up size influences this relationship.

Theoretical background
The literature suggests that leadership success is primarily influenced by its context, which includes
business environment, company life cycle or firm structure (Porter and McLaughlin, 2006). Start-
ups operate in a specific context which is characterized by a high risk of failure (Ouimet and
Zarutskie, 2014), huge complexity and unforeseeable uncertainty (Sommer et al., 2009).
Furthermore, they are associated with a lack of experience and a high degree of flexibility and
dynamics (Pellegrino et al., 2012). Concerning the growth of start-ups, research points out the
growing resistance to organizational transformation processes and improvements with increasing
company age. In young enterprises, this resistance is much less developed, which simplifies lead-
ership in this context compared to leadership in established firms (Aldrich and Auster, 1985).
160 International Small Business Journal 35(2)

Limited financial and human resources are another central characteristic of start-ups (Romanelli,
1989), which often results in having a flat organization with a small number of levels of hierarchy.
In most cases, only one management level exists, which is led by the founder-CEO. Another char-
acteristic of start-ups is the degree of internal and external uncertainty that they can experience
(Sommer et al., 2009). Internal uncertainty is based on a short company tradition and a lack of
experience (Atherton, 2003) and is associated with a low level of developed routines and pro-
cesses. External uncertainty concerns specific environmental conditions such as a complex and
dynamic market in which young companies might be operating.
Most of the characteristics of start-ups described above are mentioned in the theoretical studies
of Bass (1995), Pawar and Eastman (1997) and Shamir and Howell (1999). In contrast, however,
the context of start-ups has seldom been the subject of empirical studies, as shown in our system-
atic literature review on the topic of leadership in such ventures. Following a simplified version of
the procedure outlined by Tranfield et al. (2003), we scanned the databases ABI/INFORM, EBSCO,
Emerald, SAGE, ScienceDirect and Wiley, to review only the most important journals in the
domains of leadership and entrepreneurship. These articles were chosen based on the following
three selection criteria: first, leadership behaviour is explicitly analysed in the context of start-ups;
second, it was published in a scholarly, peer-reviewed journal; and third, it was empirical in nature.
On this basis, nine studies were selected which are presented chronologically in Table 1.
Due to differences in operationalization approaches, research designs and sample compositions,
it is difficult to summarize and compare the results of prior research. For example, leadership
behaviour has been conceptualized differently and consequently, various questionnaires have been
applied. Jensen and Luthans (2006) researched authentic leadership using the Multi-Leadership
Questionnaire (MLQ) Form 5X-Short (Bass and Avolio, 1997), the future orientation by Knight
(1997) and the Ethical Climate Questionnaire by Victor and Cullen (1988). Moreover, the indi-
vidual research designs show variety, and several leadership models have been implemented. The
majority of the studies focused unilaterally on transformational leadership and disregarded both
transactional and laissez-faire leadership (Ensley et al., 2006a; Gumusluoglu and Ilsev, 2007),
which may have an impact on any conclusions drawn.

Hypothesis development
The few studies that examined leadership in start-ups have produced inconsistent results at the
organizational level. Nevertheless, analysing prior research on transformational or charismatic
leadership revealed a positive effect of transformational leadership at this level (Ardichvili, 2001;
Baum et al., 1998; Gumusluoglu and Ilsev, 2007; Peterson et al., 2009). Only Ensley et al.’s (2006a)
study found a significantly negative effect between transformational leadership and both sales
growth and employee growth. In general, most of the studies provide empirical support for the
assumption that transformational leadership has a positive effect on start-up firm performance.
According to the literature, the context of start-ups gives weight to the effectiveness of transfor-
mational leadership (Bass, 1995; Shamir and Howell, 1999). Following the FRL model, a founder-
CEO must create a vision for the start-up and motivate others to pursue their dreams in order to
attract employees and acquire the necessary resources for developing their new ventures (Baum
et al., 1998). Transformational leaders appeal to the ideals and morals of their followers to inspire
them to reach their highest levels of achievement and adopt the goals of the group (Bass, 1995).
Transformational activities appeal to the intrinsic rather than extrinsic motives of individuals
(Ensley et al., 2006b). Followers decide on their own to work towards the achievement of goals
because they understand and approve of them (Bass and Bass, 2008). Leaders are able to influence
and motivate their followers to act, ‘by using their ability to empower and to encourage others to
Table 1.  Authors, sample, variables and main results for leadership studies in start-ups.
Authors Sample Variables Main results

Baum et al. 127 firms operating in the timber
(1998) industry, which, on average, are 8.45
years old (SD = 2.55 years), achieve
annual sales of 2.3 million and employ
MV: charismatic leadership (vision content, vision
attributes and vision communication)
DV: venture growth (sales growth, employment
growth and profit growth)
Charismatic leadership behaviour is a significant positive
predictor for firm performance
Features and content of the vision are significant positive
predictors for the communication of the vision
Zaech and Baldegger

