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Are You Suited to Entrepreneurship

Why Some Start-ups Succeed and Others Fail

Harvard researchers answer 10 perplexing questions about the success and failure of startups.

Alyson Shontell

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Do first time entrepreneurs have it harder? Does having a renowned venture capital firm behind you help? And most importantly, is successful entrepreneurship a skill, or is it luck? These are some of the issues analysed by Harvard Researchers for a working paper entitled Performance Persistance in Entrepreneurship.

1. Do serial entrepreneurs succeed more than first timers?

Answer: Yes.

If you’re a first time entrepreneur, the outlook is not so good. According to the Harvard researchers, there is performance persistence in entrepreneurship. They write, “All else equal, 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 an 18% chance of succeeding and entrepreneurs who previously failed have a 20% chance of succeeding.”

2. Who is more likely to get funded by a VC firm, a new entrepreneur or a tried and true one?

Answer: A new entrepreneur.

In addition, failed entrepreneurs are more likely to get funding than successful entrepreneurs from the same VC firm. Strange but true.

3. Is entrepreneurial success a skill, or is it luck?

Answer: Starting a company at the right time in the right industry is a skill.

According to the Harvard paper, “The industry-year success rate in the first venture is the best predictor of success in the subsequent venture. Entrepreneurs who succeeded by investing in a good industry and year (eg computers in 1983) are far more likely to succeed in their subsequent ventures than those who succeeded by doing better than other firms founded in the same industry and year (eg succeeding in computers in 1985).

“More importantly, entrepreneurs who invest in a good industry-year are more likely to invest in a good industry-year in their next ventures, even after controlling for differences in overall success rates across industries. Thus, it appears that market timing ability is an attribute of entrepreneurs.” Nothing indicated it has anything to do with wealth.

4. Does success breed success?

Answer: Yes.

Entrepreneurs with previous successes can get their hands on more capital and services if suppliers think they are persistent performers. “For example, high-quality engineers or scientists may be more interested in joining a company started by an entrepreneur who previously started a company in a good industry and year if they believe (justifiably given the evidence) that this track record increases the likelihood of success.”

5. Are companies that are funded by top-tier VC firms more likely to succeed?

Answer: Yes, with one exception (see next question).

The reason these companies are more successful is obvious. It’s either because the top VCs are better at identifying potential success, or it’s because they’re able to add more value to companies they fund. The Harvard paper assumes both.

6. If a company’s founder has been successful before, how important is the VC?

Answer: If a start-up is founded by previously successful entrepreneurs, then the VC firm doesn’t really matter. Basically, since successful entrepreneurs can easily obtain services and they have a better chance at success, then they really don’t need the guidance top VCs provide.

Harvard explains, “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, then top-tier venture capital firms add little value.

7. Where do most entrepreneurs get their ideas from?

Answer: From former employers.

Make sure employees sign those non-competes! The Harvard paper cites a 2000 study by Bhide that finds “a substantial fraction of the top 500 companies got their idea for their new company while working at their prior employer.”

8. Will VCs give the same entrepreneur funding on their next venture?

Answer: Not usually.

The same venture capital firm that funded you before probably won’t give you money again. You’d think successful entrepreneurs would have no problem getting funding from venture capital firms that previously backed them… but you’d be wrong. According to a 2007 study by Bengtsson, “it’s rare for serial entrepreneurs to receive funding from the same venture capital firm across multiple ventures.”

9. Who closes VC funding quicker, serial entrepreneurs or newbies?

Answer: Serial entrepreneurs receive venture capital sooner than first-time entrepreneurs.

It makes sense. If you’re established, it’s easier to convince VCs you’re worth betting on. “While 45% of first-time ventures receive initial venture capital funding at an early stage, close to 60% of entrepreneurs receive initial venture capital funding at an early stage when it is their second or later venture.” It takes an average of 21 months for established entrepreneurs to secure VC funding compared to 37 months for first-timers.

10. Who receives a higher initial valuation, seasoned entrepreneurs or new ones?

Answer: New entrepreneurs.

They were found to have higher initial pre-money valuations than serial entrepreneurs: $12,3 million compared to $16 million for first-time founders.

Are You Suited to Entrepreneurship

Build Solid Back-Room Basics For Business Success

What do South African entrepreneurs really know about what goes on behind the scenes building of businesses?

Marc Wachsberger

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South Africa has a vibrant start-up culture with great ideas starting out with a bang, but closing down with a whimper because entrepreneurs picture the glory at the destination, but not the nitty gritty of the journey to get there.

Be smart about scale

When I started out, I literally did everything myself. I negotiated and signed leases, I arranged the furnishing for our apartments and managed the interior décor process. When guests started using our apartments, I signed them in at reception, and then carried their bags.

At that stage, there was no money in my business to pay for attorneys, interior designers and decorators and there certainly wasn’t enough money for porters.

However, when we got to 70 apartments, it didn’t make sense for me to be a porter any longer, so I hired someone to do that job, explaining clearly what I expected of him. Before I did that, though, I spent time designing incentives for him so that he would be more affordable for me, and so that he could earn as much money as possible.

Related: Training Is A Two-Way Trick

Know your talents – and your limitations

There are certain things I’m really good at, but I know without a doubt that sales isn’t one of them – and without sales, you don’t have a business. I couldn’t afford a top-flight salesperson, but I knew that I could attract the right talent with the right business model. I set some high targets for Pamela Niemand, but offered her one third of the business if she met them. We both won: she earned a share in a successful, trend-setting business, and my trend-setting business became successful!

