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Increasing Your Chances of Success as an Entrepreneur

November 20th, 2007 by Jacob Ukelson

I am revisiting the topic I mention in my previous entry on “Overconfidence and Entrepreneurial Behavior” because of an interesting post I found on the subject by Bob Warfield. He points at a study from the Harvard School of Business, that essentially comes to same conclusions about experience as the Israeli study in my previous post, but has some interesting insights that are useful to a first time entrepreneur.

First their definition of success is different than that of the Israeli study - success is effectively defined as an exit (closer to the hearts of most VCs than the definition used by the Israeli study). Here is my summary of their findings:

1. Entrepreneurs who succeeded in a prior venture (i.e., started a company that went public) have a 30% chance of succeeding in their next venture. By contrast, first-time entrepreneurs have only an 18% chance of succeeding and entrepreneurs who previously failed have a 20% chance of succeeding.

To be honest the relations seem about right - though the actual numbers seem a bit high, but maybe it isn’t if you take into account that an exit doesn’t necessarily mean that money was made.

2. Companies that are funded by more experienced (top-tier) venture capital firms are more likely to succeed. This performance increase exists only when venture capital firms invest in companies started by first-time entrepreneurs or those who previously failed. Taken together, these findings also support the view that suppliers of capital are not just efficient risk-bearers, but rather help to put capital in the right hands and ensure that it is used effectively.

This is really important news for entrepreneurs (since you really can’t just increase your own experience) - if you don’t have the experience yourself, you should “buy” it. Choose your investors not just on the basis of money, but on the basis of their experience, and how much of that experience they are willing to put into a company (one day a month just isn’t enough). Or, if you can then you should hire the experience even though it is expensive. If you look at the numbers in the study - by getting the appropriate experience on board - you can increase your chances of success by 7%-12%

3. The average investment multiple (exit valuation divided by pre-money valuation) is higher for companies of previously successful serial entrepreneurs.

in other words - by getting the appropriate experience on board, you can not only increase your chances of success - but leave more money in your pocket when you are successful.

So for me the study proves the model that we are using at eXeedtechnology, while expensive, is the right model for entrepreneurial success (early heavy involvement of experienced industry veterans as an integral part of the startup). While it doesn’t increase your chances of a home run (which seems to be heavily predicated on luck) – it significantly increases your chance of a successful exit.

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