225 workers (SD = 14.09)
Ardichvili 138 start-ups and 150 established
(2001) firms from Russia, 70% of which are
retail or service businesses
Ensley et al. 66 firms from the ‘Inc. 500-list’,
(2006a) USA. All firms are currently in an
early development phase. Sales are
US$7,152,000, with an increase of
634%–10,432% within the preceding
years. The firms operate in 38
different industries, are on average 5.7
years old and hire 53 employees
Ensley et al. 66 firms from the ‘Inc. 500-list’,
(2006b) USA. All firms are currently in an
early development phase. Sales are
US$7,152,000, with an increase of
634%–10,432% within the preceding
years. The firms operate in 38
different industries, are on average 5.7
years old and hire 53 employees
CV: size, age and past venture growth of the firms
IV: laissez-faire leadership, management by
exception, contingent reward, transformational
leadership
DV: performance (satisfaction, extra effort,
effectiveness)
CV: age and gender of the leaders
IV: vertical and shared leadership
DV: venture growth (average annual revenue growth leadership are significant positive predictors for venture growth
and average annual growth rate in the number of
workers employed)
CV: age, size and TMT size of the firms
IV: transactional and transformational leadership Transformational leadership behaviour is a significant negative
DV: new venture performance (revenue and
employee growth)
MV: environmental dynamism
CV: age, size and TMT size of the firms
Inspirational motivation and charismatic leadership are found
to be significantly higher for founders being the leaders than for
managers
Laissez-faire leadership and contingent reward are found to be
significantly higher for managers than for founders
Transformational leadership is a significant positive predictor
for employee satisfaction in case of both founders and
managers
Contingent reward is a significant positive predictor for
employee satisfaction in the case of founders
Contingent reward is not a significant predictor for satisfaction
of followers
Vertical, directive leadership and vertical, transactional
Vertical, transformational leadership and vertical, empowering
leadership are significant negative predictors for venture growth
Shared, directive leadership and shared, transactional leadership
are significant positive predictors for venture growth
Shared, transformational leadership and shared, empowering
leadership are significant positive predictors for venture growth.
predictor for firm performance
Transactional leadership behaviour is a significant negative
predictor for firm performance
Environmental dynamism moderates the relationship between
transactional leadership and firm performance significantly
negatively
Environmental dynamism moderates the relationship between
transformational leadership and firm performance significantly
positively
(Continued)
161

Table 1. (Continued)
Authors Sample
Jensen and 62 firms from Midwestern US states
Luthans which employ on average 3.6 workers future orientation and ethical climate of the
(2006)
Gumusluoglu 43 Turkish firms operating in the
and Ilsev software development industry. On
(2007) average, these firms were founded 5.8 MV: intrinsic motivation, psychological
years ago and employ 9.4 workers
Hmieleski and 66 firms from the ‘Inc. 500-list’,
Ensley (2007) USA. All firms are currently in an
early development phase. Sales are
US$7,152,000, with an increase of
growth by 634%–10,432% within the
preceding years. The firms operate in
38 different industries, are on average
5.7 years old and hire 53 employees
Variables
IV: authentic leadership (leadership behaviours,
organization)
DV: job satisfaction, organizational commitment and
work satisfaction of the employees
CV: age, education, gender, ethnicity, prior
experience, familial relationship between
entrepreneur–leader and associate of the leaders
IV: transformational leadership
DV: organizational innovation
empowerment, perception of support for innovation
and creativity
CV: educational level and job tenure of the followers
IV: directive leadership (instruction and command,
assigns goals, active management by exception and
contingent reprimand) and empowering leadership
(encourages opportunity thinking, encourages
self-reward, encourages independent action and
participative goal setting)
DV: new venture performance (revenue and
employee growth)
MV: environmental dynamism (industry revenues,
number of industry establishments, number of
industry employees and research and development
intensity) and TMT heterogeneity (functional
specialization, educational specialization, educational
level and skill level)
CV: age, revenue and TMT size of the firms
162
Main results
Authentic leadership is a significant positive predictor for job
satisfaction, work happiness and organizational commitment
Transformational leadership is a significant positive predictor
for the creativity of followers
Transformational leadership is a significant positive predictor
for organizational innovation of these firms
Psychological empowerment moderates the relationship
between transformational leadership and employee creativity is
significantly positive
Intrinsic motivation does not mediate the relationship between
transformational leadership and employee creativity
Psychological empowerment partly mediates the relationship
between transformational leadership and creativity
Directive leadership is a significant positive predictor for new
venture performance
Empowering leadership is a significant negative predictor for
new venture performance
In a dynamic environment, heterogeneous TMTs report the
highest venture performance if directive leadership is applied
In a dynamic environment, homogeneous TMTs report the
highest venture performance if empowering leadership is
applied
In a stable environment, heterogeneous TMTs report the
highest venture performance if empowering leadership is
applied
In a stable environment, homogeneous TMTs report the highest
venture performance if directive leadership is applied
International Small Business Journal 35(2)

