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Born into Chaos

Luke Sykora, Stanford University March 23, 2022

At first glance, the reasons that one startup succeeds and another fails might seem completely idiosyncratic. Ventures can succeed because they create a novel technology, but they can also succeed by simply by being in the right place at the right time. They can fail because the technology doesn’t work as planned, or the market changes, or personality clashes tear the company apart from the inside.

Still, it’s likely that there are some general conditions that tend to lead to startups success. What might those conditions be?

For Carrington Motley, a graduate student in Stanford University’s Department of Management Science and Engineering who is studying with STVP, a year like 2020 begs some particularly intriguing questions about the environmental conditions that might impact startup success. “In 2020, there was lots of uncertainty in industry environments,” he observes. “But there were also many new ventures formed during the pandemic, as well as high startup valuations and some big exit events. Looking back, we can see that VCs continued to invest in seed and early-stage rounds at a pace similar to, if not higher than, the pre-pandemic levels. So one question would be: Was 2020 a good year to be starting a new venture?”

In comments edited and condensed below, Motley explores what drew him toward research questions about startup performance, and explains how “Born into Chaos,” his new paper-in-progress, aims to answer questions about how both team composition and environmental factors impact startup success.

Before we get into your research itself, can you explain how you became interested in asking empirical questions about startups?

CARRINGTON MOTLEY: Prior to commencing work on my PhD, I worked for four start-ups across multiple industries, including spending a summer working at a startup in Paris where my ability to speak French proved useful. I also spent 6 months with one of the most highly regarded seed and pre-seed venture funds, Flagship Pioneering. I really liked the early stage company environment. In a small company, you know everybody, and you have a direct line of sight to nearly everything the company confronts, both the opportunities and the challenges. Plus, when you finish one thing, there are always five other things to do.

Through these experiences, I realized that I was more energized working to optimize the company’s overarching strategy and understanding the role of internal factors, like people, and external factors, like timing, in determining the company’s success. I was captivated by what the companies were going to do next, who they were competing against, how they were positioning themselves. While I had a strong engineering background and got excited about engineering challenges, I found myself pulled more towards the things people were doing in the COO/CEO roles.

Beyond my burgeoning interest in strategy, I also found my experience teaching at a study abroad program for American students in my gap year to be very fulfilling. It was amazing to be the gateway for the students that I taught to a whole body of knowledge – in this case, trigonometry and calculus.

My current academic trajectory allows me to combine these two interests. I get to think about entrepreneurship and startups from a management perspective in addition to an engineering one, and I also get to educate and contribute to the growth of the next generation coming up behind me.

Let’s focus on your research about how the environment and team dynamics affect startup performance. What data are you using to look at this question in your “Born into Chaos” paper?

CM: The dataset is a Stanford alumni survey conducted in 2011. It was administered to all of the living Stanford alums across all the schools in the university, and across all classes. Overall, the survey got a 20 percent response rate, which meant around 20,000 respondents. One of the questions was: “Have you been involved in entrepreneurship?” If respondents answered yes, they were asked some follow-up questions.

That survey captured information on just under 10,000 startups, and we ended up with 1,060 startups in the final sample we used for this paper, spanning 19 industries that were founded between 1960 to 2006.

What are you finding as you work on this paper?

CM: For this paper we’re asking how conditions at founding are related to the long-term performance of that venture.

We look both at the industry environment and at the co-founders, specifically industry dynamism (the unpredictability of the industry environment) and founding team functional diversity (a measure of the diversity of cognitive resources the team possesses; imagine one founder being an engineer and the other a marketer). What are the direct effects of those two factors, and what is the interaction between the two?

Among our takeaways at this point is: Ventures that are created in unpredictable environments perform better. We also find that, overall, functional diversity helps. The startups with functionally diverse leadership teams tend to outperform the startups without functional diversity.

Interestingly, we also find that the impact of the combination of environmental uncertainty and functional diversity depends on how the environment shifts after founding. If the environment in which the start-up was created changes substantially, we find that the combination of founding features (environmental uncertainty paired with functional diversity) has a negative impact. We argue that this negative relationship is due to the fact that the processes that functionally diverse teams implement during uncertain founding environments carry forward. However, these processes actually impede success when subsequent environments do not resemble the founding environments in which they were created.

What advice would you give to entrepreneurs who want to engage with academic research focused on entrepreneurial strategy?

CM: I would encourage entrepreneurs looking to engage with academics to search for review papers (in sources like Academy of Management Review, Strategic Entrepreneurship Journal, and Organization Science) that touch on themes that are of particular relevance to them, and then seek to connect with that author. Some of the most interesting papers, especially for practitioners, aren’t the empirical papers, but rather these review papers that summarize a group of empirical papers and search for a consensus or themes. These papers make claims like, “We’ve seen this 10, 20, 30 times, and we start to believe it is true.” For example, a recent review paper I read was all about startup teams, and worked to provide perspective on research that’s come out in the past two decades. These types of review papers are especially relevant for practitioners, because they go beyond looking at variables X and Y, and extend into the implications of the area of research as a whole.

In addition to “Born into Chaos,” Carrington Motley’s working papers include “Organizational Learning From Failure & Success: A Review” and “Pivoting for Performance.” Motley has accepted a tenure track faculty position at the Carnegie Mellon University Tepper School of Business and will focus on entrepreneurship. Motley is happy to discuss his research and other academic research on entrepreneurship with interested entrepreneurs.