If the performance of a startup is influenced by its founders’ skills and demographics, how does this influence change over time? A recent study by Brown, Earle, Kim and Lee aims to understand whether factors like experience, skills, gender, and race or ethnicity influence a founding team’s likelihood of starting large companies and remaining large.
The study, titled “Start-Ups, Job Creation, and Founder Characteristics,” analyzed data on 55,800 owners of 37,100 U.S. firms founded in 2007. The firms were analyzed both at their starting year and after a period of seven years in order to determine how the impact of different factors on firm performance changed with the age of the firm. The study revealed several interesting trends.
- The largest 5 percent of companies generated over half of the total employment.
This disproportion intensified with maturity: by age seven, the largest 5 percent of companies accounted for more than two thirds of the total number of jobs created by the companies studied.
- Female, African-American, and younger founders were initially less likely to start large firms.
All-female founding teams had a 34 percent lower probability of starting companies that reached the top 5 percent in their first year. Likewise, companies with younger founders were less likely to reach the top 5 percent in their first year.
Hispanic, African-American, and Asian founders were less likely than white founders to start a company that reached the top 5 percent in its first year, but this difference seemed to fall below significance when controlling for other demographic and skill related factors. The exception to this is African-American founders, whose companies were 28 percent less likely to reach the largest 5 percent in their first year, even when controlling for these factors.
- The gender gap persisted as the company reached the age of seven, while the racial and age gaps did not.
Over the entire seven year period, companies led by all-women founding teams remained significantly less likely to reach the top 5 percent. However, companies with younger founders or all African-American founding teams that reached the age of seven became almost just as likely to reach the top 5 percent as their peers.
- Differences in startup capital seemed to account for a large part of the racial and gender gaps among founders of the largest companies.
When the amount of startup capital was controlled for, the gender gap, or the lower likelihood of all-women founding teams reaching the top 5 percent, shrank from 34 to 20 percent. The racial gap also shrank significantly at the company’s starting year and even more so at age seven. This pattern indicates that differences in startup capital accounted for a large share of the difference in performance, which is consistent with evidence of financial discrimination in the startup period.
- A bachelor’s degree was associated with a greater probability of success.
Founders with a bachelor’s degree were far more likely to successfully launch a larger company than those without one. This difference persisted throughout all firm stages. However, this was not the case for all levels of education. Graduate school did not seem to play a role in producing founders of large start-ups.
- Larger, unrelated teams made the best founders.
Firms with at least three unrelated founders were 230 percent more likely to operate a larger firm than individual founders. Firms with two founders (who were not a couple), were 100 percent more likely.
The original study can be accessed here.
Contributed by Ariadne Xenopoulos