What helps entrepreneurs succeed

By
Paul Smith

What helps entrepreneurs succeed by Paul Smith 

I have spent the last 15-years obsessed with the question: how can we best help entrepreneurs succeed? My search for answers led me to read over 500 books, review 2,500 studies, complete a masters degree, work with over 30 incubators and small business support programmes, attend over 20 entrepreneurship courses, visit Silicon Valley twice and interview over 100 successful entrepreneurs. 

So what did I learn? 

Interventions could be categorised into three camps:

  1. Negative or no impact interventions: These include many startup training programmes, incubators and getting advice from the wrong people. [1]
  2. Small positive effects, increasing the likelihood of success by only a few percent. Starting with a team vs. being a solo founder, getting industry or management experience or getting mentored by an experienced entrepreneur all improve the odds a business will survive or grow [2].
  3. Outsized impact on an entrepreneurial success: 1) Getting funded by a top accelerator or venture capital company, 2) joining a top CEO network or 3) being part of the right community, family or tribe.

The three outsized impacts are unpacked below.

1 Get funded by a top venture capital firm or accelerator 

If you get funded by a top venture capital company or accelerator, your odds of success increase dramatically. Take, for example, Sequoia Capital, an American venture capital firm, that has backed over 250 companies totalling a value of $1.4 trillion, equivalent to 22% of the Nasdaq (one of the USA's largest stock markets) [3]. The second example is Y Combinator, a top accelerator programme that has backed 1,900 companies producing a cumulative valuation of $155 billion+. 102 companies they have funded have realised a valuation of $150 million and created 50k jobs and 19 companies that have reached a valuation of $1 billion. 

To give you some perspective, only about 0.1% of US firms achieve revenue of $250 million. In comparison, 10% of Y Combinator-funded companies achieve this revenue target [4]

Why do entrepreneurs funded by top VCs and accelerators outperform those that are not? There are four primary reasons:

- They find great entrepreneurs and businesses

- They provide funding

- They provide access to networks and talent

- They offer their expertise and advice based on real experiences

2 Joining a CEO network 

Based on a five-year, 7,000 company study, Keith McFarland selected a control group of nine companies that went from small business to large organisations (the “winners”). That is, businesses that saw average revenue growth increase from $14 million to $700 million. In parallel, they compared the nine “winner” companies to 9 similar companies that tried, but failed. Of the nine successful companies, 5 CEOs belonged to the Young Presidents Organisation (YPO) and all nine companies reported regular engagement with founder advisors and advisory boards. All nine of the “losers” had CEOs who were more insular and didn't learn from people outside the firm [5]

In a study done on the world's top accelerators, Y Combinator, entrepreneurs reported peer learning as one of the most valuable aspects of the experience [6]. Another study showed that companies belonging to a CEO network grew 2.2x faster than those that didn't [7]. Many entrepreneurs also report joining a CEO network was one of the most valuable things they have done for their business. [8]

3 Joining the right tribe 

The most surprising results from these entrepreneur studies came from the Amish. Amish entrepreneurs succeed at a rate of between 90 - 95% over 5-years. Compare this to a) South Africa, in which only 20 - 30% success over 3.5-years [9]. Despite having less access to technology, the Amish succeed because they support one another through apprenticeship, becoming customers and mentorship. Such businesses operate in a strong value-driven culture that includes hard work, honesty, kindness and collaboration.

Belonging to the right tribe would include starting your business in the right location. Startup hubs like Silicon Valley, Boston and Tel Aviv produce an outsized number of unicorn companies. For example, David Frankel’s research on 17 cities showed that Silicon Valley had produced over 40 exits with a valuation of over $500 million. Compare this to South Africa which had only a single tech unicorn founder, Mark Shuttleworth, in the 20 years since the start of democracy [11].

The most radical example of the tribe effect is the Kardashian family. Where having the right mother as a mentor, and sister fame to leverage, Kylie Jenner become the youngest self-made billionaire ever [12]. Jenner would have never done this if she was born into a rural family in India.  

How can this benefit you? 

While these interventions are great, most entrepreneurs can’t access them. 

  • The large majority of entrepreneurs in Johannesburg can't move to Silicon Valley to get funded by Y Combinator or Sequoia.
  • Joining YPO (the world’s top CEO network) requires that you run a business doing $13 million in annual sales (approximately R190 million) and employ 50 people and pay a joining fee of $7500 (approximately R110 000).
  • Marrying a Kardashian or converting to Amish, is not a viable option either. 

We wanted to level the playing fields.

Hence, we started Civitas. 

How? By purposefully and intentionally creating a mash-up of the best ideas and practices used by top accelerators, venture capitalists, startup hubs, entrepreneurial tribes and CEO networks.

Our mission is to attract the best entrepreneurs in Johannesburg and help them share ideas, experience and networks in the most cost and time-efficient manner. To help top founders learn and connect with other great founders. 

If Civitas could help a few hundred or thousand entrepreneurs increase their odds of building impactful businesses that offer great services to their city, country or world while creating employment, paying taxes and enriching the stakeholders of the business. We believe that it would be a truly good and worthwhile endeavour. 

Notes 

[1] While researching the impact of entrepreneurship training programmes and incubators I was surprised to learn that many studies show limited or no impact. 

[2] For my PhD literature review I looked at 100s of studies and listed 450 variables were correlated with startup growth and survival, but even one of the most comprehensive studies using over 50 variables only explained 16% of the performance difference between businesses. 

[3] Sequoia is the most successful venture capital company but many studies show that getting funded by a venture capital company significantly increases the odds of building a large company but can also raise the risk of failure due to high growth. 

[4] Y Combinator is the most successful accelerator but other accelerators like 500 startups and TechStars have produced less impressive but still incredible results. 

[5] See The Breakthrough Company by Keith McFarland.

[6] This was reported in the study Do accelerators accelerate? By Benjamin Hallen, Christopher Bingham and Susan Cohen. In addition, GALI’s report What’s working in startup acceleration reported peer-to-peer interaction to be a great focus in more effective programmes. Y Combinator partners have also repeatedly stated founders find peer learning to be one of the most valuable aspects of the programme. 

[7] See research done by Vistage CEO network

[8] See the testimonial sections from any CEO network website. Entrepreneurs organisation, Young Presidents Organisation or Vistage. While doing my master’s research on founders companies doing over R50 million in annual revenue, many entrepreneurs spoke about how belonging to a peer advisory group had significantly contributed to them building a successful business.

[9] See Sources of enterprise success in Amish communities by Donald Kraybill, Steven Nolt and Erik Wisner. 

[10] The annual South Africa GEM report shows that between 7 to 12% of the population of the country start businesses but only 2 to 3% are running business older than 3.5-years. See GEM South Africa

[11] See Davaid Frankel’s article Startup success outside Silicon Valley and Are these the 10 all-time biggest exits deals for SA startups? By Stephen Timm.

[12] See Forbes article on Kylie Jenner becoming the youngest billionaire ever.  

Thanks to Ryan Osher and Will Harris for reviewing a draft of this. 


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