The Productivity Advantage of Serial Entrepreneurs
GAICIL Insights
Silicon Valley mythology treats founders as lottery winners: one lucky ticket, one unicorn.1 The Productivity Advantage of Serial Entrepreneurs tears up the ticket. Using panel data from Denmark from 2001 to 2013, Kathryn Shaw and Anders Sørensen show that entrepreneurship behaves like a craft that improves with practice. Serial entrepreneurs, those who open more than one business, beat novices who open only one. Their firms have 98% higher sales. They use more initial capital and labor. And they are 49% more productive.
The scale is the first shock. Forget the handful of celebrated tech founders. Serial entrepreneurs run 29% of all the new firms in Denmark from 1990 to 2013. In the sample used to model sales, 35,271 of the 189,016 new firms begun from 2001 to 2013 are run by serial entrepreneurs. New firms opened in that period make up 31% of all existing firms in Denmark by 2013, though, because most firms are small, they account for 7% of aggregate sales and 7% of employment. Entry is a mass phenomenon, and repeat founders are a big, productive slice of it.
Who wins? Entrepreneurs holding a portfolio of overlapping firms, and those who open businesses as limited liability corporations, top the performance charts. The findings suggest 41% of LLC entrepreneurs are serial. Female entrepreneurs gain sizably from serial entrepreneurship: the firms of both female and male serial entrepreneurs are twice as large as those of novice entrepreneurs of their respective gender. The returns to trying again are broad and inclusive.
Here is the angle that matters for artificial intelligence: AI is a machine for manufacturing serial entrepreneurs. Tools that draft business plans, automate accounting and run customer service drive down the cost of starting a company. Cheaper entry means more attempts. More attempts mean more founders accumulating exactly the experience the Danish data show to be valuable. The conclusion notes that venture capitalists are said to seek out serial entrepreneurs because they combine talent with learned experience that raises the odds of success. The evidence backs that instinct well beyond high technology, among the founders of ordinary firms that make up most new businesses.
That flips the usual policy conversation. If productivity rises with repeated entry, then exit rules are growth rules. Bankruptcy procedures, closure costs and the stigma of failure govern the flow of experienced founders. Make it slow and costly to shut one firm and open the next, and the economy throttles its most productive entrepreneurs. The prominence of LLC founders among serial entrepreneurs suggests that legal forms limiting personal downside help people try again. An economy that wants AI-enabled entrepreneurship to pay off should make the second and third attempts easy.
The paper also teaches a lesson about data. Studying serial entrepreneurs, the authors explain, requires many years of panel data to classify founders as serial or novice and to match founders' personal traits to their firms' performance. Denmark's population data made that possible. Administrative records of this quality are a public asset. As AI reshapes the economics of starting a firm, comparable longitudinal data elsewhere would reveal whether lower entry costs produce more productive founders or merely more short-lived firms.
Keep expectations grounded, though. The typical firm opened by a serial entrepreneur is unlikely to grow very large; the stars sit in the upper tail. Firms above the 90th percentile have annual sales above $685 thousand, with serial entrepreneurs at $1.2m and novices at $549 thousand. Growth through entrepreneurship is a portfolio outcome: many attempts, steady learning, and a minority of significant successes.
Pulled together, the lesson reads like advice to a young founder and to a finance minister at once. Entrepreneurial skill is built through practice. Technologies that cut the cost of practice, and policies that cut the penalty for failure, raise the stock of experienced founders. The Danish evidence says that stock turns into higher sales and higher productivity. In a period of rapid technological change, the cheapest growth strategy may be to let people fail fast, learn, and launch again.
Introduction
Using panel data from Denmark from 2001 to 2013, the authors find that serial entrepreneurs—those who open more than one business—have higher sales and greater productivity than do novice entrepreneurs—those who open only one business. Specifically, serial entrepreneurs’ firms have 98% higher sales than the novices’ firms, and serial entrepreneurs utilize more initial capital and labor, and thus are 49% more productive. Further, certain subsets of serial entrepreneurs perform especially well; those who hold a portfolio of overlapping firms or who open as limited liability corporations (LLCs) are top performers. The authors’ findings suggest that 41% of LLC entrepreneurs are serial entrepreneurs, thus deepening the need to understand these types of entrepreneurs. Finally, female entrepreneurs are shown to realize sizable gains from serial entrepreneurship: The firms of both female and male serial entrepreneurs are twice as large as the firms of novice entrepreneurs of their respective gender.
Takeaway
Serial entrepreneurs are much talked about, but little studied. Venture capitalists are said to seek them out, because serial entrepreneurs have a combination of talent and learned experiences that increase the odds that their next company will be more successful than that pitched by a novice entrepreneur. Serial entrepreneurs’ visibility is in the high tech sector, but the logic that serial entrepreneurs are high performers should also prevail for non-high-tech founders who open the vast majority of new firms. Therefore, this paper aims to identify whether serial entrepreneurs perform better than novices, and identify which of these serial entrepreneurs are the highest performers, and uncover some reasons why serial entrepreneurs are better performers than novices. The data requirements to study serial entrepreneurs are extensive, requiring many years of panel data to identify entrepreneurs as serial versus novice, and then matching the personal traits of the entrepreneurs to the performances of the firms they found. The Danish data on the population of entrepreneurs (for 19902013) and the performances of their firms (for 2001-2013) provides the unique data needed. These are the founders of firms that are typically small, but for whom there is a minority of large firms – those firms above the 90th percentile of the sales distribution have annual sales above $685 thousand, with serial entrepreneurs having annual sales of $1.2m and novice entrepreneurs having annual sales of $549 thousand.1
Though the typical firm opened by a serial entrepreneur is not likely to grow to be very big, their firms are very numerous: serial entrepreneurs run 29% of all the new firms in Denmark from 1990-2013. To model the sales of these new firms, we focus on the Danish firms opened by new entrepreneurs after 2001 when sales data becomes available, and serial entrepreneurs run a lessor 19% of all new firms, because we require that the serial entrepreneur runs two of his firms during 2001-2013. However, these are still a lot of firms: 35,271 firms of the 189,016 new firms begun from 2001-2013 are run by serial entrepreneurs. One other question is interesting – how important are all these new firms in the entire Danish economy? The new firms opened in 2001-2013 are 31% of all existing firms in all of Denmark by 2013 – thus, the new firms number 91,472 firms of the 298,548 firms in the Danish economy by 2013. Of course, because most firms in any economy are small in size, these firms are 7% of total aggregate sales and 7% of employment in Denmark in 2013. Given the evidence that serial entrepreneurs are so numerous, do their firms perform better than those of novices, who never open a second firm? We could expect their firms to be bigger – because the serial entrepreneur can be someone who tries the first firm, succeeds, and then opens a second firm.
Alternatively, the first firm may be a success, but the second firm a failure because the entrepreneur had gotten lucky but has no talent.
Notes
- Kathryn Shaw & Anders Sørensen, The Productivity Advantage of Serial Entrepreneurs, 72 ILR Rev. 1225 (2019), https://doi.org/10.1177/0019793919865501. Takeaway source: Conclusion, reproduced from a free author or repository copy. ↩
Cite as: Kathryn Shaw & Anders Sørensen, The Productivity Advantage of Serial Entrepreneurs, 72 ILR Rev. 1225 (2019), https://doi.org/10.1177/0019793919865501
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