The success recipe of entrepreneurs encompasses sheer grit, a solid work ethic and some luck, coupled with generous capital. People will often cite the trinity of Bill Gates, Mark Zuckerberg and Steve Jobs. Highly intelligent, tough and resourceful, their companies are now market leaders.
But data from the seed accelerator Founder Institute, and online M&A marketplace Exitround paints a different narrative, based on quantitative and qualitative data gathered from analysing startup founders and M&A deals. What’re true determinants of entrepreneurial performance?
What makes an entrepreneur?
The Founder Institute is an early startup accelerator founded by Adeo Ressi, a Silicon Valley serial entrepreneur. Reviewing the data of 15,000 applicants to its Founder programme from 2009-2013, it predicted successful outcomes with 85 per cent accuracy. Counter to the common wisdom of intelligence, ingenuity and industriousness, four factors that mattered more were professional experience, creative and positive thinking, fluid intelligence, and agreeableness.
Professional experience contributed significantly, with founders in their 30s possessing domain experience and management expertise enjoying the most success, along with those in their late 20s having practical experience and project management skills. Optimistic attitude also mattered, as did open-mindedness.
Similarly, it was not how intelligent an entrepreneur was, but fluid intelligence that predicted success. Logical thinking, abstraction and pattern recognition are powerful components of their overall psychological composition. These enabled entrepreneurs to navigate and negotiate the complexities of developing their product and organisation under great uncertainty, high pressure and intense competition.
Founders who were agreeable, considerate, cooperative and forthright also performed better, due to greater social capital and larger social networks. Startup founders need to call in favours while developing their business, meaning that having friends and associates who like you and want to help you is a crucial asset. An extensive social network spread across different sectors and professional backgrounds also enhanced business outcomes.
Mark Suster, an entrepreneur-turned-VC, noted in his blog, Both Sides of the Table, certain attributes that dovetailed with these findings. Domain experience, adaptability, tenacity and resilience were important attributes that composed what he termed “entrepreneurial DNA”. What tended to work against entrepreneurs performing well were negative qualities like narcissism, emotional instability, deceitfulness, avoidance of responsibility and predatory aggressiveness. Such qualities tended to corrode the cohesiveness and effectiveness of startup management teams.
Raising larger funds = lower exit prices Usually, entrepreneurs in Silicon Valley and elsewhere are encouraged to raise as much capital as possible, in order to provide financial reserves and buffer against any cashflow issues. Exitround, an online M&A marketplace for tech companies, found this to be counter-intuitive. Their report, using data compiled from 200 deals worth less than US$100 million, over a period of five years, includes data collected from VC firms, accelerators and incubators, among them Y Combinator and Tech Stars.
Firms raising US$2 million to US$3 million had higher chances of an exit valued over US$10 million. Startups that raised US$3 million to US$10 million had lower median exit prices. Boris Wertz of VC firm Andreessen Horowitz commented on the report, noting, “While raising large amounts of funding at high valuations is generally exciting for entrepreneurs, it is often forgotten that it limits exit opportunities down the road and also raises pressure for the next round of financing.”
The problem of too much venture capital is the intense pressure placed on entrepreneurs to grow company value before the next funding round. It reduced the agility of startups to manoeuvre, reduced options for liquidity and forced founders to take greater risks growing the company. Investors expected founders to deliver an RoI commensurate with their investment, as it increased the threshold for future funding rounds.
Entrepreneurs benefited more by minimising venture capital, using as little as possible until their business model functioned, before raising funds to scale. They also benefited through exiting by selling early and focussing on M&A deals, with reasonable equity and valuation. Comparatively, trying for the longer term goal of an IPO and a large exit required seven years or more to build towards, meaning a higher chance of failure or shifting markets.
Taken together, being a successful entrepreneur seems to lie in being moderate in fundraising, positive in attitude and team-oriented when working.