Table 1. (Continued)
Authors Sample
Peterson et al. 49 start-ups and 56 established firms
(2009) from South-western US states. All
start-ups are currently in the product
development phase, achieve annual
sales of <US$1,000,000 and employ
<100 workers
Hmieleski 179 firms from the United States,
et al. (2012) which operate in 97 different
industries, were founded on average 2
years ago and employed 51 workers
IV: independent variables; DV: dependent variables; MV: moderator variables; CV: control variables; TMT: top management team; SD: standard deviation.
Variables
IV: positive psychological traits (hope, optimism and
resilience)
DV: firm performance (performance-to-plan,
achieved targeted net income goals for the year)
MV: transformational leadership, firm performance
time 2 and 3
CV: size, age and sales of the firms
IV: shared authentic leadership and positive team
affective tone
DV: positive team affective tone and firm
performance (revenue growth and employment
growth)
CV: age, size, prior growth and environmental
uncertainty, team size, team interdependence, team
conflict, negative team affective tone of the firm
Zaech and Baldegger
Main results
Positive psychological traits correlate significantly with
transformational leadership
Positive psychological traits correlate strongly positively with
transformational leadership
Transformational leadership mediates the relationship between
psychological traits and firm performance completely
Transformational leadership has a higher impact on firm
performance in start-ups than in established firms
Shared leadership is a significant positive predictor for positive
team affective tone
Shared leadership is a significant negative predictor for firm
performance
Positive team affective tone is a significant positive predictor for
firm performance
Environmental dynamism is no significant predictor for firm
performance
163
164 International Small Business Journal 35(2)

achieve a shared vision and by leading through example’ (Roomi and Harrison, 2011: 7). This leads
to the first hypothesis concerning the relationship between transformational leadership and start-up
performance:

Hypothesis 1. The transformational leadership behaviour of the founder-CEOs will be posi-

tively related to start-up performance.

In contrast to transformational leadership, transactional leadership is focused on exchange

relationships between leaders and their followers (Burns, 1978). In this exchange process, lead-
ers appeal to the self-interest of their followers as a means of motivating them towards the
achievement of specific tasks. Primary transactional leadership behaviour includes contingent
reward behaviour and management by exception (Pearce and Sims, 2002). Contingent reward
behaviour can be described as clarifying expectations and administering rewards and punish-
ments according to specific performance criteria. Management by exception involves the close
monitoring of subordinates in order to ensure that goals are met (Bass and Riggio, 2006). Under
these circumstances, corrective action, usually in terms of punishment, is used to address perfor-
mance deficiencies.
Transactional leadership and laissez-faire leadership are associated with less activity and
involvement of the leader than in transformational leadership. Founder-CEOs playing a less
active role in the running of their venture might have negative consequences on work perfor-
mance and overall success: a start-up that lacks a CEO who creates and propagates a vision,
inspires and coaches their employees and does not intervene in business processes and procedures
when required is more likely to fail. Due to their newness and smallness, start-ups are more likely
to have less developed structures and processes to compensate for this lack of leadership capabil-
ity (Ensley et al., 2006b; Kerr and Jermier, 1978). However, the development of structures and
culture is time intensive and requires the constant interaction of the founder-CEO with both the
start-up and its employees.
Another explanation for the ineffectiveness of transactional and laissez-faire leadership in
start-up performance can be found in the need for future oriented and proactive leadership behav-
iour. A ‘watch and wait’ strategy is not expedient and can hamper a firm’s performance or even its
survival; for instance, if a single mistake is not discovered and corrected quickly. Small and
young ventures require any resources they can obtain, and belonging to networks can be of crucial
importance for their performance. Transactional and laissez-faire leadership are also based on the
legitimate power given to the leader within a firm’s bureaucratic structure (Kotter, 1990) and
generally tend to be concerned with final results such as work effectiveness, rewards and punish-
ments. A focus on outcomes is associated with managing workers by means of strict rules and
regulations to avoid change as far as possible and prevent decisions that could alter the status quo
of the organization. Such leadership behaviour, thus, prevents employees in start-ups from acting
as co-entrepreneurs or contributing proactively to its success. Therefore, we hypothesize the fol-
lowing hypothesis:

Hypothesis 2. The transactional and laissez-faire leadership behaviour of the founder-CEOs will
be negatively related to start-up performance.

