Small businesses play a vital role in our nation’s economy. The most recent report from the U.S. Small Business Administration Office of Advocacy shows small businesses make up over 99% of firms with employees and account for 62% of new jobs created in the U.S.
While small businesses are thriving, they are also more susceptible to setbacks than large firms. This is especially true in the startup phase. More than half of new businesses with employees fail within the first five years.
With less-than-ideal odds of success, startups must find methods to increase their chances of survival. A recent study published in the Academy of Management Journal provides insight into the matter by explaining how members of a founding team play a pivotal role in success or failure.
The study out of the University of Wisconsin analyzed the first-year teams of 6,000 technology manufacturing businesses over an 18-year period. The career of each founding member was retraced leading up to the new firm’s establishment. The idea was to identify how both variety and commonality in the work histories of first-year team members impact the chances of survival.
The results showed that common work experience plays a large part in startup survival. Founding teams with two or more members coming from the same employer are more likely to succeed than those without a common previous employer. This held true when their previous employer was in a similar industry to the new startup. Just three years of shared experience decreased the likelihood of failure by 10%. The results were even better as the years of shared experience increased. Through this work history, a new team can quickly adopt and adapt processes from their previous firm.
Adding founders with a variety of previous work experiences to the mix further increased the odds of startup survival. Founding teams with three years of shared experience along with three founders with otherwise diverse work backgrounds were 30% less likely to fail. The combination of commonality and diversity in employment history drastically decreases the odds of collapse. While common experience provides structure to the new firm, diverse work histories allow founding team members a broader source of ideas and perspectives. This can lead to a more innovative culture and better equips the new business to deal with setbacks.
Interestingly, diverse work backgrounds alone do not provide an advantage to a startup.
Without shared experience in the mix, the study found firms are more likely to fold as the number of founders with varying backgrounds increased. Just three founding members with diverse work backgrounds increased the likelihood of failure by 23%. This finding may seem counterintuitive. We expect broad experiences to lead to increased capabilities and better decision making. While these individual founders are likely all capable of success, the lack of shared experience creates a barrier for the startup. The new team might be generating great ideas but be unable to work together to implement them successfully. Having shared work experiences proved to be a crucial piece in the founding team mix.
The right combination of variety and commonality of work experience within the industry creates a superior environment for success. As business author Jim Collins put it, getting the right people in the right seats on the bus is critical. Yes, startups can fail with the ideal founding team, and teams without any common experience can beat the odds to succeed. There are many other variables that impact a new firm’s survival. Factors like new competition or the economic state could crash a startup before it ever makes a profit. Most of the pieces related to a startup’s survival are outside of an owner’s influence. The founding team, however, is one variable that startups can control.
Small business will continue to play a prominent role in our economy. Even so, they constantly face challenges, especially in the first few years. That is why finding ways to increase a startup’s chance of success is vital. Through careful planning of the founding team, new firms can create a better environment for survival. When you have the right people in the right place, you set up your organization for success.
Lance Coffman is a regional business consultant with the Missouri Small Business Development Center at Missouri State University. He can be reached at firstname.lastname@example.org.
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