Market Timing Is A Skill Not Luck

Selecting the ideal time to start a company is a skill, not just dumb luck.  This is one of the striking conclusions of a newly released working paper by Harvard Business School entrepreneurial finance professor Paul Gompers, et al.  Think about that.  It means that guys like Mark Cuban were not simply lucky for starting a streaming video company in 1995 and selling it to Yahoo for $6 billion in 1998.

Did you know that Cuban’s first startup was a computer systems integration company he founded in 1983 and sold to CompuServe for $6 million (pocketing $2 million after tax in the deal)?  Gompers points out in the working paper that 1983 was the best year ever to start a computer company (52% of them eventually went public).  Using a large set of data, Gompers’ paper, Performance Persistence in Entrepreneurship, supports a few really interesting conclusions, including:

  • Entrepreneurs who have previously been successful, are significantly more likely to succeed in subsequent ventures (as compared to first time entrepreneurs or entrepreneurs with previous failures).
  • Entrepreneurial “skill” comes in two forms: market timing skill and management skill.  Everyone, including VCs, tend to focus on managerial skill.  For example, in the hundreds of VC pitches I’ve given, not once was I asked questions about my (relatively poor) market timing skill.  The paper doesn’t address the issue of whether market timing or managerial skill is more valuable, but my guess is the former.
  • For subsequent ventures, successful entrepreneurs raise venture capital earlier than do first time entrepreneurs.  I wouldn’t have expected this.  I would have thought the entrepreneurs would have used their own capital to delay dilution.

There are many other pearls in this 33 page paper, so I definitely encourage you to read it.  For instance, one of my favorite conclusions that Gompers compellingly makes is that venture capitalists do not add value to the companies they invest in.  How does he know this?  Not surprisingly, the top-tier VC firms are better at picking unknown “star entrepreneurs” but once they’ve been successful in their first ventures (i.e. their “star” qualities are now public information) then the success of subsequent ventures is unaffected by whether the venture backer is a top-tier firm or a bottom-tier one.  Ouch!

So the obvious question is, how do you improve your market timing skills?  A good question…  More on that soon.