KUHN CAPITAL Wednesday, March 21, 2018
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Going to the Races? Back a Winning Horse


The business academics at Harvard Business School have unearthed some interesting facts regarding who will likely succeed in entrepreneurial undertakings. The professors, Paul Gompers, Josh Lerner and David Scharfstein, set a pretty high bar in defining “successful” – those individuals who start a company that goes public.

Their paper, Performance Persistence in Entrepreneurship, reveals that entrepreneurs who took a company public once before have a 30% chance of doing so again in their next venture. That compares to 18% for those who have never tried before, and 20% for those who tried once but did not realize an IPO.

WhIle betting on a horse with a winning track record would seem to make common sense, the authors were surprised by the degree to which prior positive experience makes a difference. They think this difference not only has to do with a relatively greater level of skill, but also with “performance persistence”. That is, the individual and those around him or her are inspired to try harder by dint of high expectations, even if the entrpreneur’s earlier success was just “lucky”. We think such individuals may also attract greater attention and support from effective investors

We also believe that given the nearly total collapse of the US IPO market as a result of Sabannes-Oxley and the current economic climate, the professors may have to look to financial indicators of success going forward like return on equity and net present value.

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