How to be a Better Entrepreneur: Pretend You're a Scientist

How can you be successful as an entrepreneur? The question hounds the full-time, venture-backed techie and the part-time freelancer alike. Two recent studies look at the success of each group, and they bear a strikingly similar result.

To be a successful entrepreneur, you should think like a scientist.

Instead of looking at each day of work as an all-or-nothing milestone on the road to success or failure, think of it as a series of experiments.

Looking at venture-backed firms, Professors William R. Kerr, Ramana Nanda, and Matthew Rhodes-Kropf of Harvard Business School find that they tend to invest a little at a time in their portfolio businesses, testing different questions over time. For example, does this technology even work? Is anyone willing to pay for it?

As the results come in, venture firms make decisions about whether to invest more or to back out.

"Venture capital firms are better thought of as conducting a portfolio of tests across a number of highly uncertain ideas with skewed economics." Most tests fail, in other words, but venture capitalists relish this information. Once they know something has failed, they can redirect and ramp up investments to those experiments that still look promising.

In the end, only 6% of investments end up returning more than five times their invested capital -- but together, those few big wins account for about 50% of overall portfolio returns.

In other words, venture capitalists realize that the "wild success" rate will be low, so rather than focusing on identifying the eventual winners at the beginning, they use the experimental process to reveal those winners over time.

But it matters for the average entrepreneur too

So how does this apply to everyone else? After all, powerful as they might be, venture-backed firms are very much a minority among entrepreneurs.

An investigation into small businesses in Texas confirms the importance of experimentation by demonstrating the value of experience. Professors Francine Lafontaine and Kathryn Shaw, from the University of Michigan and Stanford, respectively, find that "serial entrepreneurs are considerable more successful" than their first-time counterparts.

In other words, someone with prior experience opening and running a business is more likely to be successful the next time around. "For owners with one or more past businesses, the probability of exit is 7% lower than those with no prior business record."

Lafontaine and Shaw chalk up the greater probability of success to the importance of experience. Most businesses are started by people with little to none, so the skills learned in previous businesses can make a real difference. They find that having for each previously "closed" businesses, or those that failed or were sold, reduces the exit rate of the current business by almost 4%.

That means that people who have been through the trenches before are better at keeping their businesses alive later.

(It should also be noted that the people who sold probably weren't buying mansions and Porsches with the proceeds. The authors note that, even in cases where an entrepreneur sells a business, they generally don't even take home the present value of their future profits.)

The lesson: Failure isn't failure unless you stop trying

These two papers complement each other because they each drive home the important role of "failure" in finding the path to success.

Just as in science, every experiment tells you something. So instead of stressing about that one "make or break" sales pitch, treat it like an experiment. Take the results, measure them up, and see what the data tell you. Maybe you need to try a different way of selling, or a different market entirely.

Extend this to every aspect of your business, and you'll find a veritable playground of possible experiments. Keep at it, and experiment often.

It might not just make you a better entrepreneur today, the experience might be exactly what you need in the future, when that vague idea you have now is ready for fruition.

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