Harvard Study Finds VC-Backed Failures Do Not Help the Entrepreneurs To Future Success

Research by a group of Harvard Business School professors suggests that, contrary to conventional wisdom, the failure of a venture-backed business does not equip the entrepreneur with any greater capability for a future successful venture than a totally inexperienced entrepreneur, according to an article in The New York Times (3-22-09).

The study found that "when it comes to venture-backed entrepreneurship, the only experience that counts is success," the article states.

"The data are absolutely clear," said Paul A. Gompers, a professor at HBS and one of the study's authors. "Does failure breed new knowledge or experience that can be leveraged into performance the second time around?" In some cases, yes, he says, but overall, "We found there is no benefit in terms of performance."

The study looked at several thousand VC-backed companies from 1986-2003. Gompers and his HBS co-authors, Anna Kovner, Josh Lerner and David S. Scharfstein, found that first-time entrepreneurs who received VC funding had a 22% chance of success -- defined as going public or filing to go public. Gompers said the results were similar when using other measures, e.g., acquisition or merger.

Already-successful entrepreneurs were far more likely to succeed again, the study showed. Their success rate was 34%. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers, 23%.

"For the average entrepreneur who failed, no learning happened," Gompers said.

Some entrepreneurs and VCs disputed this conclusion. For example, Mark Pincus, founder and CEO of Zynga, San Francisco, an online-game developer, said that he received funding for Zynga in part because he founded two successful companies prior to a failed venture that preceded the formation of Zynga.

VCs expect entrepreneurs to take risks, and both VCs and entrepreneurs expect occasional failures, Pincus said. "As an entrepreneur, you have to get used to failure. It is just part of the path to success," he said.

Although the study found that in general, failures are not a particularly effective teacher of entrepreneurship, Gompers said that "absolutely some entrepreneurs can learn" from them.

He also believes that Silicon Valley's deep-rooted belief in the value of failure is due to "attribution bias" -- people generalizing from anecdotal success-after-failure stories.