Abstract
Entrepreneurs with prior firm-founding experience are expected to have more skills and social connections than novice entrepreneurs. Such skills and social connections could give experienced founders some advantage in the process of raising venture capital. This paper uses a large database of venture-backed companies and their founders to examine the advantage associated with prior founding experience. Compared with 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. However, when the analysis also takes into account later rounds of financing, all entrepreneurs with prior founding experience appear to raise more venture capital. This implies that skills acquired from any previous founding experience can make an entrepreneur perform better and in turn attract more venture capital.
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Notes
For convenience of exposition, I will refer to a firm’s founder in singular, male terms throughout the paper, although it is common to have multiple founders for a single firm and there are many female entrepreneurs.
One particular advantage of being experienced entrepreneurs may be that they are more likely to get VC funding than novice entrepreneurs. This issue, although important, cannot be addressed in this study because my data only capture entrepreneurs who had received VC investment. To examine the probability of successfully raising VC, one needs information on all entrepreneurs who intend to raise VC. It requires a database of all VC-seeking entrepreneurs in which some succeeded but others failed in securing VC investment. See Audretsch et al. (2007) for an analysis using a unique database of that nature.
A recent study of entrepreneurial skills identified a list of 17 different skills (Smith et al. 2007).
Some of these studies (Westhead and Wright 1998a, b; Westhead et al. 2005a, b, c; Wright et al. 1997a, b) make a distinction between “serial” and “portfolio” entrepreneurs, with the former referring to those who founded multiple firms in a sequential manner and the latter to those who start multiple firms at the same time. In this paper, I do not distinguish between them and will call all of them serial entrepreneurs.
Two earlier studies explore the performance of experienced entrepreneurs using rather inadequate data. Chambers et al. (1988) examine the performance of 100 new firms in southeastern Michigan and find that the founding team’s previous founding experience does not help, although previous managerial experience has a positive effect. Kolvereid and Bullvag (1993) compare 250 novice and experienced Norwegian entrepreneurs. They find experienced entrepreneurs are more resourceful, tend to get involved in a more competitive business environment, but show no difference in terms of performance.
See, e.g., Batjargal and Liu (2004), Birley (1985), Cooke and Wills (1999), Davidsson and Honig (2003), Florin et al. (2003), Fried and Hisrich (1994), Elfring and Hulsink (2003), Hansen (1995), Jenssen (2001), Jenssen and Koenig (2002), Shane and Cable (2002), Uzzi (1999), and Yli-Renko et al. (2001).
It is important to note that only some of the social connections discussed here are observable. For example, if an entrepreneur goes back to a venture capitalist who invested in his previous start-up, we know for sure that he is relying on an established connection in seeking VC funding for a subsequent firm; this, in principle, is verifiable using VC data. However, many other social connections do not necessarily leave a paper trail, and cannot be easily identified.
In a study of VC contractual terms, Kaplan and Strömberg (2003) observe that serial entrepreneurs are treated more favorably than novice entrepreneurs in terms of board control, liquidation rights, and the amount of funding received upfront, providing direct evidence for the fourth type of advantages. Hsu (2007) also shows that start-ups founded by experienced entrepreneurs tend to receive higher valuations from venture capitalists before capital infusion.
VentureOne, previously owned by Alternative Investor, was acquired by Dow Jones and Company in 2004. Thus it is now often referred to as “Dow Jones VentureOne”.
A firm enters the VentureOne database only if it qualifies as a “venture-backed company” that receives some investment from venture capital firms. VentureOne defines a venture capital firm as “a professional, institutional venture capital limited partnership that generally manages over $20 million in assets and invests in privately held companies” (VentureOne 2000). Once in the database, VentureOne tracks the company’s financing from all sources, including bank loans and IPOs. In this study, I will focus on VC funding only. I will not only exclude bank loans and IPOs, but also drop equity investment by non-VC private investors and corporations in order to have a homogeneous sample.
See http://www.ventureone.com/ (accessed on April 23, 2006).
Some founder information is available for 6,629 firms. However, some cases are missing the most crucial biographical information of the founder, which cuts down the usable sample to 5,972 firms.
This is probably because a start-up founded in later years of the sample period tends to have a company website that usually reveals a lot of information about the founding team.
Gompers et al. (2005, 2009) also use the VentureOne data and rely on the founder information to identify “spinoff firms” (in the case of Gompers et al. 2005) and “serial entrepreneurs” (in the case of Gompers et al. 2009). In both papers, they supplement the original VentureOne founder data by searching for the missing information through sources such as Lexis–Nexis and surviving companies’ websites. Just like the practice of VentureOne, the added founder information by Gompers et al. could also introduce some biases because the information of successful founders should be found more easily. They noted this problem in both papers, but their search of alternative sources does give them a more complete sample. Unfortunately, I cannot do the same because VentureOne, citing the concern of confidentiality, replaced real company and founder names with identification numbers in the data they provided to me.
One might be concerned with the probability that some entrepreneurs have had some previous founding experience not captured by the VentureOne data and therefore are misclassified as novice entrepreneurs. Such misclassification errors would downwardly bias my estimate of the difference between novice and experience/repeat entrepreneurs. Given that I found some statistically significant differences between novice and experience/repeat entrepreneurs—which will be shown below—correcting such biases would only make the results even stronger and would not affect my results qualitatively.
