All else being equal, a venture-capital-backed entrepreneur who starts a company that goes public, has a 30 percent chance of succeeding in his or her next venture. First-time entrepreneurs, on the other hand, have only an 18 percent chance of succeeding, and entrepreneurs who previously failed have a 20 percent chance of succeeding, according to researchers at Harvard Business School.
Prof. Paul A. Gompers, Harvard Business School |
Why do these contrasts exist?
The researchers say such performance persistence, as in the first example, is usually taken as evidence of skill.
However, in the context of entrepreneurship, the belief that successful entrepreneurs are more skilled than unsuccessful ones can induce real performance persistence. In this way, success breeds success even if successful entrepreneurs were just lucky. Success breeds even more success if entrepreneurs have some skill.
To be a successful entrepreneur, the best bet might be to partner with entrepreneurs who have a track record of success, suggests the new research by Paul A. Gompers, Josh Lerner, David S. Scharfstein, and Anna Kovner. Key concepts include:
Previously successful entrepreneurs are significantly more likely to lead successful new ventures than first-timers or those who previously failed.
Successful entrepreneurs are adept at selecting the right industry and time to start new ventures.
Suppliers and customers are more likely to back a person with previous successes.
Leslie Berlin who is project historian for the Silicon Valley Archives at Stanford University, said in the New York Times, that the finding flies in the face of conventional wisdom in Silicon Valley, where failure is regarded as an important opportunity for learning. No less an authority than Gordon Moore, a co-founder of Intel, says that in the Valley, “You’re more valuable because of the experiences you’ve been through under failures.”
The basic idea behind the embrace of failure is this: Entrepreneurs who have built and then tried to save a company have seen what does and doesn’t work. This experience is viewed as excellent preparation for tough situations that might arise in a new venture.
“Given conventional wisdom, we were expecting to find much lower differences between failed and successful entrepreneurs,”Professor Gompers concedes.
He said, that while the study found that in general, failures are not a particularly effective teacher of entrepreneurship, Gompers said that “absolutely some entrepreneurs can learn” from them.
“There are some talented entrepreneurs who fail on the first time, learn and then succeed,” he said. But, he added, “that is not the rule.”
Where does Silicon Valley’s deep-rooted belief in the value of failure come from? Gompers suggests what he calls “attribution bias” — people generalising from anecdotal success-after-failure stories.
“There is a lot of industry folklore and myth out there,”he says. “We tried to bring data to bear on it.”
Working Paper: Performance Persistence in Entrepreneurship.
Harvard Business School says the news that successful experience, or performance persistence, pays off may not be news at all. But HBS researchers were surprised at just how much it does help. Successful entrepreneurs in the study had a 34 percent chance of succeeding in their next venture-backed firm, compared with 23 percent for those who previously failed and 22 percent for first-timers.
"The size of the effect more than anything was surprising," note HBS professors Paul A. Gompers and Josh Lerner in an e-mail interview."We know that there was likely to be some degree of performance persistence, but the magnitude was quite striking."
Their research, conducted with HBS professor David S. Scharfstein and former doctoral student Anna Kovner (MBA '00, PhDBE '08), raises issues that could use further study. For example, do successful serial entrepreneurs receive higher valuations and less restrictive covenants when they raise capital?
Sarah Jane Gilbert: Can you explain the concept of "performance persistence" and what it entails?
Paul Gompers and Josh Lerner: Essentially, entrepreneurs who start venture-backed companies that are successful are more likely to be successful in their next venture-backed firm.
These effects are large and dramatic: All else equal, venture-capital-backed entrepreneurs who succeed in a venture (by our definition, starts a company that goes public) have a 34 percent chance of succeeding in their next venture. By contrast, first-time entrepreneurs have only a 22 percent chance of succeeding, and entrepreneurs who previously failed have a 23 percent chance of succeeding.
Q: How do contributing factors such as skill versus perception affect performance persistence?
A: While clearly skill is an important element, there is also support for the view that some component of performance persistence stems from "success breeding success." For instance, entrepreneurs whose first venture succeeded at least in part due to good timing seem to also do well in subsequent ventures. (By good timing we mean those entrepreneurs who founded a company in a given industry at a time when most new ventures did well: for example, microcomputer-related firms begun in 1981 or Internet firms started in 1996.) Of course, starting a company at an opportune time and place also displays a certain kind of skill as well.
Q: What are some of the more actively pursued industries by entrepreneurs?
A: Venture capitalists typically invest in industries that have substantial growth opportunities and a defensible intellectual property position. Within the study, the computer and Internet, telecommunications, and life sciences industries are disproportionately represented because they have those characteristics. When we look at the more recent years in our data, industries like cleantech have risen in importance.
Because we are focusing on venture-backed firms in this study, the industries are those that are most common for venture capitalists to fund: Internet and software, biotechnology, and telecommunications.
Q: Was there anything in your findings that surprised you?
A: The size of the effect more than anything was surprising. We know that there was likely to be some degree of performance persistence, but the magnitude was quite striking.
Q: Given the current economic conditions, do you have any advice for entrepreneurs who are considering launching a new venture at this time?
A: Certainly one lesson that emerges from our analysis is to find an experienced (and successful) partner! Given the very difficult investment conditions, venture investors are paring back their portfolios and are hesitant to make new commitments. To get serious consideration, the more that you can do to seem like a "sure thing," the better off you are.
More generally, being as careful as you can be with resources, and flexible in terms of the types of arrangements that you are willing to enter into, are particularly important in an environment such as this one.
Q: What are you working on now?
A: We are focused on further disentangling the underlying factors that impact the success of venture-capital-backed start-ups. The data that lies at the heart of our performance persistence papers was gathered from multiple sources over a three- or four-year period. It includes information on the company founders, the venture- capital firms, the boards of directors, and the outcomes of these start-ups.
One current project examines the value of boards of directors in start-up firms. We are also examining issues related to the expansion of venture-capital firms. How and when do venture-capital firms open up new offices? How do the strategic choices related to opening up those offices affect the success of investments? Finally, we are also beginning to explore how the experience and background of the individual venture capitalists influences their investment success.
We are trying to understand the drivers of success in new ventures and venture firms more generally. On the first front, we are exploring questions such as what makes up an effective board of directors for an entrepreneurial firm. On a second dimension, we are exploring issues such as how venture organizations grow: Does it make sense to open an office in a faraway city, and if so, should one staff it with a "local" or a veteran of the firm's home office.