There are two necessary ingredients for any entrepreneurial endeavour: good people and good ideas. The two may be complementary in that good people are more likely to generate good ideas. But the best of ideas may not translate into a successful business if they lie in the hands of the wrong team.
So, what really matters? A good idea or a good team? Given the resources that society pours into fostering entrepreneurial teams, you would think that we might have some answers to this question. We designed a natural field experiment with over 900 individuals and more than 300 teams at the Technical University of Hamburg, to study the effects of choosing team members versus ideas on entrepreneurial team performance.
We used a two-by-two design, with subjects randomly assigned to one of four treatments in which they (i) choose their own team but not the idea they pursue; (ii) choose their own idea but not their team; (iii) choose both their team and the idea to pursue; or (iv) choose neither their team nor the idea. The teams then get exactly the same training from tutors.
Over the course of ten weeks, each team produced a pitch deck, and then we invited about 40 evaluators (business angels, entrepreneurs and VCs) to evaluate how well the teams did with respect to the novelty of the idea, the market potential, the success potential, and whether these evaluators would invest in the idea.
Now you wonder: which group did the best?
We found a consistent pattern: freedom to choose your own team or idea is better than no choice on either of these dimensions. In other words, choice matters and is generally good for entrepreneurial performance - but how much choice and what kind of choice one has also matters.
Our results show that allowing assigning teams but allowing them to decide on the business idea they pursue results in the best performance outcomes. This result is striking because it indicates that, once you allow teams the freedom to choose their own idea, a randomly assigned team would perform better than a team who chose to work together.
Why did randomly formed teams perform better than the ones where people chose their team members?
We investigated four different channels that can account for this by looking at team composition, team work, satisfaction, and confidence. With respect to team composition, we find that teams that choose to work together are more similar in terms of observable characteristics such as age and gender, and tend to rely on pre-existing networks. Interestingly, these similarities are not exhibited when it comes to unobservable characteristics that would seem conducive to entrepreneurial success, such as entrepreneurial intention or motivation.
Interestingly, even though the performance of teams formed by choice is not as successful, they were more satisfied overall, and were more likely to continue pursuing their project in the future. In sum, these findings suggest that when you choose your team members, an echo chamber is formed – a comfortable atmosphere in which team members pat each other’s backs, but that may not produce the best outcomes.