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New study showing that for entreprenneurs past success is the best indicator of future success

By February 13, 2009 10 Comments

In May last year I blogged about some research in the FT which seemed to show that experienced entrepreneurs with a new venture were no more likely to succeed or fail than first timers.

That ran counter to my intuition at the time, and to most of yours (although we need to be careful of success bias), and indeed a couple of you pointed to research which showed the opposite – i.e that previously successful entrepreneurs are approximately 1.5 times as likely to be successful with a new venture than first timers.  Interestingly, entrepreneurs who have been previously unsuccessful are only slightly more likely to be successful the next time round as complete novices are with their first venture.

New research today from the highly regarded HBS professor Josh Lerner backs up these later results.  According to his paper, as reported on PE Hub:

successful entrepreneurs have a 34 percent chance of succeeding in the next venture-backed firm, compared with 23 percent who failed previously, and 22 percent chance for new venture-backed entrepreneurs

As PE Hub points out these are pretty high percentages in the first place, which is good for everyone.

The other interesting piece of this research is the assessment of VC value-add.  In a nutshell according to Josh’s research we don’t make much of an impact on the chances of previously successful entrepreneurs, but we are a big help with first timers and people who failed the first time round.

Putting these two stats together and it is easy to see why previously successful entrepreneurs are sometimes successful at achieving very high valuations when they raise venture capital into their companies.  The VCs know they are 50% more likely to be successful, and the entrepreneur knows it doesn’t really matter which VC she chooses….. As a caveat to this I’m going to say it is also important to remember that we are talking about statistics here and they mask a lot of variation between companies.

The final interesting stat in the PE Hub report is the percentage of VC deals that are backing serial entrepreneurs – it is surprisingly low at around 15% (and not all of these will have been successful the first time round).

To finish I’m going to offer a quick recap of the discussion that happened last May.

This questionof what predicts success is a very complex one which encompasses many variables and where much of the research is suspect.  In addition to experience the following are also important:

  • the impact of experience on risk appetite – knowing what he is getting into an experienced entrepreneur may choose not to start a new venture or to opt for a smaller success with a higher probability of getting there
  • whether you are in a novel space or not (Clay Shirky) – experience counts for less in genuinely new areas
  • Whether the previous success was due to market timing (repeatable) or good execution (less repeatable)
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