- Venture-funded startups generally pursue “equity growth events” — acquisitions or IPOs, also commonly known as exits.
- A startup’s potential to exit can be traced back to the early decisions of its founder, or so says Dr. Jorge Guzman, an assistant professor at Columbia Business School.
- Guzman studied over 10 million US companies looking for habits of success.
- He found that a founder’s “intent to grow” is demonstrated early on through “proactive choices” relating to corporate governance, intellectual property, and venture capital.
- According to Guzman, that proactivity is key.
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There’s a mentality that primes startup success.
Jorge Guzman, a professor of entrepreneurship at Columbia Business School, tracked over 10 million startups and found that the ones that reached “equity growth events” — like acquisitions or going public — exhibited what he’s dubbed a “proactive” orientation.
Why “proactive”? Because success can actually be traced back to how founders initially interact with their companies. Taking an active interest in your organization, as demonstrated by early investments of time, money, and energy, sets a startup up to succeed.
“Companies, when they’re starting out, make choices,” Guzman told Business Insider. “And it’s very obvious to understand that those choices are informed by what the company wants to do.”
For his recently published National Bureau of Economic Review working paper, Guzman consulted business registration data from 34 U.S. states from 1995 to 2004. Then he started hunting for commonalities among the most successful firms. It turned out that a majority (78%) of startups that hit those equity growth landmarks had one or more of the three early indicators of proactivity.
- Corporate governance, or where you initially choose to register your company. Choosing Delaware, which is initially more expensive, over your local state, generally indicates a long-term outlook for growth because Delaware is considered “pro-business.”
- Intellectual property, or how soon you choose to trademark your company and register patents.
- Venture capital, or how deliberately you seek external funding to have enough resources for growth.
“A lot of success in high-growth entrepreneurship is determined by the people who want to grow,” Guzman said. “That doesn’t mean that everybody who wants to grow gets to grow, but most growth happens with people who are making ambitious investments that they think are worth it from day one.”
Jeff Bezos, for example, reflected a “proactive growth orientation” in the choices he made when founding Amazon in 1994. He registered copyrights early, filed patents, and registered the firm in Delaware to make acquiring external investment easier. Amazon also received venture capital funding from Kleiner Perkins in 1996.
Let’s break down each of the three factors below.
Proactive growth is first defined by where you register your company
Companies have to choose whether to register in Delaware or their local state when they’re starting out.
A Delaware registration is a good marker of a proactive company, because although registration may be more expensive at a few thousand dollars extra a year, that pays off for large companies: the state’s legal system is generally considered “pro-business.” More than 50% of companies that trade in the stock market are actually registered in Delaware.
Delaware has a state legal system and corporate tax policies that are both business friendly.
How you protect your intellectual property early on is also a factor in projecting future growth.
The second factor is intellectual property. Founders that believe in their ideas are generally willing to trademark them early on, even though initial costs are around $3,000.
These initial investments, through registration and trademark, can serve as a self-check.
If your company isn’t worth registering in Delaware or pursuing trademarks, then “it may be that your company does not have the underlying potential to drive big outcomes,” Guzman said.
He found that firms whose founders register in Delaware, and acquire both patent and trademark protection are a whopping 278 times more likely to exit than firms that don’t make those same moves.
Venture capital matters, but maybe not as much as is imagined.
The third factor is raising venture capital. According to Guzman, companies that obtain venture capital do thousands of times better in terms of equity values than companies that don’t But among “high quality” companies — those that exhibit other proactive behaviors — the multiplier for pursuing venture capital drops down to 6x, he says.
“I think our VC results serve to emphasize that the VC doesn’t make the company,” Guzman added, “Getting a VC is a good validation that your idea is good, but it doesn’t make the idea good.”
His research adds that firms whose founders register initially in Delaware are more than eight times more likely to receive venture capital. So each of the factors are interlinked, even though most high-growth companies do at least one.
“Your success is strongly determined by your own expectations and plans for success early-on,” Guzman said.
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