Not all venture capital backed businesses are successful. OK, so that's not exactly a surprising or controversial statement. But how important are factors such as (a) prior experience of entrepreneur, (b) prior success of entrepreneur, (c) experience of venture capital firm in the likely success of VC-backed business? And how important is prior experience or prior success by entrepreneurs in the investment selection criteria by VCs?
It seems widely intuitive that prior entrepreneurial success, experienced VC-backers and even prior entrepreneurial failures could improve the chance of success of a new business. Indeed there could easily be a virtual-circle in effect - with financiers, customers and suppliers of a business providing favorable treatment to an entrepreneur that has a successful track record. Many people express opinions on such matters. But empirical evidence is uncommon.
A recent Harvard Business School working paper, "Performance Persistence in Entrepreneurship", reviewed all the funding, founders, vc-advisors and resulting success (IPO) of all US VC-backed businesses between 1975 and 2003. Their statistical conclusions confirm some common intuitition and highlight a few surprises ...
Conclusions of the working paper include the following:
- Entrepreneur history. Entrepreneurs with successful VC-backed / IPO-history have a 30% change of IPO success in their next venture. This compares with 18% and 20% for first-time entrepreneurs and entrepreneurs with earlier vc-backed failed business respectively.
- Finance timing. Entrepreneurs with previous VC-backed experience (successful or not) raise capital for their next ventures significantly earlier - 21 months versus 37 months after founding - than first-time entrepreneurs. This is contrary to some intuition that previously successful entrepreneurs may elect to personally finance their next venture in an attempt high equity ownership. Pre-money valuations for ventures with prior success are lower than first-time entrepreneurs, being $12.3 million versus $16.0 million respectively. However there is no statistical evidence that entrepreneurs with successful track record achieve an exit transaction more quickly than a first-time or previously-failed entrepreneur.
- VC experience. The existence (board membership) of a highly experienced VC firm significantly improves the probability of success of a entrepreneur. But only if it is the entrepreneur's first venture, or if the entrepreneur venture previously failed. The presence of an experienced VC provides no statistical benefit to an entrepreneur with previous venture success.
- Serial entrepreneurs. Between 8% and 16% of the ventures funded by the top forty VC firms are to entrepreneurs with prior success. However the VC-entrepreneur relationship is weak, with no evidence that VC firms prefer serial entrepreneurs to whom the VC firm has previously provided investment.
The working paper defines success as an IPO exit, however notes that the conclusions are 'qualitatively similar' if success is defined to include an acquisition exit in which the purchase price exceeds $50 million.
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