When Starting Companies, Experience Matters

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For serial entrepreneurs like Elon Musk, success begets success, a study reveals. | Reuters/Callaghan O’Hare

In February of 1999, Elon Musk received $22 million when Compaq acquired his first company. Certainly he could have taken his millions and retired, or cut back to volunteer work on weekday afternoons, but instead he went on to cofound X.com, which merged with PayPal and netted him $165 million when it was acquired three years later. Next up? He launched SpaceX and Tesla.

Musk and other Silicon Valley icons have established a kind of mythology around the serial entrepreneur. Venture capital firms now fund serial entrepreneurs at greater rates than novices. Are they right to do so?

“We wanted to test this story of whether serial entrepreneurs actually do better,” says Kathryn Shaw, the Ernest C. Arbuckle Professor of Economics at Stanford Graduate School of Business. “The literature on serial entrepreneurship really had no interesting papers asking this question, and it is a question that needs answering.”

With Anders Sørensen at Copenhagen Business School, Shaw compared the success of novice and serial entrepreneurs in Denmark between 2001 and 2013. She found that serial entrepreneurs do, in fact, outperform novices, and by substantial margins.

Serial Gains

Shaw and Sørensen looked at sales, employment, and productivity data for roughly 215,000 Danish firms run by entrepreneurs. (Entrepreneurial markets between Denmark and the U.S. are comparable, though Denmark has a smaller high-tech sector.) Most of these companies were small businesses; serial entrepreneurs, who are defined as having founded more than one firm between 2001 and 2013, ran about 20% of the companies in the sample. “Among these small businesses, is there a gain to being a serial entrepreneur?” asks Shaw. “And, if so, why?”

The answer to the first question is an unequivocal yes. Serial entrepreneurs were far more effective than novices, with 98% higher sales, on average ($54,800 per month versus $24,600 per month). They were also 49% more productive, once capital and labor were considered. This difference in the success of serial and novice entrepreneurs also proved consistent across firm sizes. Among the largest firms in the sample, for instance, those run by novice entrepreneurs averaged $943,000 in sales, while those run by serial entrepreneurs averaged $1.99 million in sales — roughly twice as much.

In addition, comparing the first and second firms founded by serial entrepreneurs, the second firms generally did even better than the first, averaging 55% greater sales than their first firm. “We show that there is a definite, pronounced gain to being a serial entrepreneur in the first firm,” says Shaw. “And we go on to show that the second firm a serial entrepreneur opens is even better.”

Seeking Reasons for Success

So are serial entrepreneurs just lucky? “Everybody needs luck,” Shaw acknowledges. But this alone can’t explain the results, as “luck is not repeatable.” If serial entrepreneurs were simply lucky, then their second firms would tend to fail or, at best, be as successful as the firms of the average novice entrepreneur. Instead, when serial entrepreneurs open a second firm, it generally performs better than the first.

But the findings also suggest something beyond raw talent. If serial entrepreneurs simply possessed better skills from the start, then we might expect their second firms to perform roughly as well as their first: They open one, it does well; they open a second, it does equally well. But, again, this is not the story.

“There must be something else going on given serial entrepreneurs tend to found second firms that are even more successful than their first firms,” she says. For her, this implies the ability to learn quickly and effectively from the success of their first firms. “This suggests that there is some amount of learning taking place among serial entrepreneurs.”

She also notes an important demographic wrinkle in the findings: Though women are much less likely to be serial entrepreneurs than men, women are slightly more successful than their male counterparts when they go on to found a second business.

There are two important takeaways hidden in these findings. First, significant resources in the U.S. and abroad are committed to supporting small businesses and entrepreneurs; the private sector, through social entrepreneurship, is increasingly viewed as an engine of public progress. Given this, serial entrepreneurs — and even certain subgroups of serial entrepreneurs — may have the most to teach others about what leads to success.

Second, Shaw notes that these results dispel the near-ironclad maxim that underscores failure as the kernel of, and the necessary precursor to, success. “Failure is not essential,” says Shaw. In fact, 84% of entrepreneurs with more than one company continue to run a successful first business after opening their second. “You might learn something from failure, but it’s not necessarily important for success. We, in fact, find the opposite.”