Almost 75% of venture capital-backed startups fail to return money to investors
Bad luck and early failures can set us up for success. All we need to do is to keep trying. In a recent study, Benjamin Jones and Dashun Yang from the Kellogg School of Management in the US studied the impact of early career setbacks on future career and found three counter-intuitive trends.
First, early professional setback has a strong and permanent negative impact on a small set of people. In Jones and Yang’s sample set, about 10% of the people permanently disappeared after initial failure. They never tried again.
Second, those who experience an early setback tend to outperform their peers if they keep trying. Jones and Yang compared those who narrowly missed achieving their goal with those who just about crossed the threshold for success. Over a period of time, the individuals who managed failure with consistent effort did far better than those who achieved early success.
Third, early-career setback improves performance among those who persevere. The researchers call it the “what doesn’t kill you makes you stronger" effect.
Entrepreneurs and venture capitalists have a lot to learn from this study. Almost 75% of venture capital-backed startups fail to return money to investors.
In the Indian context, according to a study by IBM and Oxford University, nine out of every 10 startups fail in the first five years of operation. Venture capitalists love founders with strong track records. That is why each time a founder with a successful exit decides to start a company, she is brimming with offers of funding from investors. While there is nothing wrong with this, venture capitalists are missing out on a large pool of talent.
Instead of running after a handful number of hyper-successful entrepreneurs, they should keep an eye on founders they thought of investing in but didn’t. The venture capitalist world is small; one can quickly get access to a list of companies that have been rejected by their peers. This consolidated list can be a useful guide for future investments. Moving forward Extending Jones and Yang’s research, there is certainly a small percentage of entrepreneurs who will never try after a few rejections. But there are also those who, despite all rejections, keep trying to work better, improve customer experience and build something meaningful. These are the hidden gems investors should reconsider. They didn’t let initial set of failures daunt them. In fact, they became better with each rejection.
An entrepreneur will fail multiple times. At times, you may feel like the unluckiest person alive and be tempted to give up. That’s when you should take your luck in your own hands.
Serial entrepreneur Jason Roberts inadvertently coined the phrase ‘luck surface area’ during a discussion episode of his podcast TechZing. Roberts explains that we can hack serendipity and make ourselves lucky. Instead of being subject to the whims and fancies of luck, we can create our own destiny.
He formalized the concept into the equation, L = D * T, where L is luck, D is doing and T is telling.
Luck surface area is directly proportional to the degree to which we do something we’re passionate about and the number of people who know about it.
It is important to keep in mind that passion is not enough. Having said that, we tend to work harder for things we truly care about. Because our work is channelled, the output per hour is greater and we get much better at our craft.
As we get better, more people get to know about what we are doing and tell their friends. The ‘network effect’ sets in. Remember, friends knowing about our work isn’t enough. We need to reach out to different networks, communities and organizations. New opportunities often come from surprising places. We call such happenstances serendipity, but actually they are the expansion of our luck surface area.
When we fail or experience hard luck, we should draw inspiration from the fact that perseverance makes us better in our work and, eventually, brings us success. That setback or stroke of misfortune might actually be positioning us for long-term success. All we need to do is not give up after a string of initial failures and keep expanding our luck surface area.
Millennial Matters recalibrates the skills needed to survive and find meaning in the workplace of tomorrow.
Utkarsh Amitabh is founder of Network Capital, a global peer mentoring community, and a WEF Global Shaper.