Key Ingredients for Startup Success

by Derek Loosvelt | May 09, 2016

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For every Instagram, there are nine Friendsters. That is, nine out of 10 startups fail. Although what it takes for startups to succeed is thought to be more art than science, a study conducted by the venture capital firm First Round found that certain factors seem to be strongly correlated with startup success. The study, called the 10 Year Project, looked at 300 startups and 600 startup founders. The results of the Project were recently featured by Harvard Business Review, which had this to say about perhaps its most interesting finding.

Investments in companies with at least one female founder meaningfully outperformed investments in all-male teams. In fact, companies with a female founder performed 63% better than investments with all-male founding teams … Three of First Round’s top 10 investments of all time, based on value created for investors, had at least one female founder, far higher than the percentage of female tech founders in the data set. Simply stated, women are great technology entrepreneurs, and more of them need to be funded.

Although the study didn't try to find out why female founders add so much value to startups, one highly likely explanation is that diverse groups of leaders routinely outperform homogenous ones. Another possible explanation is that women are better decision makers and deal with stress and manage risk better than men (you might recall that there were several observers, including yours truly, of the recent financial crisis who wondered if much of the pain of the crisis could have been alleviated had more women been at the helm of certain financial institutions; in any case, more recently, there have been studies pointing to the possibility that, indeed, this might have been the case).

Another First Round finding of interest had to do with the educational background of startup founders. The study found (and I hate to add to the elite-college-admission-fury but here goes …) that startups with at least one founder who went to an Ivy, Stanford, or MIT outperformed (by a large margin) other startups without this pedigree.

In First Round’s portfolio, 38% of the companies had one founder that went to one of those schools; the study found that those companies performed about 220% better than other teams. While costly and difficult to enter, a top education can be an ingredient for startup success.

Again, there was no deep dive into the possible reasons behind the correlation (in this case, between alma mater and success) by First Round (nor by HBR), so we're left to guess as to what it is. As far as my guess, I'd wager it has something to do with the difficulty of entry into these elite schools and the competitive nature, on average, of its students. Which is to say success in the startup world is no easy task. It involves tireless work, significant drive, and a relentless competitive spirit to beat, if not crush the competition. Also, there's the possibility that since funding is so key to startup success, and elite schools tend to consist of students and alumni close to, if not among the so-called 1 percent, as well as among VC firms themselves (who are the gatekeepers of said funding), that connections/alumni networks also play a part.

Somewhat related, the study found a strong correlation between startup success and work experience. In fact, it appears to pay extremely well to have worked at one of the deities of the tech world.

First Round found that teams with at least one founder coming out of Amazon, Apple, Facebook, Google, Microsoft, or Twitter performed 160% better than other companies. Founding teams with experience at any of those tech companies also landed pre-money valuations nearly 50% larger than their peers. That’s a signal that investors consider these individuals to have already been “pre-screened,” as it’s very difficult to get a job at those companies. (Interestingly, while going to an elite school correlated with higher financial returns, it did not correlate with a higher pre-money valuation, perhaps suggesting that investors do not view education as quite so effective a pre-screening measure.)

I found the above HBR parenthetical to be extremely illuminating. And it should give those young people (and parents) caught up in the elite-college-admission-fury some (or at least a tiny bit of) relief.

Pre-money valuations and the difficulty of getting hired at these big swinging tech firms aside, this correlation with the tech gods points to the fact that experience inside a successful startup likely plays a very big part in the creation of another successful startup. Which should be an eye-opening data point to recent college graduates. Yes, it's attractive to take risks soon after graduating, and young graduates might have less to lose taking risks early on in their careers. But they might also have a lot to gain by obtaining experience at firms that have succeeded, that is, working alongside employees who've navigated the startup world and made it big. In other words, you can definitely learn a lot by failing on your own, but you could perhaps learn even more by associating with those who've already failed and learned how to succeed.

First Round does take a guess at the possible reasons behind this finding, believing that "the impact of embedded networks" at tech firms and the "foundational skills these types of jobs provide" perhaps contribute to startup success later on.

That said, don't get too much experience at other firms before you head out on your own.

The average age of an entrepreneur is approximately 40, and there is reason to think that entrepreneurs improve with age. But what about Facebook, Apple, Google, and Microsoft? The average founder age for those companies was approximately 23 … First Round’s investment portfolio gives credence to this argument. Founding teams with an average age of under 25 (when First Round invested) performed nearly 30% above the average investment. And while the average age of all First Round-backed founders is 34.5, the average age for the top 10 investments was 31.9.

Youth wins again.

Other interesting findings of the study included that startups with more than one founder fared 163% better than the single-founder startups (and so it most definitely pays to team-up rather than going it alone) and that there was no significant correlation in where a startup was located and success (and so you don't need to found a startup in Silicon Valley or Silicon Alley in order to succeed; you can found a startup anywhere—Ohio, Nebraska, New Jersey, etc.—and do just as well).

All that said, it's important to note that First Round's study didn't focus on finding out what the single most important ingredient was to startup success. But, thankfully, there's a worthwhile TED talk on the very subject. And, as it turns out, the answer to the question "What's the single biggest reason startups succeed?" is also the answer to the question "What makes a great comedian?"

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Read More:
57-Year-Old Proves It’s Never Too Late to Work for a Startup
Q&A with a Stanford Grad Who Founded Her Own Venture Capital Firm
Top 10 Tech Startups to Work For in NYC

Filed Under: Job Search | Technology | Workplace Issues

Tags: silicon valley | startups | tech jobs | technology | venture capital

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