This deep dive was initially published in our VC Stack newsletter. Make sure to subscribe here to not miss any future episodes.
The debate about whether former founders are better investors has been ongoing for some time. However, as more founders consider factors beyond funding when selecting investors, the value that individual VCs bring to the table becomes more important. Having a founder's perspective as a VC can be a significant advantage. VCs who were once founders understand precisely what other founders want from their investors and can leverage that knowledge to secure favorable deals. Furthermore, startups might feel more comfortable knowing that their investor has walked in their shoes and can offer support based on their own experience and network.
A great analogy can be seen in sports, where players after retirement from their professional player career convert to coaches, enjoying previously trained athletic proficiency, knowledge, and sometimes even brand name. - Alexander Zemlyak
In an interview with former Y Combinator partner Gary Tan and Reddit co-founder Alexis Ohanian, the two emphasize the power of founders turned investors. Particularly highlighting their ability to evaluate an entrepreneur’s technical capabilities and output quality.
On the flip side, there’s a risk of former founders turned investors being too set in their ways. Supporting founders but doing so in a way that worked for them without allowing room to experiment. While there are nuances for anyone's success, we wanted to look into findings from both sides of the desk.
CB Insights ran a survey in 2017 looking to answer the question Do Ex-Startup Founders Make The Best Venture Capitalists? The goal was to see if there was a correlation between prior entrepreneurial experience and VCs’ placement on the CB Insights 100 rankings (USA). Turns out, they found none:
While conventional wisdom tells us former founders can be great mentors. There’s still a risk of their past experience hindering the ideas and approach of the founders they are backing - as they might want to impose ways that worked for them. Which tells us just as founders can excel from a variety of backgrounds so can VCs since performance is a result of many things and not solely their last role or degree.
Leta Capital ran their own research which found, out of 300 Europe-based VCs who have raised at least one $50M fund, roughly 50 have some previous entrepreneurial background (~17%). The rest of the VCs were previous employers or executives at larger organizations or from number-crunching backgrounds.
Christoph Janz, Partner at Point Nine Capital, ran a survey asking over 100 founders What sucks about fundraising? The survey was run in 2015, but still quite interesting. Here’s some of what they said:
1 "easy-peasy" - 5 "sucks big time"
4.06: Not knowing where I am in the process.
3.67: Not understanding why VCs have passed.
3.63: Having to answer dumb questions from VCs who didn’t understand our business.
3.55: The number of VCs I had to meet during the process.
Findings from a total of 110 founders
83% It felt like the process dragged out forever. No clear yes or no.
50% I talked to several people at the same firm and had to start all over again (e.g. answering the same questions).
47% An investor made it seem that we had a deal but then we didn’t get a term sheet.
14% An investor backed out of the deal after signing a term sheet.
In this NBER working paper by Paul A. Gompers & Vladimir Mukharlyamov, the two explore the impact being a founder of a VC-backed startup has on the performance of founders who pivot into VC. Ultimately they find that the outperformance of successful founder-VCs is consistent with them adding more value post-investment. A portion of the abstract is as follows:
We find that nearly 7% of VCs were previously founders of a venture-backed startup. Having a successful exit and being male and white increase the probability that a founder transitions into a venture capital career. Successful founder-VCs have investment success rates that are 6.5 percentage points higher than professional VCs while unsuccessful founder-VCs have investment success rates that are 4 percentage points lower than professional VCs. While successful founder-VCs do get higher quality deal flow than professional or unsuccessful founder-VCs, observably higher deal quality does not explain the entire difference in performance.
EQT Ventures is a multi-stage VC fund fueled by some of the world's most obsessive company builders, engineers, designers, marketers, data scientists, and scaling experts from success stories.
Four successful exits as founders and several exits - including two Unicorns - as first-check investors. We invest in early-stage B2B Software and Deep Tech in DACH.
Speedinvest is one of Europe’s most active early-stage investors. Our focused investment teams know your industry inside and out. Their proven experience, know-how, and deep networks are yours from day one
Dig was started by MuleSoft Founder, Ross Mason, shifting from unicorn founder to unicorn investor. We dig B2B SaaS, cloud infrastructure, and fintech in Europe, Israel, and the US.
Cherry Ventures is an early-stage venture capital firm led by a team of entrepreneurs with experience building fast-scaling companies. The firm backs Europe's boldest founders and supports them at every step.
Visionaries Club strongly believes that leveraging our entrepreneurial investors' authentic knowledge and access is the best support we can provide to entrepreneurs in their Seed and Early Growth stage.
Interested in learning more about the founder-to-VC pipeline? Check out these additional readings!