A Dive into Science-backed Founder Profiling

The entrepreneurial landscape is littered with fallen startups. A staggering 90% of new ventures globally eventually shutter their doors, a sobering reality that extends acutely to the African continent. This begs a crucial question for investors and ESOs, amidst the noise, how do we identify the founders, and the teams, truly equipped to beat these odds? While traditional due diligence and tacit knowledge are essential, this paper delves into insights from psychology and cognitive science for a more objective, science-backed framework of evaluating entrepreneurial potential. 

Key Takeaways

• Team Dynamics are Crucial: Startup success heavily relies on the founding team; issues like poor team composition or disharmony are major causes of failure.

• Winning Personality Traits: Founders scoring high in conscientiousness, openness to experience, and emotional stability, and lower in agreeableness, often attract more funding and achieve greater success.

• The Balance of Traits: Positive traits like risk-taking can become detrimental if taken to an extreme; moderation is key.

• Belief in Self-Determination: Entrepreneurs with a strong internal locus of control—believing they shape their own destiny—are more likely to succeed.    

• The Power of Mindset: Psychological capital is a powerful indicator of success, potentially more so than initial funding, especially in a startup's early phases.    

• Growth Mindset and Cognitive Skills: A belief that abilities can be developed (growth mindset), coupled with practical intelligence," is fundamental for navigating the entrepreneurial journey.    

• Financial Acumen and Confidence: Both actual financial literacy and a founder's confidence in their financial skills are strongly linked to entrepreneurial action and success.    

• Leveraging Scientific Assessments: Tools like personality tests (Big Five), PsyCap questionnaires, Raven's Progressive Matrices, and financial literacy assessments can provide valuable, objective data for founder evaluation.    

• Informed Use of Tools: It's essential to use these scientific tools thoughtfully, considering cultural contexts and their inherent limitations. They should complement, not replace, traditional due diligence methods.

1. Why Do Startups Fail? The Critical Role of the Team 

According to CB Insights, issues related to the founding team account for a staggering 42% of startup failures (Figure 1). This includes factors like having the wrong team composition (23%), disharmony among the team or with investors (13%), and a lack of passion (9%). This picture is not different on the African continent. The Startup Graveyard identifies Human Capital and Talent as the third leading reason for startup failure in Africa. 

2. The Complex Process Model of Entrepreneurship 

Frese's seminal 2009 "Complex Process model of Entrepreneurship" (Figure 2) remains a cornerstone in entrepreneurial research, identifying Personality, Human Capital, Active Performance, and the overarching Environment within a National Culture as critical domains. While interviews and resume screenings provide initial assessments of these categories, they often fall short of capturing the full picture and are susceptible to inherent biases, making a truly objective evaluation challenging. Below we will explore objective data points for a more comprehensive and less biased assessment of these critical entrepreneurial dimensions. 

3. Entrepreneurship and Psychology

3.1 The Five Factor-Model

One of the most widely accepted frameworks for understanding personality is the Big Five model (aka. OCEAN) (Figure 3). It assesses personality across five broad dimensions: 

• Openness to Experience: Describes the breadth, depth, originality, and complexity of an individual's mental and experiential life. 

• Conscientiousness: Describes socially prescribed impulse control that facilitates task- and goal-directed behavior, such as thinking before acting, delaying gratification, following norms and rules, and planning, organizing, and prioritizing tasks. 

• Extraversion: Implies an energetic approach toward the social and material world and includes traits such as sociability, activity, assertiveness, and positive emotionality. 

• Agreeableness: Contrasts a prosocial and communal orientation toward others with antagonism and includes traits such as altruism, tender-mindedness, trust, and modesty. 

• Neuroticism: Contrasts emotional stability and even-temperedness with negative emotionality, such as feeling anxious, nervous, sad, and tense. 

So how do founder personalities differ from managers? Research suggests that entrepreneurs tend to score higher in conscientiousness, openness to experience, and extraversion, while scoring lower in neuroticism (i.e., higher emotional stability) and agreeableness. These traits can help predict entrepreneurial intention and performance. 

A study from Columbia Business School examined the correlation between the Big Five traits and key startup success metrics (Figure 4) and their key findings are the following: 

• Conscientiousness significantly predicts capital raising, as evidenced by higher amounts of funding (B), more investors (C), and an increased likelihood of an exit (D). 

