Good people or good ideas? Which makes for a good startup?

By Linus Dahlander, Christoph Ihl, Rajshri Jayaraman & Viktoria Boss on Thursday, 2 March 2017.

Entrepreneurship is a major source of job creation and is considered to be an engine of economic growth and innovation. As a result, there is no shortage of initiatives to promote it. Governments across the world spend billions subsidizing entrepreneurial activities, companies increasingly introduce measures to encourage workers to engage in entrepreneurship, and investors are constantly on the lookout for potential “winners”. Accelerators are in the business of fostering and cashing in on entrepreneurial ideas and this industry has taken off in recent years:  it was basically non-existent at the start of the millennium but stood at almost 400 accelerators with nearly $200 Mil. in investments in 2015.

There are two necessary ingredients for any entrepreneurial endeavor: good people and good ideas. The two may be complementary in that good people are more likely generate good ideas. But the best of ideas may not translate into a successful business if they lie in the hands of a dysfunctional or unskilled team.

So what matters: having a good idea or having a good team? Given the resources that society pours into fostering entrepreneurial teams, you would think that we would have some answers to this question. We don’t.

What happens much of the time in practice is that someone has what they think is an innovative idea and then they choose people to work with, in other words, they “endogenously” generate the ideas and work teams.  We know from the entrepreneurship literature that most entrepreneurs choose people they know well when starting their companies, be it family members, school or college classmates, or old colleagues with shared work experience. While this can carry benefits of being familiarized with the person, building on prior shared experiences, and exploiting complementary skills, it can also lead to complacency in the formation of the team. Rather than picking the best potential collaborator, it may lead the usual suspects to form teams, so that comfort takes precedence over performance.

Oftentimes, accelerators and incubators make an attempt to professionalize team formation with the aim of achieving higher complementarity in team composition than would have been achieved with purely endogenous choices by the founders themselves. They also often assign these teams to ideas that they then have to develop into a business proposition.

Using a randomized controlled trial, we are setting out to answer the question: What makes teams effective in early-stage entrepreneurship—their composition, or the ideas they explore? Potential entrepreneurs are randomly assigned into four groups: the first group will be allowed to choose both their team and the idea they pursue; the second will choose their own team members, but not the startup idea; the third group will be assigned a team but the team will be able to choose their own idea to pursue; finally the last group will assigned to both a team and an idea.  

We will then follow these people over 10 weeks as they initiate their enterprise, to analyze which of the groups is most successful. We will trace the outcomes by looking at the pitch deck they produce where they explain the idea, their solution in a similar fashion as what happens in real life where venture capitalists evaluate different pitch decks in their deal flow. The different outcomes will be evaluated by seasoned entrepreneurs, venture capitalists and business angels that will be recruited through local entrepreneurial networks.

The trial will run until the summer of 2017 and we expect to have initial results by mid-fall 2017. Stay tuned for our next blog post to see what some of our early findings might be.

The research above was funded by the Innovation Growth Lab (IGL) Grants Programme. We offer research funding to randomised controlled trials that help build the evidence base on the most effective approaches to increase innovation, support entrepreneurship and accelerate business growth. For more information please click here.

Researchers

Linus Dahlander (Associate Professor of Strategy at ESMT Berlin)

Christoph Ihl (Professor at TUHH Institute of Entrepreneurship)

Rajshri Jayaraman (Associate Professor of Economics and the Karl-Heinz Kipp Chair in Research at ESMT Berlin)

Viktoria Boss (Doctoral student at TUHH)