In many leadership studies, company size has been incorporated as a descriptive variable of the
sample (Jung et al., 2003; Tosi et al., 2004; Tuan, 2010). However, there are also indications that
company size can have a moderating effect. For example, Bass and Bass (2008) suggest that a
venture’s size in itself does not make a difference. Instead, what counts are the various aspects
Zaech and Baldegger 165

Figure 1.  The effect of leadership behaviour on start-up performance and the moderation effect of start-
up size.

related to company size, including a low degree of specialization or limited resources. In other
words, size influences the organization of a firm, its processes and culture (Koene et al., 2002).
The explanation of this assumption follows the pure substitution of the leadership argument
suggested by Kerr and Jermier (1978) and later expounded by Howell et al. (1990) and Podsakoff
et al. (1993). Formalization and standardization, which can be associated with the development of
start-ups, may have a substituting or neutralizing effect on the impact of transformational leader-
ship behaviour. By contrast, the development of structures and processes may have a supporting
effect on transformational leadership behaviour. According to Melcher (1976), smaller organiza-
tions represent a simpler and more integrated social system, with fewer people, fewer levels of
organizational hierarchy and less subdivision of work. To compensate for some of the problems of
increasing size, larger organizations seem to organize themselves differently showing more spe-
cialization, more formalization and less centralization (Osborn et al., 1980). Thus, the scope of
necessary organization seems to increase with organizational size (Jaques, 1989). These considera-
tions may have implications for the effectiveness of leadership styles in organizations of different
sizes, as larger start-ups may make more use of formal structures, systems and procedures, creating
a different internal context for leadership than those in smaller start-up ventures.
The moderating effect of company size on firm performance is supported by several prior stud-
ies (Koene et al., 2002; Ling et al., 2008; Peterson et al., 2009). For instance, Peterson et al. (2009)
showed a higher impact of transformational leadership on firm performance in small enterprises
than in larger ones, while Koene et al.’s (2002) research demonstrated that charismatic leadership
has a substantial effect on the working atmosphere and financial performance in small supermarket
stores, whereas the effect was smaller or did not exist in big supermarkets. These findings lead to
the following two hypotheses:

Hypothesis 3. Start-up size will negatively moderate the relationship between transformational
leadership and start-up performance.
Hypothesis 4. Start-up size will positively moderate the relationship between transactional lead-
ership and laissez-faire leadership and start-up performance.

Figure 1 presents the hypotheses of this study. As can be seen, in accordance with prior theoreti-
cal and empirical research (Ardichvili, 2001; Baum et al., 1998; Peterson et al., 2009), direct rela-
tionships between leadership behaviours and start-up performance have been included in this model.
166 International Small Business Journal 35(2)

In summary, we expect the main effects of transformational leadership to be positive (+H1),

whereas transactional leadership and laissez-faire leadership will probably have a negative effect
(−H2). For the moderation effect of start-up size, we anticipate that transformational leadership
will be less effective in larger sized start-ups than in smaller sized start-ups (−H3) and that trans-
actional leadership and laissez-faire leadership will be more effective in larger sized start-ups than
in smaller sized start-ups (+H4). The direct effect of the leadership behaviour on the start-up per-
formance and the moderating effect of the start-up size on the relationship between leadership
behaviour and start-up performance are shown in Figure 1.

Method
Procedure
To address participating start-ups and increase their willingness to be part of our study, a multi-
stage approach was employed. The following process was adopted. First, start-up centres in
Switzerland, Liechtenstein, Southern Germany and East Austria were contacted by mail and/or
phone. In collaboration with these centres, we identified potential start-ups for investigation.
Second, founder-CEOs of start-up ventures were asked whether they wish to participate in the
study. When they consented, the relevant information on the start-up, such as the date of founda-
tion, the number of employees and their field of business, was collected by browsing their home-
pages or short telephone interviews. In addition, their motivations for founding the start-up were
sought. According to the definition employed in this study, firms were aged between 5 and 12 years
and had a minimum of three employees. To guarantee the accuracy of the data, we collected this
information again in the online survey. Additionally, the founder-CEOs received an e-mail contain-
ing instructions on the method of the study, comprising an information letter, a leaflet with guide-
lines, the link to the online survey and a pre-composed e-mail for distributing the survey to the
firm’s employees. To guarantee the anonymity of the employees and facilitate the correct alloca-
tion to the respective leader, each individual was assigned an individual tracking number. This was
passed on to the employees and allowed the participants to be identified. This procedure started in
2012 and was completed 18 months later. Both authors were involved in the research, and the
start-up centres helped only by providing addresses of potential survey participants.

