Why Don’t Ex-Startup Founders Make for Better VC Partners?

In an interesting piece out of CB Insights, Dan Mindus and Max Wessel pose the question – “Do Ex-Startup Founders Make the Best Venture Capitals?”  What would be your guess?  The “intuitive” answer, at least among entrepreneurs, is that ex-startup founders do make for better VC partners.  Why?  Because successful ex-startup founders have walked the walk, and thereby can more successfully invest funds.  That doesn’t appear to be the case.  Here’s a look.

The Evidence

What does the evidence proffered by Mindus and Wessel show?

Mindus and Wessel went through CB Insights’ top 100 VCs in the U.S.  list and correlated this with whether the investment firm was headed by an individual with prior entrepreneurial experience.  Their chart follows.

On the horizontal axis is CB Insights’ rank of VC investors (from 1 to 100).  On the vertical axis is years as a venture capitalists.  Each dot represents a company.  The chart is color-coded, with an orange dot representing firms founded with non-founder investors (non-successful entrepreneurs).  The blue dots are investment firms founded by former successful entrepreneurs.

Notice anything?  Interestingly, no apparent correlation exists, meaning that the the myth among entrepreneurs that former successful entrepreneurs make for better venture capitalists might be wrong.  Hmm.

Source: CB Insights

 

What Did Mindus and Wessel Actually Find?

In Mindus and Wessel’s results, they find that, of the top 100 VC firms, 38 founded or co-founded a company before becoming venture capital investors, while 62 had no such experience.  Perhaps it’s not so bad to be someone from, say, a large company background or from a number-crunching background.

So, Why Don’t Ex-Startup Founders Make for Better VC Partners?

With Mindus and Wessel’s data in the background, why don’t ex-startup founders make for better VC partners? Interestingly, the authors mention the most likely explanation behind why.

Mindus and Wessel mention that perhaps the most important thing venture capital investors can do to help a budding entrepreneur is to generate deal flow.  Although individuals with prior success as entrepreneurs might have ideas on how best to achieve this, they certainly don’t have a monopoly on successful deal flow.  Individuals from large companies or number-crunching backgrounds may be more open to ideas on generating deal flow.

Conclusion

Overall, in an interesting piece out of CB Insights, the authors find that there is little correlation between VC firms with successful ex-startup founders and VC partners with no such experience.  Although the possible explanations for such a finding are many, one potential explanation might be more accurate than any others – individuals with no prior entrepreneurial success may simply be just as good or better at generating deal flow, which is the most important job of an investor.