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.
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.”
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.
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:
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.
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.