No wonder venture capitalists often invest in serial entrepreneurs. Company founders who have succeeded in the past are more likely to succeed in the future than those who have failed or those who have never tried.
So finds Harvard Business School professor Josh Lerner and colleagues in "Performance Persistence in Entrepreneurship," a recent report that analyzes data from Dow Jones & Co.'s VentureSource. We spoke to Lerner about why success breeds success.
The Deal: How much more likely to succeed are entrepreneurs who have succeeded in the past?
Josh Lerner: There is a large difference in success rates. A venture capital-backed entrepreneur who succeeds in a venture has a 30% chance of succeeding in his next venture. By contrast, first-time entrepreneurs have only a 21% chance of succeeding, and entrepreneurs who previously failed have a 22% chance of succeeding.
How do you define past success and failure?
For the bulk of the paper, we look at whether the firm went public and define this as a success. This is the way that venture capitalists typically exit the most successful firms and glean the best returns. We also look at supplemental analyses cases where the company is acquired at a substantial premium to the valuation in the last venture round.
Why is there a correlation between past success and future success?
Performance persistence -- for example, among baseball players or hedge fund managers -- is usually taken as evidence of skill. This is certainly the most straightforward explanation of our finding. However, in the context of entrepreneurship, there may be another force at work. The perception of performance persistence -- the belief that successful entrepreneurs are more skilled than unsuccessful ones -- can induce real performance persistence.
We look carefully at this by dividing entrepreneurs into those who were substantially more successful than their peers -- the entrepreneurs who started similar companies in the same year -- and those who chose propitious times to begin their company (when many of their peers succeeded). We find evidence for the role of skill as well as the perception of skill in causing performance persistence.
How does perception of success turn into reality?
This would be the case if suppliers and customers are more likely to
commit resources to firms that they perceive to be more likely to
succeed based on the entrepreneur's track record. This perception of
performance persistence makes everyone confident enough to commit
resources to the firm, which they otherwise might be hesitant to do. In
this way, success breeds success even if successful entrepreneurs just
happened to be lucky.