Switching industries costly for serial entrepreneurs

Professor JP EggersSerial entrepreneurs whose previous ventures failed are likely to blame the external environment and to change industries for their subsequent ventures, reveals a new study.

Professor JP Eggers of the New York University's Stern School of Business and Lin Song of the Central University of Finance and Economics in Beijing reveal that changing industries is costly to entrepreneurs because it does not leverage relevant industry experience and contacts developed by the entrepreneurs.

Consistent with the idea that we credit ourselves for success but blame external factors for failures, founders of failed ventures are unlikely to change aspects of their prior business that are within their control (ie, strategy, decision making and planning) when starting their next business.

The authors examine two datasets – one extensive survey of entrepreneurs in China and one sample of VC-backed start-ups in the US.

Their key findings include:

  • Nearly 46% of all serial entrepreneurs in the survey sample in China changed industries before starting a subsequent venture.
  • The rate was higher – 54% – in the US sample.
  • Some sectors, in particular, prove daunting. For example, only 27% of Chinese entrepreneurs who founded their previous venture in manufacturing stayed in that industry for their subsequent venture.
  • Change of industry, regardless of prior venture success, is detrimental to subsequent venture performance – results showed 23%-31% slower growth in the Chinese data, and an 18% lower chance of a value-creating exit in the US data.

''Our results suggest that entrepreneurs should think twice before switching industries. In fact, leveraging your industry-specific knowledge from one venture to the next can be incredibly valuable,'' argues Professor Eggers.

He also warns potential investors: ''Be cautious about investing in serial entrepreneurs switching from one industry to another. They may be running from their own managerial shortcomings or strategic planning failures.''

The article, Dealing With Failure: Serial Entrepreneurs and the Costs of Changing Industries Between Ventures, isdue to appear in the Academy of Management Journal.