Entrepreneurship, Skill or Luck ?

What makes entrepreneurs successful?  Is it skill or luck?   Many argue that an important component of entrepreneurship is the willingness of the venturesome to ‘assume’ or ‘insure’ the doubtful and timid by guaranteeing to the latter a specified income in return for an assignment of the actual results.” In this view, Luck is a big determinant of entrepreneurial success. It is the only determinant of entrepreneurial success: in their model entrepreneurs are simply less risk averse individuals who are willing to guarantee workers’ wages and bear residual risk.  Schumpeter argues just the opposite, claiming that “the entrepreneur is never the risk bearer,” but rather an innovator, one who discovers new production processes, finds new markets, creates new types of organizations, or introduces new products. Entrepreneurial success, in this view, flows from innovative skill.  Only suppliers of capital bear risk.

By examining the experience of serial entrepreneurs and the venture capitalists that fund them, we are able to provide insights into how important each is and what type of skill each possesses.  It is indicated that skill is an important determinant of success for entrepreneurial startups.  Successful serial entrepreneurs are more likely to replicate the success of their past companies than either single venture entrepreneurs or serial entrepreneurs who failed in their prior venture.  

More experienced venture capital firms are also shown to have higher success rates on their investments.  However, this is isolated to first time entrepreneurs and those who previously failed.  When experienced and inexperienced venture capital firms invest in entrepreneurs with a track record of success, there is no performance differential.  This evidence would seem to suggest that prior success is a signal of quality or that venture capital firms add little value to talented, successful entrepreneurs.  If prior success were pure luck, we would not see this pattern.   

While they are more likely to be successful, serial entrepreneurs are not able to extract all of the value from their superior ability.  We find that successful serial entrepreneurs do not achieve higher valuations than do other entrepreneurs.

This leads to higher deal returns for venture capitalists who invest in companies started by successful serial entrepreneurs.  Investing in serial entrepreneurs also leads to higher rates of return of the funds themselves.  

Waseem Chishti

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