The rate of startup failure remains depressingly high: 55% of startups close before raising $1M in funding, and almost 70% of them die having raised less than $5M. So the question “Why do startups fail?”–or succeed, if you prefer a positive spin–is far from being purely academic, given the important role small businesses play in the global economy.
The lack of market demand, insufficient funding and incompetent team are routinely mentioned to account for the death of yet another startup project. One the other hand, factors making startups more successful have begun to emerge too. For example, the U.S. Small Business Administration reports that small businesses receiving mentoring services survive longer than non-mentored entrepreneurs, the fact pointing to potential value of startup accelerators and incubators. It was also noticed that startups that were funded by at least one corporate VC investor outperformed those funded exclusively by traditional VCs (here and here).
And then, there is a perennially debated question of the importance of the original idea behind any startup. One can often hear that ideas “are a dime a dozen” and that “startups are all about execution;” but a recent study paints more nuanced picture. The authors of the study took a look at a unique entrepreneurial program, the Massachusetts Institute of Technology’s Venture Mentoring Service (VMS). A peculiar feature of this program is that when an entrepreneur joins the VMS, a select group of advisors reviews a summary of the proposed venture, a document that describes technology, business model, key customers, etc., but provides little information about the founding team. Based on this summary, which is essentially just a “naked” idea behind the venture, VMS advisors decide whether to work with it.
Having analyzed the eventual outcomes of 652 ventures gone through VMS in 2005-2012, the authors of the study showed a positive correlation between the number of advisors who wanted to mentor a given venture–a signal of the quality of the original idea–and the likelihood that the startup would eventually reach the commercialization phase.
But there was a twist. The correlation between the advisor interest and startup success was especially strong for ventures with documented intellectual capital in R&D-intense sectors, such as life sciences and medical devices. No such a correlation was seen for non-R&D-intense sectors, such as consumer web and enterprise software.
The significance of the study is in pointing out that in different industries, there are different factors defining the ultimate success of newly emerging companies. These factors need to be further identified, industry by industry (a nice example of an “industry-specific” mentorship can be found here), and used as a tool by everyone working with startups: government agencies, accelerators/incubators and individual mentors.
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