4 misleading signs of entrepreneurial success

September 15, 2015, 7:49 PM UTC
Startup Business Meeting
Photograph by Getty Images

For entrepreneurs, it’s hard to know when to call what you’ve started a success; after all, the danger lies in the many definitions of success. Those who adopt a misleading definition are at risk of working very hard to win the wrong race. So here are four of the most common — and most misleading — of what it means to see your business take off.

You’ve attracted outside funding for your startup.

Entrepreneur magazine’s website, entrepreneur.com, attracts more than 6 million unique visitors each month. When you search the site for ‘success’ you get a long list of articles that tell a common story: After much work, an entrepreneur secures outside funding for his venture. A recent article, “Meet the Young Millionaires of 2015,” is typical. Says the introduction: “With funding ranging from $10.4 million for skincare company Glossier to the whopping $275 million that has gone into the grocery-delivery service Instacart, the companies highlighted on the following pages have been earmarked by financial leaders for sustainable success and growth.”

Many entrepreneurs dream of being similarly anointed by “financial leaders.” The U.S. entrepreneurial community in particular propagates the idea that getting outside funding is the most prestigious of entrepreneurial merit badges. In many circumstances, outside funding does represent major progress, but is it success? A lot can happen to a company after it gets its first funding. For example, if the founder and her team get booted out by their VC, is this still an entrepreneurial success story?

You’ve disrupted an entire industry.

This seems to be the definition favored by Success magazine, which does have some cred in defining popular notions of success. But it’s almost the polar opposite of entrepreneur.com’s yardstick for success. In fact, outside of an Edison or a Ford here and there, Success’s definition makes most entrepreneurs merely mediocre compared with top performers. Many of today’s most prestigious venture capitalists also take this “change the industry or bust” view. A slightly less extreme version of this definition of entrepreneurial success might include all entrepreneurs that make it onto the Forbes 400, whose wealth largely has its roots in entrepreneurialism.

You make Inc. magazine’s annual list of the 5000 fastest growing private companies.

A company’s inclusion on the list is based on percentage revenue growth over a four-year period. (Because revenue growth correlates with job creation, Inc. 5000 companies disproportionately contribute to overall economic well-being.) The companies on the list have successfully established themselves in their target markets. Further, the list includes a large percentage of companies where the founder is still the CEO, indicating many entrepreneurial success stories.

But as a definition of entrepreneurial success the Inc. 5000 can be highly misleading. According to The Kauffman Foundation’s analysis, only about 63% of Inc. 5000 companies are still in business five or more years after making it onto the list. About half of the companies still in business have shrunk since they made in onto the list. Many of the 32% of Inc. 5000 entrepreneurs who sold their companies go on to try again, becoming serial entrepreneurs, suggesting that they 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 just because a company grows fast, that doesn’t mean it will continue to grow, or will avoid shrinking, or that the entrepreneur will feel successful.

You achieve a growth rate of 2% or higher per week.

This even more stringent “success equals growth” definition is prevalent in Silicon Valley. Paul Graham, co-founder of the Y Combinator, argues in his essay “Startup = Growth” that only consistently fast-growing, young enterprises deserve to be called startups. Without growth rates of 2% per week or higher, the enterprise is either a failure or mired in mediocrity.

But most of the entrepreneurs on Success magazine’s list of the 50 Greatest Entrepreneurs of All Time never achieved growth rates that consistently high. Don’t misunderstand. I applaud Y Combinator’s business model — seeking out entrepreneurs whose ideas have high growth potential — and the firm’s process for developing these types of entrepreneurs is impressive. But as a community trying to help entrepreneurs we cannot slip into a mindset that applies Y Combinator-level definitions of success to all entrepreneurs.

In fact, non-venture capitalist backed entrepreneurs create the overwhelming majority of the wealth in the U.S. 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. Over 70% 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. Unless we want to exclude this vast number of entrepreneurs, we should not adopt VC definitions of entrepreneurial success or let VCs redefine the word “startup” to mean hyper-growth.

How might we define “entrepreneurial success” so that it neither leaves us with only a handful of wildly successful startups nor lets entrepreneurs delude themselves into thinking they have made it? I would put it this way: Successful entrepreneurs turn ideas into self-sustaining value-producing enterprises. One criterion here is that the entrepreneur gets the enterprise to the point where it produces consistent profitability. The other criterion is that the entrepreneur create an enterprise that can consistently generate new products to capture new groups of customers to replace those that no longer need or want the original product. Without this ability to capture new sets of customers, a firm will peak and then decay, no matter how fast it grew. Almost half of the surviving Inc. 5000 failed to meet this criterion.

With less stringent criteria, enterprises that are on the path to failure would be seen as successful. With more stringent criteria, we are creating arbitrary standards for deciding whom to call successful. But with a balanced definition, we can then leave it up to each individual entrepreneur to set some additional personal standards of entrepreneurial success.

In any case, “success” clearly means many things to many people, and I certainly don’t expect to have the final say. But there is something to be said for challenging all the many competing and contradictory definitions.

Derek Lidow is the author of Startup Leadership and teaches entrepreneurship, innovation and creativity at Princeton University. He was the founder and former CEO of iSuppli Corporation.

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