Are You Experienced or Are You Talented?:
Founding Experience --> Performance
Who is Right?
When Does Talent vs. Experience Explain Venture Performance?
Conclusions
Debate on Venture Experience - Performance Link
Prior founding experience increases performance




Most attribute this to learning


But... could be innate talent
Charles E. Eesley (Stanford)
Edward B. Roberts (MIT)
(Stuart and Abetti, 1990; Delmar and Shane, 2006; Lamont, 1972; Starr & Bygrave, 1992; Vesper, 1980; Wright, Westhead, & Sohl, 1998)  
lower failure rates (Bruderl, Preisendorfer and Ziegler, 1992; Dencker, Gruber and Shah, 2009b; Franco and Filson, 2006; Gimeno et al., 1997)
Raise external capital more quickly and from higher quality / status investors (Shane and Stuart, 2002; Hsu, 2007; Hallen and Eisenhardt, 2012)


                                     (extensive review and synthesis on entrepreneurial learning - Politis, 2005)



                                                                              (Gompers, Kovner, Lerner and Scharfstein, 2010)
Ent. Experience
Ent. Performance
Innate Talent
Learning
Ent. Performance
Ent. Experience
Innate Talent?
Schumpeter (1934) 1st to suggest that entrepreneurs have talent, rather than simply being bearers of risk. 

Little scholarly work has examined entrepreneurial talent. 







By entrepreneurial talent, we mean superior ability to consistently see viable entrepreneurial opportunities and effectively act upon them to generate greater venture performance. 
Data
Hypotheses
H1a: An entrepreneur with more venture founding experience is more likely to found a high-performing venture.
H1b: The positive effect predicted in H1a will be stronger for ventures started under more familiar conditions.

H2a: An entrepreneur with more innate talent is more likely to found a high-performing venture.
H2b: The positive effect predicted in H2a will be weaker when starting a venture in familiar conditions.

H3a: A linkage exists between talent and experience: An entrepreneur higher in both talent and entrepreneurial experience is especially more likely to found a high-performing venture.
H3b: The positive effect predicted in H3a will become negative at high levels of prior failures.
***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively. Controls for the firm age, the highest degree earned (Master’s and Doctorate degrees), the lag in years from the previous founding, founding team size, external funding, functional diversity, as well as the founder age and log initial capital were included but the coefficients are not shown to save space.
***, **,  *, and + indicate statistical significance at the 0.1%, 1%, 5% and 10% levels, respectively. 
***, **,  *, and + indicate statistical significance at the 0.1%, 1%, 5% and 10% levels, respectively. 
***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively. Controls for the firm age, the highest degree earned (Master’s and Doctorate degrees), the lag in years from the previous founding, founding team size, external funding, functional diversity, as well as the founder age and log initial capital were included but the coefficients are not shown to save space.
Measures
Experience

Talent

Familiarty
Prior founding experience 



Individual fixed effects - revenues (robustness: prior exits, grad deg., # of degrees)



Same industry (4-digit SIC code) (Haleblian & Finkelstein, 1999)
Industry disruption - dotcom boom/bust
Technological familiarity - index
Patent01 is an indicator variable for whether the firm held patents or not.
ip_critical defined as a one if the entrepreneur indicated that intellectual property was critical to the company formation.
IP_univ is equal to one if the innovation came out of a university
IP_lab is equal to one if the innovation came out of a research lab.
IP_owned is equal to one if the venture owned intellectual property (regardless of whether it was patented)
IP_author indicates whether the founders were the creators of the intellectual property.

These variables were processed with an exploratory factor analysis and then the index is reverse-coded.
Isolate learning effect?
Ent. Experience
Ent. Performance
Learning
Innate Skill
(control)
X would have higher fixed effect than Y
Y would have a higher fixed effect than Z
Z is the only one that would show evidence of a learning effect.

If individual Z stayed in more similar contexts than X and Y...
Residual of this regression (e) is component of success that cannot be explained by industry-year success rates.

Our measure of ‘"managerial skill."

May capture the entrepreneur’s management skill, the quality of the entrepreneur’s business idea - anything relating to building a business that is NOT related to overall industry timing.
N=1011 Controls: rank, firm age, VC funded, industry, country.
(Gompers, Kovner, Lerner, & Scharfstein, 2010 JFE)
earlier success = industry-year odds*B1 + individual level controls*B2 + e

Managerial skill = e  = predicted values - actual values
Market timing component= X*B1 = how good you are at market timing
N=733 Controls: Gender, non-domestic citizen, educ. level
N=1011 Controls: rank, firm age, VC funded, industry, country.
Managerial skill helps across industries
Managerial skill helps more in innovative firms
Replicating Prior Results
Alternative Talent Measures
Higher Skill Individuals Learn Faster than Lower Skill
Experience Matters More When Familiar
Robustness Across Dependent Variables
L(sales)
L(sales)
Rather than a single blueprint:

Factors driving venture performance shift according to broader industry and technological context

Ignoring context, prior work would get it wrong - overstate role of venture experience

How certain individuals better positioned to capitalize on certain types of opportunities

Theoretical boundaries on organizational learning (new ventures)

Account more fully for cost of failure
A skilled but inexperienced entrepreneur may be foolhardy to compete against experienced entrepreneurs ...

in a mature industry with established technology.

