Trends. Look beyond serial entrepreneurs

Now that the start-up ecosystem in India is seven to eight years old, and expanding rapidly, it is not uncommon to run into entrepreneurs in their second and third start-up ecosystem In start-up lingo, such a person is called ‘serial entrepreneur’ — someone who has founded at least one start-up earlier and which had raised external funding.

In the West, and increasingly now in India, serial entrepreneurs are glorified. The general belief is, if someone had founded a start-up earlier, where external funding was raised, and some kind of exit was achieved, then it is highly likely that the second or third venture will also make money, and perhaps much more than the first.

If as angel investors you come across such people or teams, here’s some advice: Be cautious, follow your usual diligence and checklists. Do not make the assumption that odds of success for the venture will be very high just because the founder has prior entrepreneurial experience.

Definition of success What may be important is whether there is clear evidence of success in the previous venture(s).

Among the most cited academic studies on the subject — whether serial entrepreneurs do better — is one published in 2009 by Gompers and Lerner from Harvard Business School; it claimed that serial entrepreneurs (SEs) had a higher chance of success compared to first time entrepreneurs (FTEs).

The study said: ‘‘all else equal, a venture-capital-backed entrepreneur who succeeds in a venture (by our definition, starts a company that goes public) has a 30 per cent chance of succeeding in his next venture. By contrast, FTEs have only a 21 per cent chance of succeeding and entrepreneurs who previously failed have a 22 per cent chance of succeeding’’.

The definition of success in the above study is worth noting: A venture which goes public. There are very, very few VC or PE-backed companies in India which have gone public. In other cases, the study finds there is very little difference between SEs and FTEs.

Funds play a vital role The authors could not find a clear answer to what drives better performance in subsequent ventures. One factor that the study highlighted was: The perception that successful entrepreneurs are more skilled than unsuccessful ones can induce “real performance persistence”. How does this happen? The study says investors and suppliers are more likely to back a successful entrepreneur. And funding plays an important role in the survival and scaling up of businesses.

An earlier study by Junfu Zhang of Clark University said something similar. It stressed that any advantage a serial entrepreneur has is simply better ability to raise funding. It said ‘‘Compared to novice entrepreneurs, entrepreneurs with venture-backed founding experience tend to raise more venture capital at an early round of financing and tend to complete the early round much more quickly. In contrast, experienced founders whose earlier firms were not venture-backed do not show a similar advantage over novice entrepreneurs, suggesting the importance of connections with venture capitalists in the early stage of venture capital financing’’.

The difference between a FTE and SE could simply be better ability to raise capital by the SE. Who raises capital first — that can be the key success factor in today’s VC-driven start-up world. To get funds in the fourth or fifth venture in a certain space is difficult, no matter how good the team or business model may be.

So what are the implications in an Indian context? One thing from the above studies is clear. A serial entrepreneur does have an advantage if he/she demonstrated clear success first time around. In India, though, exits via public listings are very, very few. Far many more exits are strategic ones — a Taxiforsure selling itself to Ola, for example. Here, it is often nebulous as to whether any real money was made by the first investors or, for that matter, by the purchasers. In fact, we hear too many stories of ventures bought, but then closed and written off by acquirers.

Does experience matter? In fact, there are other studies which show no evidence of difference in performance. A more recent study from the Centre for European Economic Research casts doubt on the Harvard study. Here, the researchers used survey data to examine the success or failure of 8,400 entrepreneurial ventures in Germany, and whether the founder’s previous experience predicted the outcome.

They concluded previously successful entrepreneurs were no more likely to succeed in their next venture, and that previously failed founders were more likely to fail than novice entrepreneurs. These results held even after accounting for education and industry experience.

Hence the advice on following usual due diligence procedures. Unless you see strong evidence that the entrepreneur has created real value in the first venture, you may be far better off backing competent teams, even if new.

The writer is a partner at Wisdomsmith Advisors LLP, a financial advisory firm, which also runs an angel platform Wisdom Angels.

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