Use your skills – but know when to hand over

My background in corporate finance meant that I had all the accounting skills I needed when we first started out, but I knew that the time would come when I would need someone focused on that side of the business full time. Doing it all myself first meant that I could brief my first full-time accountant clearly and with a deep understanding of what would be required – and that I could help that person find and fix any challenges based on my experience.

In summary, my simple advice to anyone starting out would be to bootstrap your business yourself without investors or staff for as long as you can, but don’t over-extend yourself. Know when to delegate tasks away so that you can focus on what you’re really good at – but don’t do it before you have a solid understanding of what’s required. Know what you’ll never be able to do, and bring in that resource from the beginning – but do it based on performance-based incentives, so that your fledgling business doesn’t lose out if your early hires don’t perform.

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Are You Suited to Entrepreneurship

The Myth About The Relationship Between Entrepreneurs And Taking Risks

This is the true relationship between entrepreneurs and the apparent illusion of risk.

Lisa Illingworth

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“I can’t be an entrepreneur or start a business. I don’t have the appetite for risk.” This line is spoken regularly to brave few that leave the perceived safety of a job, take the plunge and venture into the unknown world of being an entrepreneur. However, there is a gross misunderstanding in the appetite for risk that entrepreneurs are believed to have innately inside of them.

The little-known truth is that the majority of entrepreneurs don’t like taking risks and according to Luca Rigotti and Mathew Ryan in their paper that explores a model for quantifying risk and its translation into enterprising action, the results were very interesting.

Risk is explained by these theorists as taking action where the outcomes are unpredictable as well the factors leading to that outcome are unknown. One of the theorists in this area, Saraswati, who coined the term “tolerance for ambiguity” has a more accurate description of what the outside world deems taking a risk.

In simple terms, entrepreneurs don’t go head-first into the shark infested water because they like the idea of danger and potentially being eaten alive; or the thrill of being able to say that they survived whilst others perished in a pool of maimed flesh. They carefully calculate that the sharks have been fed recently, some of the sharks are ragged tooth sharks that whilst looking like they are set to devour a human being, are actually incapable of opening their jaws wide enough to bite. For those sharks that still have space or who smell blood and can’t resist the urge to kill, the entrepreneur has a cage set up that he can retreat into quickly and a knife with which to protect himself.

Related: 5 Infamous Risks Every Entrepreneur Must Face

Tolerance for ambiguity is the careful evaluation of what is known at the moment where a decision must be made and an open-mindedness for what is not known. This, coupled with the agility to change course when new information is presented, has earned the label of high risk appetite. The appetite is not for the risk, but it is the ability to move down a path, when all the information is not known.

I likened it to a person moving around in the dark holding a candle. The candle casts a light that illuminates a limited parameter around the person holding the candle. What is beyond the light that the candle casts, is unknown and potentially a risk. But as the person moves forward, the light reveals what was unknown and in the shadows. As the light reveals new information and new challenges added to what they have already learnt, the person can make better informed decisions. The tolerance is in not knowing what lies in the shadows yet to be illuminated by the candle and then the confidence in his or her own ability to act on what new information is discovered.

None of this behaviour is risky or irresponsible. There is careful consideration for what is known and a tolerance for what is unknown. And once there is more information available, a calculated next step is taken and more information is assimilated into what is now known. This is the true relationship between entrepreneurs and the apparent illusion of risk.

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Are You Suited to Entrepreneurship

7 Skills Every Entrepreneur Needs To Adopt Today

Want to know what skills can help you build confidence and your business? Here are seven…

Nicholas Bell

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For some people, becoming an entrepreneur is as easy as stepping off a bus. They have a big idea, they bring it to life, they hire employees and the next thing they are in a building smothered in branding and living the business dream. For others, the idea and the passion are there but they are unsure as to how they can make these into a sustainable reality. Entrepreneurial spirit isn’t like instant coffee – you don’t add ideas and suddenly get all the skills you need to thrive.

Want to know what skills can help you build confidence and your business? Here are seven…

1. Believable vision

Make sure that your vision is believable and achievable. It has to live in the realms of possibility, not as a blue-sky idea that looks good on paper but wouldn’t work in reality. You need to be able to live this vision so make it realistic and achievable. This will not only keep you on track, but your employees as well.

2. Be inclusive

You need to ensure that every person who works with you feels as if they are part of your vision and understand it. They need to relate to where the business is going and how it plans to get there. Many leaders don’t understand why employees are not engaged with their business and it’s because many of them don’t actually understand what the business does.

Related: 4 Ways To Improve Your Budgeting Skills

3. Communication is critical

If you don’t have fantastic communication skills, then now is the time to hone them. When it comes to building employee morale, commitment and engagement, nothing works as effectively as constant communication. The same applies to client relationships. You need to repeat the vision and ethos of the company at every opportunity and you need to be part of the team that does this communication.

4. Be visible and transparent

You are communicating, now you need to make that communication genuine by being both open and clear. People respond incredibly well to transparency. They feel as if they are part of something that recognises their value and contribution and it fosters a more inclusive company culture. Often toxic cultures come about thanks to a lack of communication and visibility. People know when things are being kept secret and react negatively to it, regardless of whether they’re an employee, a customer or a manager.

5. Be practical

You aren’t going to build an empire in a fortnight so focus on a realistic and practical business strategy that has clear benchmarks and even clearer goals. Communicate these with the company and keep everybody on the same page. Practical and achievable means long-term success.

Related: Crucial Skills You Need To Be An Entrepreneur

6. Build opportunities

As people become immersed in your company and part of its growth they will also need opportunities to grow. You need to tie their careers to the business and create opportunities for them.

7. Be human

It takes people to build a culture, a company and a future. It’s essential that you are human in your interactions and your treatment of others. The impact that a down to earth and authentic attitude can have on a company is extraordinary.

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