Social Econ Blog

Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs

This paper argues that a large component of success in entrepreneurship and venture capital can be attributed to skill. We show that entrepreneurs with a track record of success are more likely to succeed than first time entrepreneurs and those who have previously failed. Funding by more experienced venture capital firms enhances the chance of success, but only for entrepreneurs without a successful track record. Similarly, more experienced venture capitalists are able to identify and invest in first time entrepreneurs who are more likely to become serial entrepreneurs. Investments by venture capitalists in successful serial entrepreneurs generate higher returns for their venture capital investors. This finding provides further support for the role of skill in both entrepreneurship and venture capital.

Here's a particularly interesting paragraph (I didn't know precisely how low the "success rate" of entrepreneurs is):

Our approach to identifying skill in entrepreneurship is to examine the performance of venture-capital backed serial entrepreneurs. We try to answer the following simple question: Are successful entrepreneurs more likely to succeed in their next ventures than first-time entrepreneurs and entrepreneurs who previously failed? Our answer is yes. Our empirical model indicates that entrepreneurs who succeeded in a prior venture (i.e., started a company that went public) have a 30% chance of succeeding in their 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. This performance persistence suggests that a component of success in entrepreneurship is attributable to skill. While it may be better to be lucky than smart, the evidence presented here indicates that being smart has value too.