December 11, 2020

Why some startups do better. According to Harvard.

We explore some of the key factors behind startup success, based on a Harvard Business school study.

Insights + resources
Why some startups do better. According to Harvard.

Measuring success

In his survey for the Harvard Business school Thomas Eisenmann addresses the question: Why do some entrepreneurs succeed while so many others fail? The study, involving the CEOs of 470 early-stage startups, explored a broad range of factors that may have contributed to the firm’s success; such as their product management, marketing, technology and operations, financial management, funding choices, team management and founder attributes. The startups were concentrated in three sectors: information technology, business services and consumer products and services. 

Keep it lean

Eisenmann’s research found that several sets of related factors had strong relationships with a businesses valuation. One outcome from the survey found that performance was better for startups whose teams followed lean startup management practices, popular among modern early-stage businesses who are often on a tight budget. These teams conducted customer research more proactively, ran minimum viable product tests, and were more likely to pivot with optimal frequency. This finding is noteworthy, since only a single empirical paper (Camuffo et al., 2019) has previously assessed the performance consequences of lean startup practices.

Know your numbers

Close attention to financial metrics was also associated with higher valuations. Performance was stronger when founders had greater confidence in their estimates of total addressable market size, unit economics, and the ratio of customer lifetime value to customer acquisition cost. The study employed a survey of 470 founders/CEOs in the U.S. who raised a seed round of $500,000 to $3 million between January 1, 2015 and April 30, 2018. They were asked how they estimate the value of their 4 seed round equity as of year-end 2019 compared to its original value—or, in the case of firms that had been acquired or shut down, how the value of any proceeds received by seed round investors compared to the value of their original investment.

CEOs are a little helpful

Finally, several factors related to team management were positively related to valuation outcomes as well. Following a structured, disciplined approach to human resource management, striking the right balance in recruiting for skills vs. attitude, and having clarity on top team members’ responsibilities were among the predictors related to better performance. Surprisingly the CEOs were not significant predictors of valuation outcomes, including holding an MBA or any degree from one of the world’s top fifty universities; prior experience in functional roles (e.g., engineering, marketing, etc.); prior relationships between co founders; self-assessed personality traits; and personal motivations for becoming an entrepreneur. 

The weak predictive power of founder attributes in Thomas Eisenmann study’s regression analysis calls into question the conventional wisdom espoused by many venture capitalists, who hold in that deciding whether to invest in a startup, the ability of its “jockey” (i.e., founder) is more important than that of the “horse” (i.e., the attractiveness of the startup’s opportunity).


Do this

Following a lean methodology (and knowing when to pivot), knowing your market size and unit economics (CAC and LTV), having a professionalised HR function and a hiring process that balances hiring for skill and attitude were all predictive of stronger seed stage valuation growth.

Don’t worry too much about this

Valuation was not related to several founder/CEO attributes including age, educational background, personality traits, and motivations for becoming an entrepreneur. Likewise, choosing angels versus venture capital firms as lead seed round investors did not predict subsequent growth in equity valuation, nor did decisions about partnerships to provide technology, operational capacity, or marketing support.

Insightful - But not gospel

The caveat is that this type of analysis does not demonstrate causation but it's certainly an interesting piece of work and challenges some of the assumptions about the importance of the individual as opposed to being in the right market at the right time with the right management skills.

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