Startup success is, to a great extent, about good timing

Figuring out which companies are likely to succeed is one of the toughest problems in business. But even very dry data from business registrations can tell you a great deal, according to a new NBER working paper from researchers at MIT. Even though the authors have come up with a robust way to predict growth, one of the biggest factors is still timing.

In a dataset from Massachusetts, 77% of growth outcomes (an IPO or acquisition within 6 years of being founded) came from companies in the top 5% of the quality measure the authors created, based on everything from how a company is named to how quickly it files for patents. Nearly 50% of successful outcomes were in the top 1%. A similar dataset from in California produced remarkably similar results for the researchers (paywall).

But their model doesn’t account for everything. The highest potential entrepreneurs in a dataset that ran from 1988 to 2014 were from the class of 2000. But entrepreneurs in 1995 had a far, far greater chance of success.

Timing matters, a lot. The earlier entrepreneurs got more time in a growth market, and were more likely to be successful. Their years of success attracted more people and made the early stages easier, but high potential means very little in a tough market. There was a huge spike in the number of firms that exited successfully around 1995—they got the full benefit of the boom, and suffered fewer of the consequences of the tech-bubble bust:

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(Guzman and Stern)

The height of entrepreneurial quality was actually at the very end of the bubble. But they had a substantially harder time making it, and that difficulty persisted for years after the bubble burst. RECPI is the average quality of firms multiplied by the number of startups created in a given year in a particular area, the state of Massachusetts in this case:

colorcorrected (20)
(Guzman and Stern)

So what sort of data predicts success? It’s a few, surprisingly simple, things. Registering as a corporation rather than an LLC or partnership means a company is five times more likely to be successful. Registering in Delaware (a particularly business-friendly jurisdiction) is associated with a 40 times greater chance. Filing for a patent within a year of starting means a 60 times greater likelihood of growth.

Names matter: successful firms tend to have short ones (3 words or less). An company named after a founder has only a 5% chance of success, compared to one that isn’t. And an early mention in the Boston Globe business section was associated with a 30 times greater likelihood of success.

The difference between a firm that satisfies many of the quality metrics and one that doesn’t is pretty startling. The odds of a Delaware corporation with a patent and trademark succeeding compared to a Massachusetts LLC without intellectual property is 3097:1. The authors go even deeper:

More dramatically, at the (near) extreme, comparing the growth probability of a Delaware corporation with a patent, trademark, media mention and non-eponymous short name with an eponymous partnership or LLC with a long name but no intellectual property or media mentions, the odds-ratio is 295,115 to one!

It’s not causal—just registering in Delaware won’t make a company successful. But it’s an excellent signal of the ambition and potential of a company at a very early stage.

This data isn’t likely to give investors an advantage, but for governments trying to grow jobs and encourage entrepreneurs, it’s a way to focus on quality over quantity.

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