This weekend, I reviewed a recent paper titled “Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence From Serial Entrepreneurs” by Paul Gompers, Anna Kovner, Josh Lerner and David Scharfstein from Harvard. Regular readers of OnStartups will not be surprised that a paper with this kind of title caught my eye. It’s hard to find good, reasonably well supported writings on the topic of startups and this particular paper stood out for me.
I read through the paper and captured a few data points that I found really interesting and thought worthy of sharing with you. My hope is that it sparks some interesting dialog and conversation.
I have not been able to find a copy of this paper on the web yet (otherwise I would have linked to it). I’ll try to make contact with one or more of the authors and see if it I am allowed to distribute the full paper through this website (stay tuned for that).
Update: One of the readers of OnStartups.com was kind enough to share a link to the full paper.
You can access it here for free: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=933932
I’ve done my best to capture the essence of some of these points, but there may be errors (unlike the authors, I do not have the burden of academic rigor here).
Six Interesting Stats About Startup Success
1. Failure Increases Chances Of Success: Entrepreneurs who succeeded in a prior venture have a 30% chance of succeeding in their next venture. First-time entrepreneurs only have an 18% chance of succeeding. Interestingly, those have previously failed have a 20% chance of succeeding.
So, it seems that you're better off having started a company and having failed -- then not having started one at all. If you’re considering kicking off a startup, it seems that you should just go ahead and do it (even if you’re going to fail). Getting the first failure out of the way (assuming you learn what you should from it) will increase your chances the second time around.
2. VCs Really Do Invest In The People: Failed serial entrepreneurs are more likely than successful serial entrepreneurs to get funding from the same venture capital firm that financed their first ventures.
This doesn’t make complete sense to me, but I believe it. VCs are “relationship” investors and I can see how they might lean more towards the entrepreneur they know (even if their original startup was a failure) rather than take a chance on a successful serial entrepreneur they don’t know. On the other hand, if I were a limited partner and had a choice of VCs, I think I’d pick those that have a demonstrated history of backing successful serial entrepreneurs. But, I have a bias.
3. Serial Entrepreneurs More Likely To Raise Funding: Entrepreneurs are much more likely to receive first-round funding at an early stage (60% of the time) if this is their second or subsequent venture than first time entrepreneurs (which receive such funding 45% of the time).
Though the numbers seem a little high (this is probably because they’re talking about all funding, and not just VC funding), this makes sense. Nothing to talk about here.
4. First-Timers and Non-Successes Benefit More From VC Expertise: First-time entrepreneurs have a 17.6% chance of succeeding when funded by more experienced VC firms and an 11.7% chance of succeeding when funded by less experience VC firms. Failed entrepreneurs who are funded by experienced VC firms have a 22.1% chance of succeeding compared to a 14.7% chance of succeeding when they are funded by less experienced VC firms. So, first time entrepreneurs and failed entrepreneurs are more likely to benefit from VC firm expertise..
5. Better VCs Provide Better Deals: Venture capital firm experience is positively related to pre-money valuation. More experienced firms pay more for new ventures -- likely because they have higher success rates.
This seems like one more reason to pick the top-tier, experienced VC (if you have the choice). Overall, you’ll likely get a better deal. Not only is this “smart money”, it’s more money too.
6. Serial Entrepreneurs Get Better Terms: Repeat entrepreneurs receive more favorable terms for vesting, board structure and liquidation rights, but do not receive greater equity ownership percentages. So, though serial entrepreneurs may extract greater value from VCs, this value is in the non-price terms of the investment.
I don’t like this particular data point as I’d hope to get better pricing terms from a VC as a “repeat” entrepreneur. But, then again, things outside of pure valuation are often just as important so I’m not going to complain.
So, what do you think? Do any of the above points agree with your own experience or instincts? Anything leap out at you as being counter-intuitive?