Entrepreneurial Spawning: Experience, Education, and Exit

In our recent paper forthcoming in The Financial Review (2016), we highlight the role of venture capital (VC) in spawning new ventures.  That is, after acquisitions, IPOs and other successful exits, entrepreneurs backed by venture capitalists (VCs) tend to form new companies or become angels coaching and investing in entrepreneurs.  In our recent paper, we examine for the first time the specific conditions under which entrepreneurs actually stick with entrepreneurship in the form of starting a new company or becoming an angel.  We address the question of when does entrepreneurial finance spawn the creation of new ventures by examining detailed longtitudinal data tracing founders.

VC backed firms are among the most dynamic entrepreneurial firms, contributing significantly to innovation and economic growth. This is particularly true for firms in high-tech industries on which most of venture-capital financing is concentrated on. One of the key inputs in this process is, besides VC financing, the spirit and human capital of the founders and entrepreneurs. While being a decisive input in this process, rather little is known about the career paths (after leaving the VC-backed venture) and personal backgrounds of VC-backed entrepreneurs.

We aim to narrow this gap in the literature through analysis of career paths of entrepreneurs in high-tech firms. In order to do so we address two main research questions. First, we relate the entry decision of founders (that is, whether they have worked for a start-up before, and their founding experience and education) with their exit decision (i.e. whether they stick with entrepreneurial activity or become dependently employed). Second, we investigate other drivers of the founders’ exit decision such as the exit choice of the company itself.  By answering both questions we depict a broader picture of the dynamics of entrepreneurial careers, their patterns as well as the driving forces.

We analyze these dynamics of the career paths of VC-backed entrepreneurs by using a hand-collected sample of high-tech firms which have received venture financing. Our analysis is based on venture-backed startups listed in the CrunchBase online database (see http://www.CrunchBase.com). CrunchBase was developed and is maintained by TechCrunch, the most influential technology blog in the United States. Professionals in the technology community can add information to the database, which then goes through an approval process before being made available online. We focus on those startups that, among funding from VC firms, also received funding from a corporation (Corporate VC or CVC). We define CVCs as NASDAQ100 companies that either directly or indirectly (via their associated CVC fund) invest in startups.

We focus on the patterns of the entrepreneurs’ career paths as well as on the determinants of the likelihood of an entrepreneur and founder to stick with entrepreneurial activity. We relate different patterns of career paths to characteristics of the entrepreneurs (e.g. starting point of the career, education and work experience) as well as to company and industry characteristics. The focus of our analysis is on the determinants of serial entrepreneurship rather than on factors affecting the decision to become an entrepreneur initially.

The data examined indicate the following.  First, non-specialists (measured by the fact that they have earned a management degree) are 19.7% more likely to found a new venture or become an angel after having left the current startup. In contrast, Ph.D.s are 15.0% less likely to stay with entrepreneurship.

Second, entrepreneurs that have past experience working at a start-up (instead of a large firm) are much more likely to found another business after exit. The effect is statistically significant in all models, and the economic significance ranges from 26% – 54%.  Similarly, there is evidence of serial entrepreneurship insofar as entrepreneurs that were engaged in more prior ventures are more likely to stick with entrepreneurship. Each additional venture increases the probability of sticking with entrepreneurial activity by 9%.

Finally, financial success positively affects founders’ subsequent decisions, and having achieved an IPO increases probability of subsequent entrepreneurship by 35%.  Likewise, a 1-standard deviation increase in the exit multiple increases the probability of subsequent entrepreneurial activities by 18%.

In summary, we show that working for a start-up firm provides a spawning ground for repeated entrepreneurial activity. With this finding we reject the notion that large companies are the starting point of entrepreneurs who are not able or willing to pursue their new ideas within the large organization. Furthermore, our analysis provides clear-cut support for the jack-of-all-trades theory: non-specialists are more likely to stay entrepreneurial after having founded their first venture. Serial entrepreneurship seems to be a persistent pattern: people who have founded a venture before, are significantly more likely to stick with entrepreneurship after having left the current venture they have founded, thereby pointing to the existence of an entrepreneurial genotype.

The preceding post comes to us from Douglas Cumming, Professor in Finance and Entrepreneurship and Ontario Research Chair in Economics and Cross Cultural Studies, Uwe Walz, Professor in the Faculty of Economics and Business Administration at the Goethe Universitat, and Jochen Werth, Professor at the Goethe Universitat.  The post is based on their paper, which is entitled “Entrepreneurial Spawning: Experience, Education, and Exit”, forthcoming in The Financial Review (2016) and available here.