Sample
In total, 516 start-ups were invited to participate in the study and 124 firms were willing to take part
in the project. Out of these 124 firms, 22 had to be eliminated due to the fact that they either had
already passed the start-up phase (6 firms), they had not yet hired any employees (8 firms) or the
questionnaires were not answered completely or correctly. This resulted in a total sample of 102 start-
ups, implying a response rate of 24%. After the survey had been circulated by the founder-CEOs to
their employees, 372 completed questionnaires could be incorporated into the data analysis. The
geographical area of analysis was limited to Switzerland (56 firms, 54.9%), Liechtenstein (18 firms,
17.6%), Southern Germany (18 firms, 17.6%) and East Austria (10 firms, 9.8%). Restriction to these
areas has the advantage that possible cultural influences are minimized. At the time of the survey, the
average age of the start-ups was 8.03 years (standard deviation (SD) = 2.57 years), and the number of
employees was 32 (SD = 75.75); 80.4% of the start-ups had less than 20 employees, whereas 5.9%
had between 20 and 30 employees. A total of 13.7% of the firms had more than 30 and less than 220
employees. The questionnaire enabled the participating firms to indicate their field of business on a
wide scale of 17 different categories. According to this categorization, most start-ups were service
Zaech and Baldegger 167

firms (18.6%), followed by software and IT firms (16.7%) and mechanical and engineering firms
(14.7%). In total, these represented 50% of the questioned start-ups with the other 50% being allo-
cated to 14 different industries. Concerning the employee sample, we found that 3.65 employees per
start-up (SD = 1.22) participated in the survey. On average, these employees were 42.71 years old
(SD = 8.75 years), and 32.00% were female (n = 119), while 68% (n = 253) were male. The employ-
ees had been hired on average for 4.42 years at the time of the survey (SD = 5.00 years) and had
cooperated with their leaders for 3.53 years (SD = 3.98 years).

Variables
Two online surveys were compiled, one version for the founder-CEOs and another for the employ-
ees. The survey for the founder-CEOs covered questions about the performance of the start-up and
the firm in general as well as some personal questions. The employee survey was designed to
gather information on the leadership behaviour of the founder-CEO and personal data. The varia-
bles used for the underlying study are explained below.

Independent variable: leadership behaviour.  To operationalize the leadership behaviour of the founder-
CEOs and that of the employees, we utilized the MLQ. Developed by Bass (1985), the question-
naire has been elaborated to measure the FRL model. On the basis of the original versions of the
MLQ published in 1985, several different versions have been developed and empirically tested.
Today, the most frequently used version is the MLQ Form 5X-Short which has proven statistical
reliability in several studies (Bass and Avolio, 1997; Kirkbride, 2006; Tejeda, 2001). This survey
comprises 36 items that examine transformational, transactional and laissez-faire leadership.
Respondents are required to assess items on a Likert-scale of 1 (never) to 5 (almost always). Five
factors represented by 20 items are integrated into the questionnaire to measure transformational
leadership: idealized influence – attributes (e.g. I go beyond self-interest for the good of the group),
idealized influence – behaviour (e.g. I consider the moral and ethical consequences of decisions),
inspirational motivation (e.g. I talk optimistically about the future), intellectual stimulation (e.g. I
re-examine critical assumptions to question whether they are appropriate) and individualized con-
sideration (e.g. I help others to develop their strengths). Transactional leadership is represented by
12 items and includes contingent reward (e.g. I make clear what one can expect to receive when
performance goals are achieved), management by exception, which can be divided into manage-
ment by exception active (e.g. I keep track of all mistakes) and management by exception passive
(I wait for things to go wrong before taking action), while laissez-faire leadership is operational-
ized with four additional items (e.g. I avoid making decisions).
For our research, we used the German version of the MLQ Form 5X-Short provided by Mind
Garden and developed by Bass and Avolio (1995). It has been used in a series of other studies in
which its validity and reliability have been verified. For example, Avolio et al. (1999) and later
Antonakis et al. (2003) have reported good values for its convergent as well as its discriminant
validity. In the context of young enterprises, particular parts of the questionnaire were used and
indicated good psychometric validity (Ardichvili, 2001; Ensley et al., 2006b; Peterson et al., 2009).
The questionnaire used in this study was elaborated in the German-speaking area and was tested
using a confirmatory factor analysis with orthogonal, oblimin rotation (Zäch, 2014). Indicators for
validity and reliability showed good to very good values (measure of sampling adequacy: .687–
.947, Kaiser–Meyer–Olkin: .889 and explained variance: 69.527%).

Dependent variable: start-up performance.  The founder-CEOs were required to evaluate the success
of their start-up firm. In this context, sales growth is often used as a performance indicator
168 International Small Business Journal 35(2)

in entrepreneurship research (Gilbert et al., 2006). Therefore, sales growth was included in the
survey, supplemented by the relationship between sales growth and pre-established goals, that is,
sales growth and entrepreneurial behaviour. The comparison of sales growth with the pre-estab-
lished goals has already investigated by Peterson et al. (2009) and Ling et al. (2008). This issue was
assessed on a scale of 1 (much lower than expected) to 5 (much higher than expected). Comparison
with the leader in the respective field of business is also a widely applied method of operational-
izing performance (e.g. Choi et al., 2008; Garcia-Morales et al., 2012; Murray and Kotabe, 1999).
For this, the five-scale anchors ranged from 1 (much lower than industry leader) to 5 (much higher
than industry leader).

