9 Questions and answers about successful startups – Harvard study

Ever wondered what makes one startup succeed while another fails? Well a team of brains from Harvard Business School has put together a fascinating working paper called Performance Persistence in Entrepreneurship which answers questions related to just this.

We scoured the 35 page document and found the following pearls of wisdom.

Question: Are serial entrepreneurs more likely to succeed than first time entrepreneurs?
Answer: Yes.

All things being equal, the paper states that a VC backed entrepreneur who succeeds in a venture (by the paper’s definition, starts a company that goes public) has a 30% chance of succeeding in a follow up venture. By contrast, first-time entrepreneurs have only an 18% chance of succeeding and entrepreneurs who previously failed have a 20% chance of succeeding.

Question: What makes a successful entrepreneur, successful?
Answer: Market timing, management skill, perceived ability.

Market timing — starting a company at the opportune time and place. For example, 52% of computer startups founded in 1983 eventually went public, while only 18% of computer companies founded in 1985 ultimately succeeded. Is market timing luck or skill? It is believed to be skill. Entrepreneurs who invested at the right time with their first ventures, are more likely to succeed in subsequent ventures as they seem to have the ability to seize the opportune moment time and again.

Venture management — outperformance relative to other startups founded at the same time and in the same industry. Some entrepreneurs have the ability to have successful companies despite having poor market timing, by displaying excellent managerial skill.

Perceived ability. Successful entrepreneurs are perceived to be more skilled than unsuccessful ones. Therefore, success breeds success even if successful entrepreneurs were just lucky. Success breeds even more success if entrepreneurs have good market timing and managerial skills. Good track records help entrepreneurs to more readily attract suppliers of capital, labor, goods and services, which increases the likelihood of success.

Question: How important are top-tier VCs to a first-time or failed startup’s success?
Answer: The likelihood of success increases.

The theory is that top-tier VC firms are better at identifying high-quality fledgling companies and entrepreneurs, and that the VCs add more value to these firms they fund (e.g., by helping new ventures attract critical resources or by helping them set business strategy).

Question: How important are top-tier VCs to a successful startup founder’s success?
Answer: The VC doesn’t seem to matter.

Since successful entrepreneurs can more readily secure resources and are more likely to succeed, the VC is of little consequence. The Harvard report explains, “If successful entrepreneurs are better, then top-tier venture capital firms have no advantage identifying them (because success is public information) and they add little value. And, if successful entrepreneurs have an easier time attracting high-quality resources and customers, then top-tier venture capital firms add little value.”

Question: Where do most entrepreneurs get their ideas from?
Answer: Former employers.

Not only do entrepreneurs mostly get their ideas from their former employers, their ability to secure resources is greater. The report says that “a substantial portion of the Inc. 500 got their idea for their new company while working at their prior employer.” “Former employees of prominent companies tend to perform better across a number of metrics, including investment valuation, time to product approval, and time to first funding.”

Question: Is it common for serial entrepreneurs to repeatedly get funding from the same VC?
Answer: Nope. It’s rare.

According to the report, it’s “relatively rare for serial entrepreneurs to receive funding from the same venture capital firm across multiple ventures. This is consistent with the view that success is a public measure of quality and that venture capital relationships play little role in enhancing performance.”

Question: Which sectors have the highest concentration of entrepreneurs?
Answer: Internet & computers, communications & electronics, and biotech & healthcare.

Other industries, such as financial services and consumer, are smaller and have a lower percentage of serial entrepreneurs.

Question: Who closes VC funding fastest, serial or first-time entrepreneurs?
Answer: Serial entrepreneurs.

Serial entrepreneurs with higher success rates are more likely to receive VC funding at an earlier stage in their company’s development. No surprise here. The report states that “while 45% of first-time ventures receive initial venture capital funding at an early stage (meaning they are classified as “startup,” “developing product,” or “beta testing,” and not yet “profitable” or
“shipping product”), close to 60% of entrepreneurs receive initial venture capital funding at
an early stage when it is their second or later venture. The later ventures of serial
entrepreneurs also receive first-round funding when their firms are younger–21 months as
compared to 37 months for first-time entrepreneurs”

Question: Who gets higher company valuations, serial or first-time entrepreneurs?
Answer: First time entrepreneurs.

The report shows “lower initial pre-money valuations for serial entrepreneurs: $12.3 million as compared to $16.0 million for first-time entrepreneurs.”