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Do You Know What Makes a Successful Entrepreneur?

May 7, 2012

According to Harvard Business School academics it’s a combination of skill, luck and good timing.

What makes some entrepreneurs successful and others unsuccessful? It’s a combination of skill, luck and good timing, according to Harvard Business School academics. In their paper “Performance Persistence in Entrepreneurship,” Paul Gompers, Anna Kovner, Josh Lerner and David Scharfstein looked into the factors behind an entrepreneur’s success (in this case, starting a company that subsequently goes public).

Here are the key points:

Serial entrepreneurs really are more successful than first-timers

• An entrepreneur who is backed by venture capital and succeeds in one venture has a 30% chance of succeeding in his next venture, according to the study.

• Whereas, a rookie entrepreneur has only an 18% chance of succeeding, while those who failed before have a 20% chance of succeeding in a future endeavor.

So the lesson is “If at first you don’t succeed, try again.”

Success breeds more success

If you’re a good entrepreneur then you’ll succeed. But the perception of success may be a factor, too.

• Entrepreneurs who have had success in the past are more likely to attract capital and critical resources.

• In addition, higher quality people and potential customers are more likely to be attracted to that firm, because they think it has a better likelihood of success.

That investors choose to back it probably increases the venture’s chances of success. So success breeds further success, even if the entrepreneur was just lucky first time out.

Market timing is a skill

“A good year” isn’t just a term used for fine wine. Choosing the right time to set up a venture is a knack that successful entrepreneurs have.

For example:

• Of those computer companies that set up in 1983, 52% eventually went public, i.e., they were successful.

• Whereas, of those computer companies that were created in 1985, only 18% went public – they missed the tide.

If an entrepreneur set up a company in a “good industry year” (in which success rates were high) they are more likely to succeed in their next venture. They have a skill for choosing to start up in the right industry at the right time.

Entrepreneurs who start up a new venture in a good industry year are more likely to invest in a good industry year in their next ventures, the study finds.

Companies backed by top-tier venture capital firms are more likely to succeed

The top VC firms help companies succeed, either because they are better at spotting good companies and entrepreneurs, they help it attract better resources or help it to formulate a better small business plan.

Interestingly, top-tier VC firms were only observed as adding to the success of small business start ups by first-time entrepreneurs or by those that failed in a previous venture.

Successful entrepreneurs don’t need a top-tier VC

If an entrepreneur with a track record of success starts a company it is no more likely to succeed if it is funded by a top-tier VC firm than a lesser known firm.

That’s because 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 because of the perception that they’re successful, then top-tier venture capital firms add little value. In fact, another study cited by the Harvard academics found it was rare for serial entrepreneurs to receive backing from the same VC firm across all their ventures and that relationships with VC firms play little role in enhancing performance.

Those entrepreneurs that invest in proper liability insurance to protect their ventures have a better chance of succeeding, because their plans are less likely to be blown out of the water by an unexpected and expensive legal disaster or claim.

At Hiscox, we’re here to help small business entrepreneurs realize their dreams of success.