• Openness shows a positive link with raising funding (A) and the number of investors (C). Neuroticism has a negative impact on the number of investors (C) and the amount of funding raised (B). 

• Extraversion and Agreeableness show mixed or less significant effects on these specific metrics, even though they might leave a strong impression during an interview. 

  
  

  

  
  

3.2 The "Janus Face" of Personality Traits: When Strengths Become Weaknesses

While certain traits are generally positive, research also highlights the idea that even desirable attributes can become detrimental if taken to the extreme. There appears to be an optimal threshold.

Begley & Boyd observed a curvilinear relationship between psychological attributes and financial performance. Initially, as a beneficial psychological attribute increases, financial performance also improves up to an optimal point, beyond which further increases in the attribute lead to a decline in financial performance. 

• Risk-Taking and Return on Assets (ROA): For founders, moderate risk-taking is associated with higher ROA. However, when risk-taking becomes excessive, ROA decreases. 

• Tolerance of Ambiguity and Growth Rate: Tolerance of ambiguity positively affects growth up to a certain point, beyond which it negatively affects growth. They suggest that excessive ambiguity tolerance might hinder the development of necessary response mechanisms to deal with environmental changes. 
  
  

3.3 Locus of Control: Do Founders Believe They Shape Their Destiny?

Locus of control is another major data point in entrepreneurial success. It refers to the extent to which people believe they have control over the events in their lives.  

• Internal Locus of Control: People with an internal locus believe they are largely responsible for their outcomes through their actions and decisions. Entrepreneurs typically exhibit a higher internal locus of control. 

• External Locus of Control: People with an external locus believe external factors like luck, fate, or others' actions determine their outcomes. 

Research found that proactive personality, self-efficacy, stress tolerance, need for autonomy, achievement motivation represent an internal locus of control and that correlates with business creation and success. 

3.4 Psychological Capital (PsyCap): The Power of Mindset 

Beyond the Big Five, Psychological Capital (PsyCap) is another critical factor. PsyCap refers to a collection of four positive psychological states known to enhance well-being and performance: Hope, Efficacy (Confidence), Resilience, and Optimism (often abbreviated as HERO). These states can often be developed and measured using the PsyCap questionnaire. 

3.5 How Predictive Are These Personality and Psychological Factors? 

A legitimate question is whether assessing these traits actually helps predict real-world outcomes. Research tracking entrepreneurs from intention to business growth provides some answers. Figure 8 shows the proportion of variance explained by Personality factors (blue) versus Environment/Resources/Process factors (red) at different stages. While environmental factors become increasingly important as a business grows, personality factors consistently explain a significant portion of the variance, particularly in the early stages of intention and startup probability. This suggests that personality assessment is valuable, especially for identifying individuals with high entrepreneurial potential. 

4. Entrepreneurship and Cognition science 

Beyond personality traits, how a founder thinks is critical. At the heart of this is the growth mindset – the belief that abilities and intelligence can be developed through dedication and hard work. This contrasts with a fixed mindset, which assumes abilities are static. For entrepreneurs, a growth mindset isn't just beneficial; it's fundamental for navigating the startup journey. It fuels the resilience to learn from failures, adapt to changing markets, and persist through the inevitable challenges. 

This mindset underpins several key cognitive skills vital for entrepreneurial success: 

Seeing and Seizing Opportunities: Successful entrepreneurship often starts with generating new ideas (invention) and then skillfully bringing them to life in the market (innovation). This dual focus requires a blend of thinking styles: the creative, big-picture thinking to dream up new possibilities, and the logical, analytical thinking to plan and execute. 

Real-World Smarts: It's not enough to be just "book smart." Founders need what Robert J. Sternberg termed "successful intelligence." This means being able to: 

• Analyze problems effectively (analytical skills). 

• Come up with novel solutions (creative skills). 

• Apply ideas practically and persuade others (practical skills or 'street smarts'). This practical side often involves understanding the unwritten rules and nuances learned through experience, a kind of "tacit knowledge". 

