According to. almost half – 49% – of unicorn startup founders have began at least one company before Endeavor. In Europe it is even higher and amounts to 65%, Mosaic projects estimates.
At first glance, these numbers seem to substantiate a common assumption in enterprise capital: prior entrepreneurial experience leads to raised performance.
However, the discrepancy between these numbers points to something more complex.
It’s no surprise that serial founders are more common in Europe, where VCs are likely to be more risk averse and scrutinize their track record. Indeed, European enterprise capital funds have performed higher on average than their US counterparts, partly resulting from a more disciplined investment strategy.
However, this caution also limits the potential for an outlier – the form of outsized returns that accumulate top VC lists with firms from the USA
This is the risk of over-reliance on patterns and an necessary lesson about enterprise capital averages.
Risk of missing outliers
To paraphrase a popular saying: you’ll be able to only lose 1x your money on an investment, but you’ll be able to lose 1000x on an investment you miss.
Article by Gompers, Kovner, Lerner and Sharfstein looking at the sustainability of entrepreneurial outcomes, notes that each the best and worst performing founders are likely to be novices.
Aspiring entrepreneurs, motivated by the pursuit of their life’s work, can create the next one Facebook, Airbnb Or Amazonothers fail spectacularly and abandon entrepreneurship for good.
This is the central tension of enterprise capital: achieving extreme success means tolerating frequent failure.
By matching patterns too closely to serial founders, VCs can lower their failure rates, but additionally they risk excluding themselves from the highest potential returns.
Understanding success and failure
Interestingly, the article by Rajarishi Nahata indicates that repeat founders can raise capital faster (and on more generous terms) no matter the performance of their previous ventures.
However, based on Charles Eesley and Edward Robertsit is successful exits (via IPOs or acquisitions) that correlate with higher future performance in terms of revenue growth. Therefore, one other article by Gompers and colleagues found that founders who have failed before and first-time founders have roughly similar odds of success.
Moreover, when VCs back successful serial entrepreneurs, their very own experience as investors does not appear to influence the end result.
Indeed, Gompers and colleagues found little difference in performance between experienced and inexperienced VCs investing in deceased founders. This suggests that VCs add little value (and show no real differentiation) in these cases. As a GP, relying on access to those offers puts you in a precarious position with severe supply constraints and constant competition.
To achieve higher results in enterprise capital, it’s essential to go beyond pattern matching and discover outliers, whether the founder is experienced or not. Supporting serial founders can assist you to achieve “good” results, but achieving greatness requires defying the consensus, believing in non-obvious ideas and founders.
Nothing in the enterprise is obvious
The bottom line is that you would be able to’t focus on repeat founders in any coherent fund strategy. You would have to fight for access to those deals with larger brand firms, without having much added value to the exchange. Successful founders can raise funding from anyone without having to think about too many aspects, so they are a difficult market to serve.
When evaluating founders, track record must be taken into account, but it is unlikely to be the difference between “yes” and “no”, nor should or not it’s black and white: when building something unlikely, the most qualified candidate could also be someone who has no experience to know how unlikely it is that it’s going to work.