Why entrepreneurs should not follow the herd

standing-outThere is a strong image of entrepreneurs as lone wolves happy going against the flow, but the reality is that many entrepreneurs follow the pack, especially when hot new markets emerge.

A recent study from the University of Chicago Booth School of Business reveals this is seldom a good path to go down.  Indeed, when startups resist the urge to follow the pack, not only do they last longer, but they usually attract more funding and often go public.

“Startups and investors face constant pressure to follow the consensus, and that pressure is hard to overcome” the authors say. “When we talked to individual entrepreneurs and venture capitalists directly, they said they know intellectually that they shouldn’t follow the crowd, but they still do it.”

Bucking the norm

Over 4,500 startups were analyzed over a 13 year period, with each tracked in areas such as their market category, venture capital raised and whether they floated on the stock exchange.  They also conducted qualitative research by interviewing investors and senior managers from both the startups and the industry to better understand the rationale behind entering the new market.

When the data was crunched it emerged that there was considerable herd behavior from both VCs and the startups themselves, with many startups entering markets that had already shown the potential for success.

Whilst this was common however, it was not especially effective, especially in the long-term.  The study found that when entrepreneurs and VCs followed the pack into hot markets, they failed to accurately gauge whether the product was actually a good fit for that market.  This trend was especially apparent when placed alongside startups entering riskier markets that were littered with bankruptcies.  In such instances, much more diligence was paid before entry, and therefore better longer term results were achieved.

Do your research

The moral of the story seems a clear one, and entrepreneurs are urged to act more with their head than their hearts when deciding on whether to enter a new market.  If they do careful analysis of the potential fit between their products and this new market, their chances of long-term success rise considerably.

“Although non-consensus behavior may seem like foolishness at the time, it turns out to be a wise alternative — if the organization can weather the heightened scrutiny,” the authors conclude. “Consensus entrepreneurs can readily garner support to enter a hot market, but as a result are less viable.”

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