Why Only 1% of Entrepreneurs Succeed More Than Once

One of the most persistent challenges in the world of alternative asset investing is navigating cognitive biases, particularly the illusion of skill. This bias can lead an investor to overestimate their own abilities or those of "star" founders, assuming past successes will naturally repeat. While we’d like to think our judgment and experience guarantee results, the reality is far more complex—luck and timing often play much bigger roles than we acknowledge.?

Take the case of serial entrepreneurs like Elon Musk or Richard Branson. ?

Many assume that hard work, talent, and strong networks are enough to guarantee repeated success. Yet only a small percentage of founders succeed in building multiple successful companies. The majority of entrepreneurs find that their subsequent ventures struggle. ?

Why? ?

Because business success often hinges on external factors—market conditions, timing, and sometimes sheer luck—more than on skill alone.?

As an alternative asset investor, it’s easy to assume a founder’s previous win ensures future success, but this isn’t always the case.?

What Is the Illusion of Skill??

The illusion of skill occurs when investors believe that past achievements—especially in volatile fields like business and investing—are strong indicators of future performance. This bias leads us to overvalue founders or fund managers with impressive track records, assuming their success stems from superior skill. In reality, factors like market timing, economic trends, and even luck often have more influence than we realize.?

The Knowledge/Skill vs. Confidence graph, often used to illustrate the Dunning-Kruger effect, shows how individuals with limited experience tend to overestimate their abilities, while those with deeper expertise may initially underestimate their skills. Early on, confidence is high despite a lack of knowledge, leading to overconfidence in one’s abilities. As individuals gain more experience and realize the complexity of a subject, confidence dips before eventually rising again, this time more aligned with their true level of skill.?

For venture capitalists, this dynamic mirrors the illusion of skill, where early success can lead to overconfidence in one’s ability to pick winners, disregarding the role of luck and external factors. As investors gain experience, they begin to understand that success is influenced by timing, market conditions, and other forces beyond their control. Recognizing these complexities encourages a more balanced, humble approach to decision-making, rather than over-relying on past successes or star founders.?

Past success doesn't guarantee future returns. ?

In alternative asset investing, we often face decisions where the illusion of skill plays out.?

?For example, choosing between Startup A, led by a high-profile founder who’s seen past success, and Startup B, a promising new player with less experience. The bias inclines us to favor the more established founder, assuming that their track record will lead to another win. Meanwhile, the newer startup, which might have a more innovative idea or better market fit, could be overlooked.?

This pattern results in misplaced confidence and missed opportunities. Understanding that success often involves a degree of luck can help us make more thoughtful, data-driven investment decisions, instead of relying solely on reputation or past performance.?

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3 Ways We Keep Betting on It:?

1. Overconfidence in Picking Winners?

Many VCs believe they have a unique ability to consistently identify the next "unicorn"—a startup valued at over $1 billion. Past successes can reinforce this belief, attributing the outcome to their selection skills. However, startup success is frequently driven by external factors such as market timing, economic conditions, or even sheer luck, rather than the investor's judgment. The illusion of skill can lead VCs to overlook these influences, overestimating their ability to spot winners and potentially doubling down on faulty bets.?

2. Extrapolating Success from a Few Investments?

After experiencing a few standout successes, VCs may begin to believe that their skill was the key driver of those results. In reality, success in venture capital follows power-law dynamics, where a small number of investments yield the majority of returns. The bulk of investments result in little to no gain. This bias can cause investors to misinterpret these outliers as confirmation of their abilities, rather than recognizing the significant role of luck and favorable circumstances.?

3. Overestimating Control in Portfolio Companies?

VCs often assume that their influence—through mentorship, guidance, or strategic connections—can significantly affect the success of a startup. While these inputs are undoubtedly valuable, the illusion of skill may cause investors to underestimate the critical impact of uncontrollable factors such as market competition, shifts in consumer behavior, or technological disruption. These external forces often play a more decisive role in a startup's trajectory than the involvement of even the most skilled investors.?

Chasing Trends: When the Illusion of Skill Leads to Missed Opportunities?

The illusion of skill also causes us to chase hot sectors or invest in founders who seem connected to the latest trend. This often results in capital being funneled into overhyped markets, where innovation takes a backseat to buzz. We've seen this play out repeatedly with startups that fail despite significant funding and backing from high-profile investors:?

• Rdio: Despite being founded by the creators of Skype, Rdio couldn’t compete with platforms like Spotify, ultimately filing for bankruptcy. VCs were drawn to the founders’ history and the hot music-streaming space, but market dominance proved elusive.?

• Color Labs: Backed by $41 million in VC funding pre-launch, Color Labs failed spectacularly in the social media and photo-sharing boom. Investors were more focused on the founder’s past success than the product’s actual market fit.?

• Segway: Hailed as the future of transportation, Segway attracted substantial VC funding, driven by overconfidence in the visionary founder and the groundbreaking nature of the product. However, the illusion of skill led investors to believe that innovative technology alone would ensure mass adoption, overlooking the importance of market demand and consumer behavior. Ultimately, Segway failed to live up to the high expectations.?

