In my previous blog post, I discussed how, on average, a successful entrepreneur is 48% more likely to build a successful company than first-time or failed entrepreneurs.
A Harvard Business School study found that the success rate for successful entrepreneurs building a new company was 34%, while first-time and failed entrepreneurs was 23%.
As a result, investors make more money, more often by investing in entrepreneurs with a track record of success.
This higher likelihood of success has positive implications on investors’ returns and is discussed further here.
Why is a successful entrepreneur most likely to succeed?
What I did not cover in my last blog post is why? What makes them the most likely to succeed by such a big margin?
In this blog post, I’ll explain why they are almost 50% more likely to succeed and provide some example case studies.
Because successful entrepreneurs have done it before, so they know how to avoid the main reasons why a business fails.
According to a CB Insights study, the 5 main reasons a startup fails are:
- No market need
- Run out of cash
- Wrong team
- Pricing/cost issues
To help explain why, and how, successful entrepreneurs avoid making these mistakes, I have included a summary of the CB Insights findings and an example case studies for each below.
1. No Market Need
Firstly, “tackling problems that are interesting to solve rather than those that serve a market need was cited as the No.1 reason for failure, noted in 42% of cases.”
A successful entrepreneur patiently waits to time the market needs perfectly, often waiting years or decades.
Rod Drury is a serially successful entrepreneur who did not make this mistake. He recognised that small businesses across the globe needed an accounting software solution. He also knew that ‘cloud computing was the solution to this problem. However, because the technology was not available, he had to wait more than a decade to build the first cloud based small business accounting software, called Xero, which is now worth more than USD$5bn.
2. Run out of cash
The second most common mistake is running out of money. “Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by startups (29%)”
Successful entrepreneurs know how much money they need to achieve the next milestone, so they under-promise and over-deliver.
Robert Friedland is an example of a successful entrepreneur in the mining industry not making the common mistake of running out of money. Because he had done it before (more than 5 times), so he knows better than anyone how much money it takes to build a mine. As a result, in his latest venture, he raised over USD$200m to give him enough runway for the world to realise what minerals/resources are required to solve the climate change problem.
3. Can’t build the right team
Thirdly, “a diverse team with different skill sets was often cited as being critical to the success of a company (23%).”
A successful entrepreneur understands what needs to be done, and have the networks and relationships with people who have been successful at the tasks they need done.
Matthew Callahan is a successful entrepreneur in the dermatology industry. He saw an opportunity to get new dermatology products approved in a third of the time it usually takes to get FDA approval (4 years instead of 12 years). So, he put together a team with more than 20 successful FDA approvals between them to rapidly bring these products to market.
The fourth most common mistake is focussing too much on the competition. “Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space (19%).”
Having outpaced the competition before, successful entrepreneurs know how, and what is required to outmanoeuvre them.
Anthony Thomson is successful entrepreneur in the banking industry. In 2019 he joined 86 400, one of Australia’s first ‘neobanks’ (digital banks). Within 12 months 86 400 had received a banking licence, more than AUD100m in customer deposits and became the first neobank in Australia to offer home loans.
5. Pricing/cost issues
The fifth most common mistake is mis-pricing. “Pricing is a dark art when it comes to startup success, and startup post-mortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers (18%).”
Successful entrepreneurs embody Winston Churchill’s famous quote:
“To improve is to change; to be perfect is to change often.”
Evan (Ev) Williams is a successful entrepreneur in the publishing/blogging industry. In his latest venture, called Medium, after a few years of operations he changed the business model from advertising revenue to charging readers a subscription fee. Ev made the switch after noticing the problems with relying on advertising dollars like he did in his previous business Twitter (he is the Founder and ex-CEO), and other platforms like Facebook etc. This wasn’t the first time Ev had ‘pivoted’ business models, he had previously made one of the most talked about startup pivots of all time when he transformed Odeo into Twitter.
So, what does this mean for you as an investor?
Like me, if you want to reduce risk and increase returns in your portfolio, then you should invest in businesses being built by successful entrepreneurs.
This is not to say that you should not invest in unproven or failed entrepreneurs. The intended purpose of this post is to show the benefits of investing in a type of person who is most likely to succeed, simply because you are investing in skill, as opposed to luck.