Dangerous Definitions of Entrepreneurial Success

I want to discuss the dangerous implications of the most commonly accepted definitions of entrepreneurial success.  Using wrong or misguided definitions of success puts entrepreneurs at risk of working hard to ultimately win the wrong race.  Let me make my point by discussing the four most common implied definitions of success:

When you search entrepreneur.com for ‘success’ you get a long list of articles that tell a common story about someone who launched a company and received outside funding (see for example: http://www.entrepreneur.com/article/223497).  Many entrepreneurs dream of reaching this milestone.  The US entrepreneurial community in particular propagates the idea that getting outside funding is the most prestigious of entrepreneurial merit badges. In many circumstances outside funding represents major progress, but is it success?  A lot can happen to a company after it gets its first funding.  For example, what if the founder and her team get booted out by their VC, is this still an entrepreneurial success story?

Success Magazine has some cred in defining popular notions of success and they have a clear point of view on entrepreneurial success.  They take the absolute opposite view from that of entrepeneur.com and imply that you measure entrepreneurial success based upon historic impact on an entire industry (http://www.success.com/articles/182–50-greatest-entrepreneurs-of-all-time).  This definition groups virtually all entrepreneurs, past and present, into a category of also-rans.  This view, “change the industry or bust,” is held by many of today’s most prestigious venture capitalists.  A slightly less extreme version of this definition of entrepreneurial success might include all entrepreneurs that make it onto the Forbes 400 http://www.forbes.com/forbes-400 .  After all, the vast majority of the Forbes 400 wealth listed was entrepreneurially generated.

Another very popular definition of entrepreneurial success is to make it onto Inc. Magazine’s annual list of the 5000 fastest growing private (i.e., entrepreneurial) companies (http://www.inc.com/inc5000/list/2012 ).  The most recent three year Revenue Growth Rate is used as the selection criteria.  Revenue growth correlates to job creation, so Inc. 5000 companies disproportionately contribute to overall economic well being.  The Inc. 5000 is a list of companies that have successfully established themselves in their target markets.  And the list includes a large percentage of companies where the founder is still the CEO.  This list is clearly includes many entrepreneurial success stories.

But the Inc. 5000 cannot serve as the definition of entrepreneurial success.  According to the latest Kauffman Foundation analysis, about 63% of Inc. 5000 companies are still in business 5 or more years after making it onto the list (this research is generally consistent with research done on the Inc. 500 in previous time periods).  About half of the companies still in business have shrunk from the size they were when they made in onto the list.  Thirty-seven percent of the Inc. 5000 were sold or went out of business.  Many of the 32% of Inc. 500 entrepreneurs that sold their companies go on to try again, becoming serial entrepreneurs (search for “life-after-the-inc-500-fortune-flameout-self-discovery” at http://www.inc.com).  This implies that most of the entrepreneurs that sold their companies were not completely satisfied with the outcome.  Undoubtedly a fraction of these Inc. 5000 serial entrepreneurs did well in the sale of their companies yet still wanted to launch another company because they find founding companies exciting.  But the point is that just because an entrepreneur has a company that grows fast doesn’t mean that the firm will continue to have even non-negative growth, or, that the entrepreneur will be satisfied with his outcome.

This ‘success equals growth’ definition is prevalent in Silicon Valley.  Paul Graham’s recent essay, “Startup = Growth” (http://paulgraham.com/growth.html) attempts to make the distinction that only consistently fast growing young enterprises deserve to be called a startup. Without growth rates of 2% per week or higher an entrepreneur is a failure, or maybe just mediocre.  Most of the entrepreneurs on the Success Magazine all time great 50 list never saw growth rates this consistently high!  I completely support Y Combinator’s business model to seek out entrepreneurs with high growth potential ideas – their process for developing these types of entrepreneurs is impressive – but we cannot as a community slip into a mindset that whatever is required to make YC successful should be expected of all successful entrepreneurs.

Non-VC backed entrepreneurs create the overwhelming majority of the wealth in the US.  Only around 12% of all the companies on the Inc. 5000 have taken money from VCs or angels.  Another 17% raised growth equity after they had established stable positive cash flow (search for “Big Picture” at http://www.inc.com).  Over seventy percent of all Inc. 5000 companies did not need to sell part of their company to professional investors to start up or to fund their fast growth.  We cannot use VC mindsets to define entrepreneurial success nor let VCs redefine the word startup to mean hyper-growth.

I have a definition I like.  Successful entrepreneurs turn ideas into self-sustaining value producing enterprises.  One criterion of this definition requires that the entrepreneur gets his enterprise to the point where it produces net positive value; in the case of a company this means consistent profitability.  The other criterion requires the entrepreneur creates an enterprise that can consistently generate new products that capture new groups of customers to at least replace those that no longer need or want his product.  Without this ability to capture new sets of customers a firm will just peak and decay, no matter how fast it grew.  This is a criterion that almost half of the surviving Inc. 5000 did not meet.  With any fewer success criteria the enterprise is on a path to eventual failure.  With any more criteria we are creating arbitrary standards for deciding whom we call successful.  This definition is very balanced and we can rightly leave it up to each individual entrepreneur as to whether they set some additional size or valuation criteria for their personal standard of entrepreneurial success.

I offer these thoughts to start an explicit conversation within the entrepreneurial community on the subject of entrepreneurial success.  I do not expect my words to be the last word on this important subject.