Innovative Thinking in Action: Creative ideas rarely appear out of thin air. As research by cognitive scientists like Thomas B. Ward suggests, they often stem from how we process information and connect existing knowledge in new ways: 

• Conceptual Combination: Many breakthroughs happen when founders merge existing, sometimes unrelated, ideas to create something new and valuable – a key mechanism Ward identified for generating novelty. 

• Analogy: Entrepreneurs can solve new challenges by looking at how similar issues were tackled in different areas, adapting those lessons to their own unique situation through what can be seen as analogical thinking. 

• Problem Formulation: How a founder defines a problem, as Ward's work on problem formulation implies, significantly influences the types of solutions they'll discover. Approaching challenges from different perspectives can unlock more innovative answers. 

Essentially, a growth mindset provides the foundation for entrepreneurs to continuously develop these cognitive skills. It’s the engine that drives them to adapt, learn, and ultimately find pathways to success. This crucial mindset and its associated cognitive abilities can often be identified through targeted questionnaires and cognitive assessments like Raven's Progressive Matrices, helping to pinpoint individuals geared for the entrepreneurial marathon.

5. Entrepreneurship and Financial Literacy  

It's clear that understanding money is a big plus for anyone looking to start a business. Research shows a strong link between how financially literate someone is and their likelihood of becoming an entrepreneur. 

But it's not just about knowing the basics. The studies, such as those by Burchi and colleagues, suggest that truly getting to grips with financial concepts – like how interest calculations work, for example – has an even bigger impact than just having a general awareness. This deeper financial competence equips founders to make smarter decisions from day one. 

Interestingly, it’s not only what founders know about finance that counts, but also what they believe they know. A founder's perceived skill and confidence (often referred to in research by measures like SUSKIL) in their financial knowledge is a powerful factor. When entrepreneurs feel competent and sure about their grasp of financial matters, they are more likely to take the bold step of launching and managing a new venture. This self-assurance in their financial know-how can be a key driver for taking entrepreneurial action and navigating the financial complexities of a startup. 

6. Integrating Science into Human Capital Due Diligence 

6.1 Tools and Techniques

• Big 5 Assessments: Standardized questionnaires to measure the five core personality traits. 

• Psychological Capital (PsyCap) Questionnaires: Tools like the PCQ assess levels of hope, efficacy, resilience, and optimism. 

• Financial Literacy Tests: Evaluate understanding of core financial concepts. 

• Cognitive Ability Tests: Measures like Raven's Progressive Matrices assess non-verbal reasoning and problem-solving skills. 

• Growth Mindset Assessments: Questionnaires to gauge mindset beliefs. 

• AI-Assisted Screening: Emerging tools using LLMs (like ChatGPT) show promise in providing surprisingly accurate Big Five personality assessments from text data, as researched by Prof. Sandra Matz, Columbia University. 

6.2. Important Considerations and Disclaimers 

• Cultural Context ('WEIRD' Bias): Much behavioural science research is based on Western, Educated, Industrialized, Rich, and Democratic populations. Findings may need careful interpretation in different contexts. For instance, one study found that Africa scored significantly higher in Agreeableness and Conscientiousness and lower in Neuroticism and Openness compared to other world regions. Understanding these nuances is vital. 

• Predictive Limitations: Personality traits predict average behaviour better than specific actions in isolated situations. 

• Questionnaire Quality: Poorly designed questionnaires (complex terms, ambiguity, lack of emotional consideration) yield inaccurate results. Use validated, well-designed psychometric tools. 

• Self-Reporting Bias: Be mindful that individuals may present themselves in a favourable light. 

• Complement, Don't Replace: These tools should be used as a starting point or an aid to structure conversations and probe deeper, never as a replacement for in-depth interviews, reference checks, and holistic, person-to-person assessments. 

  
  

7. Towards More Informed Founder Assessment 

Spotting the right founder is arguably the most critical task for investors and ecosystem builders. While experience and intuition are invaluable, incorporating science-backed insights into personality, cognitive abilities, and psychological capital can significantly enhance the due diligence process. By using validated tools thoughtfully and understanding their context and limitations, we can move beyond gut feelings towards a more objective, comprehensive, and ultimately more successful approach to founder profiling. 

Our software Level integrates many of these scientifically validated assessments to provide a holistic founder profile.