From Warren Buffett to Marc Andreessen, it’s become increasingly common for venture capitalists to subscribe a mantra of “backing people, not companies.” This is understandable, as the success of a startup depends largely on the capabilities of its founders. But of course, it’s a lot harder to objectively evaluate the potential of a human being than that of a specific business plan or technology.
Research: VCs Reward Self-Presentation Over Qualifications
An analysis of more than 4,000 firms, their founders, and their funders.
April 13, 2022, Updated April 20, 2022
Juan Moyano/Stocksy
Summary.
One need only look to widely publicized cases such as Theranos and WeWork to see that the most charismatic, convincing founders do not always make the best investments. What can VCs do to ensure that they invest in startup founders for the right reasons? The authors used LinkedIn data from the founders of more than 4,000 U.S. companies to explore the connection between self-presentation, actual expertise, and companies’ short- and long-term success. Based on this analysis, they found that founders’ expertise was the strongest predictor of a successful exit — but when it came to funding, expertise signaling made much more of a difference than actual experience. In other words, while longer-term outcomes depend more on actual expertise, shorter-term fundraising success may depend more on effective self-presentation. In light of these findings, the authors recommend that founders not overlook the importance of effectively signaling their strengths, while investors should be sure to check their assumptions and avoid making financial decisions based on founders’ self-reported signals alone.