Investing in First-time vs. Serial Entrepreneurs

The passion of a first-time founder who is often pursuing something uniquely personal is captivating. Yet, the learning curve for successfully building a high-potential startup is so steep that investors gravitate towards experienced serial entrepreneurs as a way of de-risking their investment. Yet, there is a balancing act since all startups have multiple dimensions of risk. Let’s unpack some of the differences between first-time and serial entrepreneurs.

I will never forget some of my conversations with investors as a first-time startup CEO in the early 2000s. One VC said, “You should recruit an experienced startup CEO to run your business.” Another said, “We prefer to back CEOs who have done it before.” It was incredibly frustrating to get such feedback after my co-founder and I had spent a year without pay working to develop our business by validating the market opportunity, figuring out a product design, completing initial prototype tests, researching the market size, creating financial models, and developing an operational plan. Now, we were supposed to just hand all that work over to a hired-gun startup CEO? While perhaps we could have, we never did. We kept grinding away in de-risking our plans and hunting for the right investors to help us realize them. Years later, those who took a chance and backed us got a very nice return on their investments.

I have seen this dynamic play out from every angle in the decades since then.

• As a first-time startup CEO whom investors were forever advising to recruit some other experienced CEO instead
  
• As an experienced serial startup CEO building my second, third, and fourth startups
  
• As an advisor/board member lending my hard-won expertise to help first-time startup CEOs who are trying to raise money and build innovative businesses
  
• As an angel investor considering the risks in a potential investment
  
• As a limited partner in a venture capital fund watching the choices the general partners are making as they deploy our precious capital in the hunt for returns

As frustrating as it is for first-time founders, investors seeking experienced startup leaders have some solid reasons for their preference for experienced startup CEOs:

• The breadth of business skills required to lead a startup as CEO is vast—and there are few opportunities to learn the blocking and tackling of building a startup besides within a startup itself (which is one of the reasons I write this blog every week!). As a result, a first-time startup CEO has a steep learning curve with the inherent risks that they may not learn fast enough or will make critical mistakes.

• First-time startup CEOs often do not even realize the full scope of what they need to learn. Patterns they may be familiar with at more established companies/brands or with less innovative products often do not apply. Plus, they will frequently have to tackle problems (legal, accounting, fundraising, regulatory, etc.) in a scrappy startup way that would be handled by specialists in a larger company. Startups do not have the resources yet for a whole team of specialists. The good news is that each problem successfully solved adds to the experience base of a startup CEO and can be leveraged the next time around. The bad news is that investors are aware that first-time CEOs often face massive blind spots on their first try and will be looking for indicators that they are overcoming those gaps.

• For a startup CEO, the diverse skills, knowledge, and experiences required to build a startup from concept through scaling are not easily learned in a large-scale company, an accelerator, or a degree program. Instead, they are learned by doing and by mentorship. Then, each additional startup layers on more breadth and depth of experience and insight that can be leveraged for greater efficiency and fewer missteps in a future startup. This is the potential de-risking value of an experienced startup CEO and why experienced startup leaders, especially successful ones, are in high demand. 

At the same time, there are some excellent reasons for taking a chance on a first-time startup CEO:

• First-time founding CEOs frequently bring unique domain expertise to their ventures since it was often a firm conviction born out of deep knowledge in a particular domain that convinced them to take the plunge and try building a company to address the unmet need they perceived.
   
• First-time founding CEOs frequently have great passion, energy, and an eagerness to learn, which can go a long way toward creating innovation and momentum around a particular opportunity.
  
  
• There are more first-time founding CEOs than experienced ones. Every successful serial entrepreneur was once a first-time founder, so the trick for investors is to identify and back those leaders and opportunities that have the right combination of elements for potential success. Please note that there is often more value in something different than in a “me, too!”

Here are a few pieces of advice for both investors and first-time startup CEOs to help increase the chances of success: 

• Build a support structure around your startup CEO. Encourage them to recruit and take advantage of experienced advisors, board members, and skilled team members to shore up areas where their own experience is weaker. For the CEO, recognize that the primary thing everyone cares about is whether you can figure out how to build the company successfully. It is a mark of effectiveness as a leader if you can find ways to delegate and shore up weaker areas rather than try to do everything yourself. The ability to learn and grow is one of the absolute essentials for success – listen and lean into those willing to help you.
  
  
• Keep in mind that other experiences can translate into building a well-rounded set of skills to lead a startup. For example, does the startup CEO have a background in sales? Taking breakthrough products to market for the first time? Managing complex multi-functional teams? Leading change processes? Experiences with P&L financial management and fundraising? Operational skills, especially in a relevant area? Project team leadership? Also, look at how well they have navigated the company formation and early-stage development processes, as that will often reveal the ability to integrate all those critical skills to build something out of nothing.
  While straight-up prior experience as a CEO is a shortcut for assessing the strengths and weaknesses of any particular CEO, digging a bit deeper into a first-time CEO’s background may well reveal that they have developed and demonstrated some or many of the core skills required for success in other contexts and other job titles—and that can mean spotting an opportunity others might be missing.
  
  
• Remember that many entrepreneurs try multiple times – and succeed hopefully a percentage of those times. That is the very definition of a serial entrepreneur. Success is easy to get excited about. And, given the statistics, the failure of a startup is not a surprise. Hence, the entrepreneur’s experience recognizing the emerging signs, making the smart and insightful business decision to stop before crashing into the wall, and then winding down with a high level of professionalism actually speaks volumes about that individual’s professionalism. Both types of experiences can be helpful springboards toward building the kind of experience and reputation for professional management that supports the transition to a serial entrepreneurial career.

Ultimately, the difference between a first-time and a serial startup CEO is how many times they have played the game. The raw material that is the foundation for success is refined by experience; however, each individual’s core of skills, personality, expertise, and leadership is there regardless. So, for first-timers, keep climbing that learning curve as fast as possible so you can start sending those strong capability signals and hopefully minimize how much more progress than a serial entrepreneur you need to attract enough investors.