How Much Experience Do You Need to Start a Company?

Yes, almost anyone can play the entrepreneurship game. And some stumbles when starting a business are the rule, not the exception. But, at the end of the day, being a successful entrepreneur takes more than just luck and persistence.

Research shows that a particular mix of creative leaders and venture capitalists are what you need to start a company that sticks.

Striking a balance

Start a Company pbs rewire
Source: entrepreneur.com

A long-range look at 10,000 entrepreneurs over a 20-year period, 1980 to 2000, suggests that balance is key. While experienced entrepreneurs can be successful partnering with inexperienced venture capitalists (VCs), inexperienced entrepreneurs—ones who have never tried to start a business before or who have failed in the past—are better off teaming up with experienced VCs.

Jon Eckhardt, executive director of the Weinert Center for Entrepreneurship at the University of Wisconsin-Madison, wrote about striking this balance for Entrepreneur & Innovation Exchange, where he’s an editor.

“Venture capitalists often take a chance on businesses led by unproven entrepreneurs: either novices or those who’ve failed before,” he wrote. “It takes a special skill to spot the diamonds in the rough that might pay off handsomely later.”

Eckhardt’s article was based on research by Harvard University professor Paul Gompers and Anna Kovner, Josh Lerner and David Scharfstein. That was the team that crunched the numbers of thousands of entrepreneurs captured over two decades.

They found that newbies to entrepreneurship benefit more from being coached by experienced funders. But those who have already had one or more successful ventures can get away with a less experienced VC—in fact, they do just as well regardless of the experience level of the folks backing them.

“An important inference from this work is that it appears that skill—not only luck—is an important factor in determining the success of new ventures,” Eckhardt wrote. “The findings suggest that either entrepreneurs or the VCs must know what they are doing.”

What does that mean for first-timers?

Of the 10,000 companies the team studied, most fell into one of three categories: internet and computers, communications and electronics or biotech and health care.  Most of the people leading these companies were first-time entrepreneurs. The research team gauged the companies’ success by whether they had gone public or filed to go public by December 2003.

Start a Company pbs rewire
Source: entrepreneur.com

The team also followed 40 venture capitalists who backed the companies and ranked them by experience, determined by how many entrepreneur-led firms they had in their portfolios.

Here are Eckhardt’s top takeaways from the study:

  • Entrepreneurs who have started one or more successful businesses are more likely to succeed in their next venture than the ones who are trying for the first time or who have failed in the past.
  • Those new or failed entrepreneurs have a better shot at success if they seek out and team up with more experienced VCs who can mentor them and develop their potential. New entrepreneurs who teamed up with inexperienced VCs had a success rate of 11.7 percent, but that rate rose to 17.6 percent when they paired with experienced ones. Entrepreneurs who had a failure in their past had a success rate boost to 22.1 percent from 14.7 percent when they sought support from an experienced VC.
  • Entrepreneurs with successes already under their belts experienced no difference when they were partnered with inexperienced or experienced VCs. In both situations, they experienced a success rate of almost 30 percent.
  • Experienced VCs pay more for new ventures than novice VCs do.

Good mentorship or something else?

Eckhardt pointed out that being backed by an experienced VC doesn’t improve the chances of all inexperienced entrepreneurs. And it’s not clear if the better outcomes for this pairing are because of better mentorship. It could be that the experienced VCs are just better at picking out the diamonds in the rough, giving them better stats.

“However, the findings are consistent with the idea that more experienced VCs may pay more attention to their portfolio firms and are effective in adding value: for example, recruiting new executives for the venture or introducing it to new markets,” Eckhardt wrote. “Already successful entrepreneurs don’t need this hand-holding.”

Want to fund your startup? Here’s where to start.

This article is part of America’s Entrepreneurs: Making it Work, a Rewire initiative made possible by the Richard M. Schulze Family Foundation and EIX, the Entrepreneur and Innovation Exchange.  

Katie Moritz

Katie Moritz is Rewire’s web editor and a Pisces who enjoys thrift stores, rock concerts and pho. She covered politics for a newspaper in Juneau, Alaska, before driving down to balmy Minnesota to help produce long-standing public affairs show “Almanac” at Twin Cities PBS. Now she works on this here website. Reach her via email at [email protected] Follow her on Twitter @katecmoritz and on Instagram @yepilikeit.