These examples highlight how the illusion of skill and chasing trends can lead to poor decision-making, especially when investors are overly focused on founders’ past wins rather than evaluating the long-term viability of the business.?

The Power Law Trap: Overconfidence in Star Managers?

Venture capital often operates under the power law—where a small number of investments produce the majority of returns. This fuels the trap of overconfidence in star managers or well-connected founders, where we assume their past success ensures future wins. However, just like in asset management, a few big wins can mask the role of chance.?

A classic example is Masayoshi Son, founder of SoftBank. Son’s early investment in Alibaba transformed a $20 million stake into a $60 billion fortune, cementing his reputation as a star investor. This success led to the creation of the $100 billion Vision Fund, with investments in high-profile companies like WeWork and Uber. However, some of these investments—most notably WeWork—failed to meet expectations, demonstrating that past success doesn’t guarantee future results. Many of Son’s bets were based on the assumption that his initial success would continue, when luck and timing played a significant role in Alibaba’s rise.?

The illusion of skill leads investors to overlook warning signs, as was the case with WeWork. Son’s prior success blinded many to the fundamental flaws in the business model. It’s a reminder that even star managers can’t consistently predict winners in an uncertain market, where external forces and the unpredictable nature of the power law dictate outcomes.??

Misplaced Faith in Private Equity Returns?

A similar dynamic plays out in private equity, where firms with a few successful exits tend to attract large amounts of capital. An example is KKR’s investment in Energy Future Holdings (EFH), one of the largest leveraged buyouts in history. Despite KKR’s strong track record, EFH filed for bankruptcy in 2014, largely due to unforeseen market conditions. Investors assumed KKR’s previous success would translate, failing to account for external factors like falling natural gas prices, which devastated the coal-heavy business.?

Breaking Free from the Illusion of Pattern Recognition?

To avoid falling victim to the pattern recognition bias, investors should:?

• Conduct thorough due diligence on various factors?

• Diversify investments across the portfolio?

• Consult with niche experts?

• Factor in the inherent risk of uncertainty?

• Recognize and adapt to changing market conditions?

• Allocate appropriate capital without simply doubling down on past winners, considering future potential instead?

• Avoid believing intuition or experience alone gives a unique edge in predicting high-risk investments?

• Don’t downplay the inherent risks and focus solely on potential rewards?

• Avoid anchoring on past performance, especially in changing market conditions?

• Seek out diverse viewpoints and evidence, even if it challenges existing beliefs?

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Overcoming the illusion of skill Bias: How ACE Alternatives and Tactyc Are Revolutionizing Data-Driven Decision Making?

Illusion of skill bias is a subtle but powerful cognitive force that can significantly shape our decision-making in ways we might not even realize. Whether in investing, negotiations, or daily life, being anchored to an initial piece of information can lead to skewed judgments and less-than-optimal outcomes. However, by recognizing this bias and adopting strategies to counteract it, we can make more rational, informed decisions, ultimately driving better results. ?

ACE Alternatives recognizes this and has partnered with Tactyc to empower fund managers with advanced tools and real-time insights.?

Matias Collan ?? , CEO of ACE Alternatives, Matias Collan, shares:?

Our collaboration with Tactyc marks a pivotal movement in fund management. Together, we're equipping fund managers with the power to fully leverage data-driven processes, thereby boosting efficiency and refining decision-making throughout the fund's lifecycle.

Anubhav Srivastava CEO of Tactyc, emphasizes the partnership's impact:?

Joining forces with ACE Alternatives enhances fund managers' capabilities with real-time data and market insights, lifting portfolio forecasting, planning, and management to unprecedented levels. We're not only introducing cutting-edge technology but also fostering stronger, more informed decision-making to improve fund performance.?

Conclusion: Avoiding the Illusion of Skill?

As venture capital fund managers, it’s essential to remain aware of the illusion of skill and its effects on decision-making. Past success, whether it belongs to founders or managers, doesn’t guarantee future performance. By recognizing the role of luck, market forces, and timing, we can avoid overconfidence and make more balanced, data-driven decisions—focusing on long-term viability rather than chasing trends or star power.?

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Source: Rolf Dobelli, “The Art of Thinking Clearly” (2013)

About ACE Alternatives

ACE Alternatives, a leader in managed services for the Alternative Assets sector, specializes in venture capital, private equity, fund of funds, private real estate, and more. Leveraging tech-driven processes and extensive industry experience, ACE offers tailored solutions for fund administration, compliance and regulatory, tax and accounting, investor onboarding and ESG needs.

Our vision is to redefine fund management standards with data-driven processes, combining advanced technology with deep industry knowledge. We are committed to demystifying complex fund operations, promoting transparency, and achieving sustained growth across the fund lifecycle.

Media Contact: Rhea Colaso ??