Why a Failed Startup Might Be Good for Your Career After All

In August, mega venture capital firm Andreessen Horowitz announced a $350 million investment in residential real estate firm Flow — the largest single investment the VC titan has ever made.

But a bigger surprise than the investment was the person who received it: Adam Neumann, the charismatic but controversial co-founder of WeWork, who stepped down as CEO in 2019 after a botched IPO and questions about his business practices.

“The market values ​​the experience they have and rewards them with high seniority and high prestige positions even when they have failed.”

Why would the VC firm risk backing an entrepreneur with a questionable track record? A recent paper might contain the answer. Entrepreneurs surviving an initial VC-backed failure often find their careers accelerate in their follow-up job, as highlighted in Failing Just Fine: Assessing Careers of Venture Capital-Backed Entrepreneurs Via a Non-Wage Measure.

After exiting their startups, these entrepreneurs end up with jobs roughly three years older than their peers, according to the study. The results suggest that companies value the experience of entrepreneurs, who often have their hands on most aspects of the business: operations, marketing, finance, communications and product development. Clearly, general managerial skills win the day, says one of the paper’s co-authors, Paul A. Gompers, Eugene Holman Professor of Business Administration at Harvard Business School.

“The market values ​​the experience they have and rewards them with high seniority and high prestige positions even when they fail,” says Gompers.

The study comes at a time when Americans are taking more risks, people are quitting their jobs in record numbers, and many are starting their own businesses. While some of these new ventures typically fail, perhaps the results are welcome encouragement: Entrepreneurs not only land on their feet after failure, but actually continue to climb the corporate ladder.

The research challenges previous studies that found entrepreneurs who failed early in their careers often took jobs with a lower salary than their previous roles.

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“This literature presents failure as a stigma,” says Gompers. “It might make you think that if you start something and fail, people won’t want to hire you.”

The study was co-authored by Gompers, Natee Amornsiripanitch, economist at the Federal Reserve Bank of Philadelphia; George Hu, a graduate student at Harvard University; Will Levinson, research fellow at HBS; and Vladimir Mukharlyamov, an assistant professor at Georgetown University’s McDonough School of Business.

Success measurement based on 5 million resumes

Researchers focused on entrepreneurs backed by venture capitalists, but they immediately faced a challenge. How do you measure the success of incumbents in different roles in industries as diverse as technology, finance, and academia? Who is more successful: a full university professor or an insurance company? Traditional measures of professional success like compensation may not tell the whole story.

So the researchers invented their own methods of measuring success, accessing a collection of 5 million resumes in the Emsi Burning Glass profile database, which collects work history and educational data from various public and private sources. Combined with data from Dow Jones VentureSource, the list was pared down to 14,000 founders of VC-backed companies who had posted a post-startup job. Failed startups were defined as those that were acquired for less than the total investment or that were active but had not received funding for at least three years.

Researchers developed a seniority concept to define cross-industry success based on specific job titles and the number of years it took to achieve them. For example, the title “Software Engineer” received a seniority rating of 2, meaning the average person earns that title two years after graduating from college. This person’s boss, a “Senior Software Engineer”, has seniority 7. A CEO has seniority 16.

A second part of the paper used seniority and salary measures to compare the career paths of VC-backed entrepreneurs before and after founding their startup relative to the career paths of cohorts of non-entrepreneurs who graduated around the same time and at the same university level Graduated first positions of similar seniority and in the same industry.

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The conclusions discussed below also hold when the career paths of VC-backed entrepreneurs are compared to “pre-startup cohorts” of non-entrepreneurs. That is, a group of non-entrepreneurs who graduated from the same college level around the same time had jobs with the same seniority that were also in the same industry as the entrepreneurs before starting their VC-backed businesses.

Leap up the career ladder

The results provide an in-depth look at the rungs of typical career ladders and offer a new blueprint for faster advancement:

  • Successful founders develop further than most others. Successful founders achieved larger gains in seniority and rose about three years in their next job than founders of failed companies who rose two years.
  • When the jury decides on a company, founders still do well. Founders who still ran active companies (which had not yet been deemed a success or failure by the 2021 project sample end date) received a two-year seniority increment when they transitioned.
  • The careers of founders develop higher in the long term. Founders reached an average career level of 20 over time, while non-founders reached around 10. Only 20 percent of workers reached level 20 or higher.
  • The careers of founders progress faster before founding. Even before founding a start-up, founders tend to achieve higher positions in the labor market than comparable non-founders. The median founder achieves 13 seniority immediately prior to incorporation, while a similar non-founder achieves 9 seniority over the same period.
  • Founders make more money. Aside from reaching higher-level, prestigious positions, founders also tend to earn non-founders throughout their careers. Before founding their start-up, founders achieve jobs with up to 40 percent higher wages than comparable non-founders. This wage gap between founders and non-founders only widens when founders re-enter the labor market after leaving their respective start-up company.

“It’s probably not surprising that founders are extraordinary people, that they have a lot of success before they start their business, which is probably why they can convince people to give them money,” says Gompers. “The story of Adam Neumann plays right into this. You can lose billions of dollars and still do well.”

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Taking time to think can help. In an interview last year, Neumann, the co-founder of WeWork, said of his experience, “I had a lot of time to think, and there were multiple lessons and multiple regrets.”

Some risks are worth taking

The research may prove useful for business practitioners. First, it could encourage more business leaders to take a risk by starting a business, Gompers believes, and allay the concerns of those who believe failure could hurt their career aspirations or result in financial consequences that destroy families.

“If we look at places where failure is stigmatized, the prime example is Japan. Japan has a very, very small entrepreneurial ecosystem.”

Second, the message that a startup failure can provide entrepreneurs with valuable experience is a valuable lesson for companies that would otherwise punish the leader of a company that has gone haywire.

“You have to value that experience and reward that experience to get people to start startups,” says Gompers. “If we look at places where failure is stigmatized, the prime example is Japan. Japan has a very, very small entrepreneurial ecosystem.”

New iterations of the paper are in the works, using around 150 million LinkedIn resumes to expand the study. “Our paper clearly shows that the risk of founding a new company pays off in the long term, even if the founding itself is not successful in the end,” says Gompers. And in a separate career progression study, Gompers compares the careers of college athletes to those of non-athletes. (Spoiler alert: The athletes have more career success.)

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