- In the trade-off between management experience and industry experience, the winner depends on the venture's level of risk.
- Social capital – i.e., good connections – can help bring entrepreneurs to the startup stage, but only strong networking skills correlate with success.
- Entrepreneurs are generalists, not specialists – no single area of expertise can predetermine success.
What does an early-stage investor look for in a company? E. Keller Fitzsimmons, serial entrepreneur and angel investor behind the book Lost in Startuplandia, evaluates the founder themselves with a question of her own: "Do they have the ability to ride out the roller-coaster ride of entrepreneurship?"
It may be tempting to waste time nailing down the specifics of your elevator pitch, but such concerns are secondary in the long run. "It's not about the market, idea or team," Fitzsimmons said. "All of those things are subject to change."
David Jackson, as CEO of FullStack Labs, has worked with dozens of entrepreneurs to help them launch their software, and he had a similar impression. "Innovative ideas would be at the very bottom of my list of required skills," he said. "Everyone has innovative ideas. Having ideas is easy."
In that case, what cocktail of traits makes a successful entrepreneur? It's a question faced by both aspiring entrepreneurs and the investors sizing them up – and, as it turns out, academia.
Managerial experience vs. industry knowledge
Identifying the ideal leader involves a trade-off between managerial and industry-specific skills. While a vocal minority of fast-growth startups are founded on an entrepreneur's ability and desire to lead, many new companies are founded by someone with unique industry knowledge who has identified room for improvement. It's hard to find someone with both attributes.
A 2014 research paper in the Strategic Management Journal found that the importance of a founder's knowledge depends on the entrepreneurial opportunity. Thus, in high-risk ventures, managerial experience takes priority. This may be because high risk can also lead to fast growth – in which case a good orchestrator is imperative, whereas industry experts can always be brought on.
"Management skills are more important as the business grows," said John Holloway, co-founder of NoExam.com, a digital life insurance brokerage. "As the business changes, so will the demands placed on them, and being able to adapt to change is important to keep growing."
The study also found the converse to be true: For founders of low-risk ventures, industry experience is a better indicator than managerial experience. In a low-risk but saturated market, those who have done time in the industry have a competitive advantage.
The good news is that, while there may be a correlation between managerial experience and high-risk venture success, it's not a death sentence for inexperienced businesspeople with risky startup ideas. Another finding of the study was that in high-risk, high-return startups, "the riskier the opportunity, the greater the performance of the startup above and beyond founder characteristics." Apparently, some ingenious ideas can indeed make up for the shortcomings of their inventor.
Social capital and networking ability
A cynical view may be that it's not about who the entrepreneur is, but who they know. Were they born with a silver spoon in their mouth? Did a friend or relative provide business advice, or finance their startup?
Alas, a study of 452 nascent firms found such "social capital" relationships were indeed predictors of entrepreneurship. However, while those with connections were more likely to create their own startup, only one of these factors had any positive correlation with selling or turning a profit – membership in a business network. Good entrepreneurs are tenacious networkers.
Benjamin Walker, founder and CEO of Transcription Outsourcing and member of a few business networks himself, can vouch for the data.
"[Entrepreneurs] network like crazy … they go to conferences, retreats, breakfasts, happy hours, and any other get-together and make true connections," he said. "Most don't ever lead to anything. The few that do, though, will be earth-shattering once they start to bear fruit."
Of course, this provides something new to be cynical about – the buzzword-y nature of "networking." It's a phrase that sooner conjures men in suits chatting over free champagne than any sort of substantial interaction. Call it what you will, but being able to say "I know a guy" clearly pays off.
Most entrepreneurs have to wear a lot of hats for a long time before they can afford to hire and delegate. This creates a dilemma – is it better to be a specialist in one area, or a jack-of-all-trades but master of none?
While there is little academic research to support any one skill being essential to entrepreneurship, there is evidence for entrepreneurs as dabblers. In a Journal of Labor Economics research paper examining the careers of a class of Stanford MBA grads, those who studied varied subjects and went on to have varied careers were more likely to eventually start their own businesses.
"Although not necessarily superb at anything, entrepreneurs have to be sufficiently skilled in a variety of areas to put together the many ingredients required to create a successful business," the study concludes. So, while the prescriptive advice for aspiring entrepreneurs may be to invest in a diversity of skills, for investors, it's to not be floored by pitches from the experts, no matter how impressive.
Finally, we did a bit of qualitative research of our own, asking entrepreneurs and investors about the tried-and-true traits. The overwhelming response was that entrepreneurs need a certain level of grit.
"It's really, really hard to start and grow a business, and most people give up early in the process," Jackson said. "Starting a business means dealing with rejection, failure and disappointment on a daily basis." According to Jackson, this means less of the fun stuff, like designing the app no one uses yet, and more of the uncomfortable stuff, like cold-calling customers.
Fitzsimmons agreed. "Resilience is the key, and it's rare." However, she clarified, "I am not interested in investing in a founder who is so dedicated to their startup that they risk being hospitalized for a lack of self-care." Instead, she said, it's about weathering failures and setbacks, staying in the game long enough for the market conditions to become favorable.
That's not to say that you should never quit – better to abandon ship before you sink – but that quitters never win.