Tuesday, November 24, 2009

Puzzle: Failing as a Founder Seems to Teach Surprisingly Little

"...a programmer deciding between a regular job at a big company and their own startup is probably going to learn more doing the startup." -Paul Graham
Paul Graham's sentiment, that the best way to gain the skills, experience, and knowledge necessary to succeed at a startup is to launch a startup, is common, logical, and reasonable, but (surprisingly) might be wrong. Some claim your odds of success are maximized if you have experience as an employee rather than a founder:
"...good preparation, having a business partner, and some years in salaried employment also enhance firm growth." -Determinants of new firm success
"...people who have worked (and indeed were employed before start-up) in the industry where they are founding the new firm, and who have had at least some managerial experience, embody the entrepreneurial human capital features which are more likely to contribute to the early success of new businesses... Entrepreneurial experience in itself does not seem to play a significant role in enhancing survival probability..." -Entrepreneurial Backgrounds, Human Capital and Start-Up Success
The data is mixed on the final point above, whether entrepreneurial experience might be useful if added to experience as an employee. Part of the difficulty in analyzing the data is that first-time success (or near-success) can cause someone to become a serial entrepreneur, and the traits of successful entrepreneurs differ from the traits of failed entrepreneurs. Failed serial entrepreneurs do have a decent second-time success rate, but this could be an artifact of the fact that serial entrepreneurs' first-time failures are more likely to be of the 'almost made it' variety. People who completely crash and burn are less likely to continue to want to be entrepreneurs! Such people tend to withdraw themselves from the entrepreneur pool, leaving behind a more competent set of serial entrepreneurs; this confounds the data analysis.

Anyway, here is one set of numbers:
  • In one population, the overall success rate of first-time ventures is 25.3%.
  • Subsequent ventures in the same population have a success rate of 29.0%.
This all seems fairly mysterious; "practice makes perfect" is the rule in most other domains, and failed entrepreneurs seem to strongly believe they learned a lot from their experiences. Still, until more data is available, I would argue you should only start a venture because you think it might succeed, not because you think failing at it will provide you with priceless and invaluable experience.

6 comments:

Arun

I'd be interested to know, out of the 'one set of numbers,' how many of the first time successful entrepreneurs were second time entrepreneurs?

Rolf Nelson

@Arun insightful question. Overall is about 5%, but successful-only isn't broken out. I'm curious too, I'll email the authors.

Jonathan

Rolf, great post! However, after reading the source article, I have to challenge your conclusion..

The reason? The data only takes into consideration venture-backed companies which only applies to a small percentage of entrepreneurs.

First, almost by definition, VC's want to invest in entrepreneurs who have to learn very little in order to make a particular venture succeed - the entrepreneur's background and experiences should already be aligned with the actions it takes to make a venture succeed.

Second, many venture funded entrepreneurs I have met will already have a track record of success or failure even before being venture funded. The data source does not account at all for serial entrepreneurs who have learned their way into the experience set required for a VC to invest in them.

Lastly, many VC backed business models simply have different challenges and different success metrics than non venture-backed businesses. It is frequent that the founder of a venture-backed company simply does not have the authority to execute based on their own intentions and experience - they must work within the constraints of their investors who may have different goals.

Rolf Nelson

@Jonathan Your model seems consistent with the Gompers paper mentioned. However, the Baptista (Portugal) paper mentioned includes non-VC firms and shows experience as an employee being more useful than experience as a founder, even though both groups presumably have to deal with investor constraints. Still, you may be onto something here.

John

Maybe failing as a founder teaches less than being part of a successful company because there are many ways to fail and only a few to succeed. If your experiences all involve failure, you might not necessarily know what you need to change to become successful. If your experiences all involve success, then you can just reuse what you experienced and likely have a success yourself.

damion

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