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Are Individual Investors Entrepreneurs? If So…

| | Posted in: Individual Investing, Investing Expertise

Is success as an entrepreneur all luck, or is there a provable contribution from skill? Do winners win just because they are willing to roll the dice, or because they consistently bring innovative insights to the market? In their July 2006 paper entitled “Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs”, Paul Gompers, Anna Kovner, Josh Lerner and David Scharfstein pit skill against luck by investigating the persistence of success among serial entrepreneurs. Focusing on the founders of companies listed by Venture Source as recipients of venture capital during the period 1975-2000, they conclude that:

  • The probabilities of success in a new venture are: 30% for entrepreneurs who succeeded in a prior startup; 18% for first-time entrepreneurs; and, 20% for entrepreneurs who previously failed.
  • Funding by more experienced venture capital firms enhances the probability of success only for entrepreneurs without a successful track record, suggesting that these firms accumulate skills similar to those of successful entrepreneurs.
  • Venture capital firms acknowledge the skill of previously successful entrepreneurs by funding their subsequent ventures at an earlier stage of development.
  • Investments in successful serial entrepreneurs generate higher returns, demonstrating the economic value of performance persistence.

In summary, the persistence of success among some serial entrepreneurs demonstrates that success is not all luck. By similarity, investors/traders who persistently outperform their peers likely have skills in developing superior information about the market.

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