This must be true for a great majority of the experienced entrepreneurs because VC was generally unavailable to most firm founders, especially prior to 1995. One cannot rule out the possibility that their previous firms did receive some VC but the deals were all completed before VentureOne started to track venture-backed firms and thus not captured by the database. However, this possibility has to be very small given that the sample shows that only a small fraction of venture-backed entrepreneurs have two or more venture-backed firms.
This is a conservative assumption in that, if access to VC is not determined by the most experienced founder, the advantage of the experienced founder will be underestimated, against finding supportive evidence for hypotheses 1 to 3.
VentureOne does collect this information although it is not available in my version of the VentureOne data.
This is not the “first” (earliest) round of venture capital a start-up completed. Rather, it is the round labeled as the “first round” by the round class variable. A small fraction of start-ups completed a “seed round” before the “first round.”
In one case, when different VC deals completed by a single VC-backed firm are treated as separate observations, I report standard errors that cluster on the firm.
The duration analysis follows Shane and Stuart (2002), which examines the hazard of VC funding, IPO, and failure events for 134 firms founded to exploit inventions at MIT.
Here one should not confuse the performance of the entrepreneur with the performance of the firm. Even a great entrepreneur may produce failures, because many other factors affect the performance of the firm. Such factors may include the overall economic trend, unanticipated demand, supply or price shocks, and luck, which are all out of the entrepreneur’s control. See Sarasvathy and Menon (2003) for an alternative and more sophisticated argument.
In Table 5, it is shown that subsequent firms founded by repeat entrepreneurs tend to raise their first-round VC at a younger age. Therefore, they may appear to raise more VC in total not because they indeed raise more VC over their lifetime, but only because they have secured VC more quickly and the data are censored at the end of the sample period (fourth quarter of 2001). I tried to address this issue by including “time to first-round VC” as a control variable in model (3). This is done in two different ways: (1) including this variable as an additional control variable, and (2) including this variable as a control and excluding “age at last VC round” from the regression. The results are qualitatively identical to those reported in Table 6; that is, holding “time to first-round VC” constant, by the end of 2001 subsequent firms founded by repeat entrepreneurs tend to raise more VC than those founded by novice entrepreneurs. This suggests that the results in model (3) of Table 6 are not an artifact of the censored data.
Throughout the discussion, I have assumed that repeat entrepreneurs, when founding their first start-ups captured in the VentureOne data, are novice entrepreneurs. However, one might suspect that some of them actually had some non-VC-backed founding experience before they started their first VC-backed firms and that such experience was not captured by the VentureOne data. Indeed, this alternative assumption would also be consistent with the finding that the first firms founded by repeat entrepreneurs show some advantages in later rounds of financing.
Given that experience matters, one would expect that an inexperienced entrepreneur will have incentive to assemble a more experienced management team and a board of directors with many veterans to compensate his lack of experience. Unfortunately, the VentureOne data I am using do not have detailed information about the management team or board members. So it is impossible to check directly whether this hypothesis is true and whether the experience of the management group and board members also matters.
They present this as evidence that serial entrepreneurs, when founding their later ventures, are not necessarily wealthy individuals.
In fact, over three-quarters of repeat entrepreneurs’ subsequent firms in these VentureOne data are located within 50 miles from their previous firms (Zhang 2007b).
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Acknowledgments
I would like to thank Ting Lu for many stimulating discussions on this topic. This paper has benefited from comments and suggestions by Kannika Damrongplasit, Amy Ickowitz, Chris Jepsen, Adam Lederer, David Neumark, Xue Song, Brandon Wall, the editors of this journal, three anonymous referees, and seminar/conference participants at the Public Policy Institute of California, the 80th Western Economic Association Annual Conference in San Francisco, CA, the 17th Academy of Entrepreneurial Finance Annual Conference in Pasadena, CA, and the 2007 Econometric Society Summer Meetings at Duke University.
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Appendix
Appendix
1.1 Geographic definition of high-tech centers
Following Saxenian (1999), I define Silicon Valley as the whole Santa Clara County and adjacent cities in Alameda, San Mateo, and Santa Cruz Counties.
City | Zip code |
|---|---|
Santa Clara County | |
All | All |
Alameda County | |
Fremont | 94536–39, 94555 |
Newark | 94560 |
Union City | 94587 |
San Mateo County | |
Atherton | 94027 |
Belmont | 94002 |
East Palo Alto | 94303 |
Foster City | 94404 |
Menlo Park | 94025 |
Redwood City | 94061–65 |
San Carlos | 94070 |
San Mateo | 94400–03 |
Santa Cruz County | |
Scotts Valley | 95066–67 |
Other regions are defined using telephone area codes.
Region | Area code |
|---|---|
San Francisco Bay Area | Silicon Valley, plus 408, 415, 510, 650, 925 if not already in Silicon Valley |
Boston | 508, 617, 781, 978 |
New York | 201, 212, 347, 516, 646, 718, 732, 845, 908, 914, 917, 973 |
Seattle | 206, 253, 360, 425 |
Washington, DC | 202, 240, 301, 571, 703 |
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Zhang, J. The advantage of experienced start-up founders in venture capital acquisition: evidence from serial entrepreneurs. Small Bus Econ 36, 187–208 (2011). https://doi.org/10.1007/s11187-009-9216-4
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DOI: https://doi.org/10.1007/s11187-009-9216-4