Moderator variable: start-up size.  The company size was collected as a moderator variable and was
defined as the number of employees at the time of the survey.

Analytic approach
In this study, regression analysis was applied as the primary statistical procedure for answering
hypotheses 1 and 2. With our sample size of 372, we are in line with Green’s (1991) recommenda-
tion. For testing the interaction effects of hypotheses 3 and 4, moderated regression analysis was
used. In addition, all interactions were graphed using a procedure proposed by Cohen et al. (2003).
Following this, the slope of each graph was tested using Dawson’s (2014) procedure. The signifi-
cance of each graphed interaction slope was tested. Aiken and West (1991) recommend a test for
the simple slopes of the graphed interactions to identify whether they deviate significantly from
zero. As they argue, it is simply not enough to assume that the interaction graph demonstrates that
the change in performance is significantly different from zero without testing for the significance
of the slope. These tests allow both the importance and the meaningfulness of the interaction to
be expanded.

Results
In the first step of data analysis, the scales of the MLQ Form 5X-Short were tested for internal
consistency. To test for reliability, we took the sample of 372 questionnaires gathered from the
followers and calculated Cronbach’s alpha. In line with previous research (Antonakis et al., 2003;
Ensley et al., 2006b), we used the five dimensions of transformational leadership as indicators
(α = .918). In the original questionnaire, contingent reward (α = .802) was defined as a sub-
dimension of transactional leadership. However, no high correlation between contingent reward
and management by exception was found (r = .101, p < .05). In a further step, as proposed by
several authors (Barling et al., 2000; Densten and Gray, 1999), the active and passive management
by exception behaviour style scales (α = .843) were treated as an indicator of management by
exception. The remaining four items referred to the dimension of laissez-faire leadership (α = .823).
In the next step, the indicators of the dependent variable were tested. Based on these results, we
composed the factor start-up performance. This factor includes four items, which constitute
Cronbach’s alpha of .770. To obtain normal distribution, start-up size was measured as the natural
log of the number of employees.
Table 2 presents the means, standard deviations, zero-order correlations and reliabilities of both
leadership behaviour and start-up performance. Additionally, scale reliability estimates are pro-
vided along the diagonal within Table 2.
Table 3 provides the results of hierarchical moderated regression analyses for start-up perfor-
mance. Hypothesis 1 stated that transformational leadership behaviour would be positively
Zaech and Baldegger 169

Table 2.  Means, standard deviations, zero-order correlations and reliabilities of study variables.

M SD 1 2 3 4 5 6 7
1. Start-up age 8.19 2.48 −  
2. Start-up size log 1.07 .52 .389*** −  
3. Laissez-faire leadership 1.99 .63 .166*** .072 .823  
4. Management by exception 2.80 .39 .164*** .044 .346*** .843  
5. Contingent reward 3.93 .61 −.074 −.061 −.311*** .101* .802  
6. Transformational 3.98 .51 −.058 −.004 −.376*** −.050 .657*** .918  
leadership
7. Start-up performance 3.43 .90 .059 .390*** .030 .032 .136** .176** .779

SD: standard deviation.

*p < .05, **p < .01, ***p < .001, two tailed.

Table 3.  Results of hierarchical moderated regression analyses for start-up performance.

Dependent variable Start-up performance

  Model 1 Model 2
Control variables
  Start-up age −.110* −.121*
  Start-up size log .432*** .429***
Leadership behaviour
  Laissez-faire leadership .103 .075
  Management by exception −.006 .019
  Contingent reward .087 .101
  Transformational leadership .152* .152*
Interactions
  Laissez-faire leadership × start-up size .193***
  Management by exception × start-up size .111*
  Contingent reward × start-up size .020
  Transformational leadership × start-up size −.027
ΔR2 .040**
Explained variance (R2) .203*** .243***

Standardized regression coefficients are shown. N = 102 start-ups.

*p < .05, **p < .01, ***p < .001.

related to start-up performance. Our results support this hypothesis, as transformational leader-
ship was positively related to start-up performance (β = .152, t < .05). Hypothesis 2 specified
that the transactional and laissez-faire leadership behaviours of the founder-CEOs would be
negatively related to start-up performance. However, no significant effects on either type of
leadership behaviour were found (contingent reward: β = .087, t < .05; management by excep-
tion: β = −.006, t > .05; laissez-faire leadership: β = .103, t > .05); thus, hypothesis 2 could not
be supported.
Hypothesis 3 advanced that start-up size would negatively moderate the relationship between
transformational leadership and start-up performance. Although the main effect of transforma-
tional leadership was supported, no significant interaction effect was found (β = −.027, t > .05).
Accordingly, hypothesis 3 is not supported by our results.
170 International Small Business Journal 35(2)

Figure 2.  Interaction graph of laissez-faire leadership with start-up size.

