Some reasons why founders’ second startups are harder

Investors love serial entrepreneurs and routinely pay big bucks to invest in their companies. I’ve heard investors say they have backed serial entrepreneurs when they don’t believe in the idea or because it would look bad if they invested in the first company and missed out on the second. Sometimes it works well – Jack Dorsey did a $10m seed round for Square in 2009 at a rumoured valuation of $40m and I’m sure his investors are very happy. But often it doesn’t work so well – Dave Morin/Path and Bill Nguyen/Color Labs had similar seed rounds but couldn’t leverage the profile and cash into sustainable businesses.

I’ve seen research showing that serial founders have slightly higher success rates than first time founders, but the effect was not pronounced and I wondered about the quality of the research. It has always felt to me like the learnings from doing one startup must help with the second, although not enough to justify investors’ enthusiasm in backing them.

I’m writing about this subject today because I’ve just read a post on Mattermark about the second time founder syndrome. It’s a balanced account of the strengths and weaknesses that prior experience of founding a company brings to the next one, written by two serial entrepreneurs.

Benefits of prior founding experience:

  • Wider network makes it easier to raise money and hire people
  • More experience as an entrepreneur leads to better decisions
  • More comfort with the logistics of company building saves time finding lawyers, writing board packs and so on

Disadvantages of prior founding experience

  • Previous success means there is now more at stake – reputation, capital from those who invested based on trust, careers of those who joined based on trust – can lead to risk aversion
  • High confidence can quickly turn to self doubt – was the first success just lucky?
  • Prior success means people pushback less on ideas
  • More distractions – serial founders speak at conferences more often, are mentors more often, and are more likely to have a family
  • It’s hard to know whether what worked previously will work again, circumstances change and it’s hard to understand the impact of luck

That’s a long list of issues, but they can be avoided by maintaining self awareness and retaining some humility.

  • Tom Valentine

    The more likely to have a family point is dropped in there a bit, is it a negative when assessing a founding team if they have families?

  • Alex Bainbridge

    To add to the list
    * People are watching you, whereas previously you could experiment out of the limelight. This forces you to move faster, sometimes faster than you want to
    * Its like training for a fight. You know you are going to get punched, just you don’t know who by yet and what they are going to aim at. Natural reaction then is to be more defensive (more classical) when you should be as punchy as your first time around

    However, positively, its good to have something to push against, i.e. showing that last time around was not a fluke.

    Also positively, if the first time around put you in a reasonable financial position, then you don’t have to cover your downside quite so much second time, so you can safely push on to a bigger position without thinking about selling early…. i.e. much better for the backers….

  • Rmicals

    Funny. Went to a talk by Saul Klein and two of the Bessmer Ventuere guys yesterday and they were discussing the same topic and had data back to 95 comparing Europe vs US. They dissected every aspect of this. Extremely interesting.