Yet, it might be a missed opportunity for that same individual to become discouraged by the intimidating experienced entrepreneurs...

particularly with innovative technology or in a brand new industry.
Practically
Advantageous for performance when familiar with critical aspects (Argote and Ingram, 2000; Argote, Beckman, and Epple, 1990)

Familiarity - having a close acquaintance or being well known (Merriam-Webster, 2011)

familiar technology - fewer surprises / problems (Levinthal and March, 1993)
familiar industry - understand competitive dynamics, customers, suppliers, ways of doing business 
analogies from  prior experience  fit with current venture (Gavetti, Levinthal, and Rivkin, 2005)
greater overlap with problems already faced in previous venture 
likely to choose a promising opportunity

hubris and overconfidence along with experience (Hiller and Hambrick, 2005) - particularly ineffective in unfamiliar contexts
If industry is disrupted - new industry dynamics - experience is not likely to give an advantage
Talented founders extract more from experience

Talent --> fewer unforced errors --> better isolate lessons from the market.

Ventures often blend familiar and unfamiliar

Cognitive science (Siegler, Deloache, and Eisenberg, 2003)
Talent - what to do
Experience - how to do it

Developing useful heuristics - not automatic (Bingham, Eisenhardt and Furr, 2007)

rely on divergent thinking such as from questioning, observing, and experimenting.  behaviors aid in unfamiliar contexts and gaining more learning from their experience (Dyer, Gregersen, and Christensen, 2008)
Experienced entrepreneurs:

identify viable opportunities (Baron and Ensley, 2006), 
engage more effectively in strategic processes - product development and internationalization (Bingham and Eisenhardt, forthcoming; Gilovich, Griffin and Kahneman, 2002)
imprint their ventures more effectively at outset (Huber, 1991; Ingram and Baum, 1997)

Entrepreneurs w/ only large firm experience
 
less likely to have learned how to identify superior opportunities and execute  (Wasserman, 2003; Delmar and Shane, 2006)

literature on experts (Hayes, 1989) - likely to develop routines that can quickly re-use in next venture rather than spending time developing  
re-use strategies, network connections and industry-specific knowledge
wider spectrum of issues and problems during the startup process
less likely that the decisions in next venture will be unexpected or unknown 
already encountered this problem 
Measures -
DV
Dunn and Bradstreet - match 80% of our firms. For the remaining firms, we use the self-reported revenues. Out of 2,111 firms, 1,370 survey respondents reported revenues for their firms.

Test for (and find) robustness using log employees, initial public offering (IPO) or acquisition. Also the top 10% of revenues or employees. Acquisition and IPO events were checked for accuracy with Compustat and SDC Platinum database.
Measure organizational performance by firm revenues (infl. adjusted, log, most recent fiscal year in operation)

Reliable, objective measure of performance available across the sample

Establish importance of entrepreneurial talent for performance
High managerial skill individuals learn more than high market timing skill individuals
Controls: VC funded, founding team size, functional diversity
managerial talent in firm formation - an ability to get more output per worker (Lucas, 1978)
ability to get greater entrepreneurial earnings out of a given amount of capital invested (Evans and Jovanovic, 1989)
the ability to combine tangible and intangible assets and to deploy them to meet customer needs in a manner that cannot easily be imitated.” (Amit et al., 1990) 
Talented entrepreneurs:

More likely to succeed, motivating them to found successive firms, more consistently successful

Innate entrepreneurial talent - abstract reasoning, divergent thinking, frame-breaking behaviors
Allows them to identify higher quality opportunities - requires more than applying past lessons
Advantage to think more flexibly, not merely apply the past
Talent is less advantageous in familiar conditions

Better thinking through less familiar aspects of the venture
Less relevent when familiar conditions enable re-use
Less familiar conditions --> must sort out appropriate strategic actions
Ability to handle the familiar & unfamiliar aspects, results in consistently high performance


Too many prior ventures that went out of business should negate the benefits that experience and talent bring. 

Prior work suggests that entrepreneurs learn from failure, but does not adequately account for the negative impact of failure (Politis, 2005; Sitkin, 1992). 

Negative reputation effects, resource gathering, and opportunity selection 

Challenge moves from handling familiar and unfamiliar aspects of the  process to  the challenge of gathering sufficient resources to begin with.
Experience and talent become substitutes - more of either one can reduce  negative effects 
Successes allow the entrepreneur to experience more of the startup process - engage in the entire path to success rather than just part

Adjust the type of opportunities they select to pursue (avoid a next failure) - picking opportunities that are lower risk / lower reward. 


Talented but inexperienced entrepreneur may be foolhardy to compete against experienced entrepreneurs in a mature industry with established technology. 

Yet, it might be a missed opportunity for that same individual to become intimidated by experienced entrepreneurs, particularly with innovative technology or in a brand new industry.