Startup general interest

Some reasons why founders’ second startups are harder

By March 22, 2016 3 Comments

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.