Thoughts on startups by investors that
fund them & entrepreneurs that run them

How important is previous business experience to a VC or angel when investing in a start up?

It’s true, but…

Starting a company is NOT at all easy, and unfortunately there simply is no way to really learn about it other than by doing it. No book, school, mentoring, or even apprenticeship can substitute for hands-on experience. When you consider that doctors spend a minimum of two years in pre-med, four years in med school, one year in internship, and two years in residency before you would consider putting yourself in their hands, think about how investors feel putting hundreds of thousands, or millions, of dollars into the hands of a startup team with no experience. Isn’t creating a viable company at LEAST as difficult as treating a patient? [Hint: Yes!]

Even barbers have to have at least two years’ experience and pass a rigorous state licensing exam before they can work on their own…and as the old saying goes, “I’d prefer that you learned to shave on someone ELSE’S whiskers!”

Several studies have shown a direct, positive correlation between past and future entrepreneurial success. But the same studies showed NO correlation between past entrepreneurial *failure* and future success. Therefore, it is perfectly logical for investors to lean toward experienced entrepreneurs, because it only increases the odds in their favor.

Finally, from a purely pragmatic perspective, first-time entrepreneurs tend to require a great deal of support, mentoring and handholding, which is an unspoken deal that both sides subscribe to going into the relationship. This takes a lot of time, and time is the scarcest commodity for successful people.

So, given all of the points above, why do investors ever invest in first-time entrepreneurs? The answer is that because EVERY successful serial entrepreneur was once a first-timer, investors would have missed out on Steve Jobs, Bill Gates and Mark Zuckerberg if they hadn’t taken the chance.

So, the bottom line is that yes, investors reasonably and legitimately look for startup experience (in my book, it’s the third most important thing after integrity and passion), but we also routinely bet on first timers if (a) we think we can spot the seeds of entrepreneurial greatness, and (b) are prepared to devote the required time and personal attention that we know it will take.

As a senior partner at Warburg Pincus (my first VC investor) said over twenty years ago “now we have to see if we can turn a phenom into a company!”

OK, so let’s discuss what you can do about it:

  1. Bring on an advisor (good), a full time employee (better) or a co-founder (best) who has the startup and domain expertise you lack.
  2. Highlight to prospective investors all of the experiences of your founding team that are *close* to starting a company. Started a club at school? Captained the soccer team? Had your own paper route?
  3. Learn, learn, learn! Voraciously, from everyone, all the time. Read the seminal books on entrepreneurship, listen to your mentors, learn from other [good] startup CEOs, take classes, apply to an accelerator.

And above all, keep the faith, because EVERYONE started somewhere!

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Written by David S. Rose

user David S. Rose Founder and CEO,
Gust

David has been described as "the Father of Angel Investing in New York" by Crain's New York Business, & a "world conquering entrepreneur" by BusinessWeek. He is a serial entrepreneur & Inc 500 CEO who chairs New York Angels, one of the most active angel investment groups. David is also CEO of Gust.

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