Figure 3.  Interaction graph of management by exception with start-up size.

Hypothesis 4 postulated a positive moderating effect of start-up size on the relationship between
transactional leadership and laissez-faire leadership and start-up performance. Support was found
for negative interaction between management by exception and start-up size (β = −.111, t < .05)
and laissez-faire leadership and start-up size (β = .193, t < .001). However, no support was found
for an interaction effect of contingent reward and start-up size (β = .020, t > .05). Therefore,
hypothesis 4 is not supported.
To illustrate the moderating effect of the start-up size on the efficacy of leadership behaviour
more clearly, we graphed the interaction effects, following the procedures proposed by Dawson
(2014). The interaction graphs for management by exception and laissez-faire leadership are pre-
sented in Figures 2 and 3. In Figure 2, the graphs indicate that high levels of management by
Zaech and Baldegger 171

exception in large start-ups were associated with higher start-up performance, rather than low per-
ceptions of management by exception under similar conditions of start-up size.
Figure 3 shows that high levels of laissez-faire leadership in large start-ups were associated with
higher start-up performance, rather than low laissez-faire leadership under similar conditions of
start-up size. Furthermore, tests were run to identify whether the simple slopes of the graphed
interactions were significantly different from zero. Significance of the interaction graphs was
found for both types of leadership behaviour.

Discussion
This study examined the effects of leadership behaviour of the founder-CEOs on start-up perfor-
mance. Based on our results, we are able to draw three main conclusions. In short, we find evidence
that transformational leadership behaviour has a significant and positive effect on start-up perfor-
mance. Furthermore, in larger start-ups, laissez-faire leadership has a significant and positive effect
on the performance, while in smaller start-ups, it shows a negative effect. Similar results were
found for the management by exception leadership style. High transactional leadership has a sig-
nificant positive effect on performance in larger start-ups, while transactional leadership shows
negative effects in smaller start-ups.
As stated in hypothesis 1, the main effect of transformational leadership on start-up perfor-
mance was positive, which is in line with earlier research (Baum et al., 1998; Peterson et al., 2009).
In his first presentation of the FRL model, Bass (1985) had already found that intellectual stimula-
tion is most valuable in unstable environments such as start-ups. In fact, start-ups operate in a
context that is highly risky (Ouimet and Zarutskie, 2014), complex and uncertain (Sommer et al.,
2009) as well as open, flexible and unstructured (Shamir and Howell, 1999). Therefore, the quali-
fications and experiences of a founder-CEO to guide the organization and its members through this
stage are decisive. Through transformational leadership, the founder-CEO can communicate his
vision, which may motivate the employees and provide them with a deeper understanding of their
contribution to the firm’s success. Through transformational leadership, teamwork and team spirit
are stimulated, and optimism is generated. Employees feel supported, and their confidence in the
founder-CEO and in the company and its chance of success is reinforced. A transformational
leader, however, does not only create and communicate a vision but also presents his belief that the
vision can be achieved through common effort and with great conviction (Bass and Riggio, 2006).
Hypotheses 2 and 3 could not be supported. An explanation may be found in Ensley et al.’s
(2006b) study in which they measured the impact of directive leadership, consisting of instruction
and command, assigning goals, active management by exception and contingent reprimand.
Results showed that in a dynamic environment, heterogeneous top management teams (TMTs)
achieved the highest venture performance if directive leadership is applied. In another study,
Hmieleski and Ensley (2007) concluded that environmental dynamism moderates the relationship
between transactional leadership and firm performance significantly negatively, suggesting that
there are many other variables which might influence the effectiveness of leadership behaviour in
start-ups. An overview of different contextual factors that can influence the effectiveness of leader-
ship behaviour was conducted by Porter and McLaughlin (2006). Specifically, they found that
leadership is likely to have only an indirect effect on firm performance and suggest that factors
such as commitment or motivation might be the missing link.
Hypothesis 4 proposes the positive moderating effects of start-up size on the relationship
between laissez-faire leadership and start-up performance and transactional leadership and start-up
performance. The results do not support the hypothesis. A positive moderating effect has been
shown only for laissez-faire leadership and management by exception leadership behaviours. This
172 International Small Business Journal 35(2)

