How Do Startup Founders Fare as Venture Capitalists?

Successful founders of venture-capital-backed startups are more likely to become venture capitalists (VCs), and are more likely to succeed as VCs, Paul A. Gompers and Vladimir Mukharlyamov find in Transferable Skills? Founders as Venture Capitalists (NBER Working Paper 29907).

The researchers collect data from 1990–2019 from VentureSource and Thompson Financial on the identities of startup founders and VCs as well as information on dates of investments, amounts invested, each startup’s industry and location, and each portfolio company’s ultimate outcome. They also collect biographical information from a wide range of sources about founders and VCs, including past work experience, educational history, ethnicity, and gender.

Founders of successful startups who become VCs have higher success rates on their investments than professional VCs who are not founders.

The researchers define success for both founders and VCs as having a startup or investment that goes public or having a startup that is acquired for a value higher than the total amount of capital invested. Success as a founder is a significant factor in determining who becomes a VC. Almost 7 percent of VCs in the sample — 825 out of 12,195 — had founded a venture-capital-funded startup. Nearly 30 percent of these startups were successful, while about 12 percent were unsuccessful.

Members of privileged groups are also more likely to move from founding a startup into venture capital. Being male makes this more likely. Almost 12 percent of founders are women, but only about 5 percent of them become VCs. Nearly 85 percent of founder-VCs are White. There is a smaller percentage of racial and ethnic minority group members in the sample of founder-VCs than there is in the pool of founders. Finally, attending one of 17 colleges defined by the researchers as top schools also increases the probability of a founder becoming a venture capitalist.

The researchers divide their dataset into three groups: successful startup founders who became VCs, unsuccessful founders who became VCs, and professional VCs who were not previously startup founders. There is a clear progression of success rates among them. Successful startup founders have the highest success rates on their VC investments, nearly 30 percent. They are followed by professional VCs at just over 23 percent, and unsuccessful founder-VCs at just over 19 percent. About one in every eight successful founder-VCs’ investments exit via an initial public offering; fewer than one in 10 professional VCs’ investments exit via an IPO, and only one in 14 unsuccessful founder-VCs’ investments exit via an IPO.

On average, successful founder-VCs make more investments (6.7) and have longer careers (12.2 years) relative to both professional VCs (5.8 investments and 11.5 years) and unsuccessful founder-VCs (4.9 investments and 9.6 years).

Some of the successful founder-VCs’ achievements are the result of their joining venture capital firms with higher success rates. Another contributing factor is their ability to add value to a startup after investing. The researchers speculate that added value may be attributable to a “halo effect,” through which potential future investors, customers, or employees view a startup more favorably because a successful founder-VC has invested in it. Successful founder-VCs may also add value by being accessible to employees and board members, or by offering advice and guidance based on knowledge of the startup’s industry. Investments by successful founder-VCs in the industry of their startup are nearly 6 percent more successful than investments by professional VCs.

— Brett M. Rhyne