HBS: Persistence Leads to Startup Success
Harvard Business School undertook a recent study to determine the factors that lead to success in startups and, while nothing succeeds like success, a previous failure can still help an entrepreneur make it.
Paul Gompers and Josh Lerman studied over 30 years of data from venture funded businesses under the title “Performance Persistence in Entrepreneurship”. If a business went public, they considered it successful. However the results are qualitatively similar if the definition of success is taken to include acquisitions in the excess of $50 million. They then analysed all the factors that separated a successful from an unsuccessful startup. The study is US-heavy, but contains some good learnings with a long history.
The first thing that they discovered is that experience counts. First time entrepreneurs were successful 22 percent of the time, whereas repeat entrepreneurs were successful 25 percent of the time. When they broke down the repeat entrepreneurs into those that had succeeded before and those who failed before they found something interesting: those who had succeeded previously succeeded 34 percent of the time, but those who had failed still managed a success rate of 23 percent – slightly higher than the success rate for novices. Failure isn’t a black mark against future success, the study demonstrated. In fact, the authors say, “the experience of starting a new venture – successful or not – confers on entrepreneurs some benefits (skills, contacts, ideas) that are useful in subsequent ventures.”
The authors also wanted to determine the effect of venture capital partners on the success of a startup: “Financing from experienced venture capital firms has a large effect on the probability that an entrepreneur succeeds for several reasons: because these firms are better able to screen for high-quality entrepreneurs; because they are better monitors of entrepreneurs; or because they simply have access to the best deals. But, if an entrepreneur already has a demonstrable track record of success, does a more experienced venture capital firm still enhance the probability of a successful outcome?”
After crunching the numbers they found that the effect of the VC’s experience depends also on the prior experience of the entrepreneur. They found that previously successful entrepreneurs had a success rate of around 32 percent, no matter what. “Essentially, venture capital firm experience has a minimal effect on the performance of entrepreneurs with good track records. Where venture capital firm experience does matter is in the performance of first-time entrepreneurs and serial entrepreneurs with histories of failure. First-time entrepreneurs have a 20.9 percent chance of succeeding when funded by more experienced venture capital firms and a 14.2 percent chance of succeeding when funded by a less experienced venture capital firm. Likewise, failed entrepreneurs who are funded by more experienced venture capital firms have a 25.9 percent chance of succeeding as compared to a 17.7 percent chance of succeeding when they are funded by less experienced venture capital firms.”
Gompers and Lerman also found that timing matters. Fifty-two percent of all IT startups founded in 1983 eventually went public, while only 18 percent of those founded in 1985 did so. Spotting the right time to enter a market is a skill – serial entrepreneurs who had their first deal in one of the most successful years has a 31 percent chance of success in their second ventures, whereas the ones who started in the bottom of the market have only a 25 percent chance of further success.
Finally, serial entrepreneurs, whether successful or not in their first venture, are more likely to raise venture capital earlier than those on their first startup. The repeat entrepreneurs tend to be funded within two years whereas first timers wait over three years for funding. However, the eventual valuations of repeat entrepreneur companies tend to be lower: an average of $12.3 million for repeat entrepreneurs as compared to $16.0 million for first-timers.
While previous success is an excellent indicator of a higher chance of future success, the Harvard study shows that experience, and timing, count for a lot. If at first you don’t succeed…
You can read the whole study here (PDF) and an interview with the authors.