supports the findings of prior studies on the moderating effect of company size on the relationship
between leadership behaviour and firm performance (Koene et al., 2002; Ling et al., 2008; Peterson
et al., 2009).
In the early stages of a start-up, the firm’s internal development is of vital importance because
existing structures and processes influence its future (Ardichvili, 2001; Kotey and Slade, 2005;
Leitch et al., 2010). In this context, the pure substitution of leadership argument was introduced,
which suggests that formalization and standardization implemented during the development of
new ventures can at least partly substitute for or neutralize the potential effects of transformational
leadership (Kerr and Jermier, 1978). Following our arguments, growing start-up ventures risk los-
ing their open context through the implementation of processes, structures and routines, which may
substitute or complement the founder-CEO’s leadership activity (Kerr and Jermier, 1978; Podsakoff
et al., 1993). Standardized and recorded processes allow the founder-CEO to successfully adopt a
more passive leadership behaviour. Intervention in working procedures can be reduced and instead
processes, structures and routines provide employees with guidance enabling them to act accord-
ingly. As a result, the founder-CEO can focus on his/her role as a leader concerned with more
strategic issues.
This study can offer important insights for practitioners. Its results indicate that there is no sin-
gle type of leadership behaviour to guarantee success. In different contexts, leaders need to be able
to utilize different leadership behaviours and evaluate their effectiveness and, furthermore, that
these have to be authentic. While transformational leadership was found to be an important predic-
tor of the success of start-up performance, an effect on transactional leadership was also found. To
summarize, founder-CEOs cannot display one single type of leadership behaviour for all situa-
tions. They need to adapt their behaviour to the respective situation and context to be most success-
ful. Therefore, they need a variety of abilities and skills in addition to the basic competence
necessary for founding and running a business. Leadership is an interpersonal process that requires
more sophisticated capabilities than developing a product and attracting the first customers.
In the German-speaking part of Europe, entrepreneurship is mostly understood to be the crea-
tion of a new business (Fuchs et al., 2008). The growth of firms and leadership potential are not
seen as important aspects of entrepreneurship. However, as soon as the first employee is employed,
the founder-CEO will have to focus on leadership tasks. Accordingly, we recommend that leader-
ship should be integrated into entrepreneurship education. This is especially important as potential
founders do not consider leadership to be a requirement when considering starting a new venture
creation (e.g. Sieger et al., 2014).

Limitations and future research needs

The reported findings should be viewed in the light of some limitations of the investigation, which
suggest directions for future research.
First, the leadership behaviour of the founder-CEOs was evaluated only by their employees,
which might have led to biased ratings. Future studies are advised to also incorporate self-assess-
ments of the founder-CEOs in order to reduce this bias.
Second, although we have based our research model on the FRL model, other conceptual mod-
els and related definitions of leadership dimensions should be considered in future research. We
also suggest the inclusion of shared leadership in the research design. Shared leadership is based
on the concept of vertical leadership (Pearce et al., 2007; Pearce and Sims, 2002) and implies that
the leadership task is not focused on one particular leader but shared by a group of individuals
(Pearce and Conger, 2003). Since in start-ups, the founder-CEO frequently represents the only
existing leadership level (Melcher, 1976), shared leadership could be a possible remedy to this
Zaech and Baldegger 173

problem. Moreover, shared leadership could increase identification of the employees with the start-
up, which can have a positive effect on firm performance.
Third, future research should include the perspective of the employees more clearly. For
instance, the FRL model could be extended by the concept of super-leadership in order to integrate
the self-leadership perspective of the follower (e.g. Manz, 1986; Manz and Sims, 1990). In this
way, the influence of the founder-CEOs on their followers could be explored and possible impacts
on the individuals, such as their self-leadership behaviour on the organizational level (start-up
performance), could be recorded. Furthermore, self-leadership of the founder-CEO can have an
impact on the effectiveness of their leadership behaviour. Empirical support is given for the
assumption that effectively leading oneself is associated with effectively leading others (Furtner
et al., 2013).
Fourth, this research does not include additional individual characteristics or processes such as
group composition, cohesiveness and homogeneity. This may have made understanding the com-
plexity of the relationship between founder-CEOs and followers difficult. In team research, for
instance, it has been found that homogeneous groups work together more efficiently due to their
similar character traits, which in turn leads to a higher degree of team cohesiveness (Horwitz and
Horwitz, 2007; Turner et al., 1992). On the other hand, Hmieleski and Ensley (2007) show that in
dynamic industry environments, heterogeneous teams achieve better firm performance when led
by a directive leader, while homogeneous new venture teams show best results when led by an
empowering leader. Even if results in this field of study are inconsistent (Klotz et al., 2014), they
reveal possible effects of the team composition on the company’s performance. This, in turn, can
have a positive effect on start-up performance, even though empirical results may be inconsistent.

Funding
The author(s) received no financial support for the research, authorship and/or publication of this article.

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Author biographies
Simon Zaech obtained his PhD from the University of Liechtenstein. He works as a consultant at GS1
Switzerland.
Urs Baldegger holds the Van Riemsdijk Chair in Entrepreneurship at the University of Liechtenstein.

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