Evidence, Finally, that VCs Are More Important than Their Firms


Let’s face it. Venture capitalists who take credit for successful startups at the expense of their firms are about as common as seagulls at a beach-side picnic. Now, there’s evidence to suggest that some of their hot-dogging is warranted.

When it comes to predicting which startups will be successful, individual venture capitalists are roughly five times more powerful as leading indicators than the firms for which they work, according to a new study published by Harvard and Carnegie Mellon academics.

Here’s how the study worked: Using econometrics – the application of math, computer science and statistical models – Matthew Rhodes-Kropf, an associate professor at Harvard Business School, and Michael Ewens, an assistant professor at Carnegie Mellon, pored over the Dow Jones VentureSource database of venture-backed startups that were founded between 1987 and 2005. They also culled data from Correlation Ventures, a San Diego-based venture firm that uses quantitative methods to invest in startups (and where Rhodes-Kropf and Ewens are consultants).

The authors controlled for all kinds of deviations, such as the industry that the venture capitalists were backing, the amount of dollars their firms invested, how much experience they had at the time of the investment, and the age of the startup itself.

They also tracked whether the venture capitalists’ success — or lack of it — changed if they shifted to other firms (investments were attributed to VCs based on their board seats), and how these investors compared to their fellow partners.

In all instances, they found significant partner “persistence.” That is to say, “The guys who know how to get big exits get big exits no matter where [they’re employed],” says Rhodes-Kropf. “The guys who fail are pretty consistent about that, too.”

“I’m not saying Sequoia doesn’t have value,” he adds. “I’m saying that on average, the firm is not very helpful. You can see guys move among firms regularly and find little in the way of changing performance.”

I asked Rhodes-Kropf what it means for a partner’s human capital to be up to five times more important than a firm’s organization capital. Does it mean that certain people are five times more likely to steer a company to a successful acquisition or public offering? He says it doesn’t work that way; it has more to do with “signal strength.”

Rhodes-Kropf concedes that his study “doesn’t prove anything.” Econometrics also can’t definitively answer why some people are more successful than others over the course of their careers. “I tried to control for as many things, but why one outperforms the other one, I don’t know,” he says. Still, he believes, based on his study, that networks are “maybe just more personal than we may have thought.” The study also seemingly highlights the importance of that intangible quality which all venture capitalists would like to think they possess — skill.

“It’s easy to say, ‘Oh, so and so works at this top-tier fund. They see all the best business plans,'” says Rhodes-Kropf. “In some cases, that may be true. But you have to remember that those business plans all look pretty good, and they involve good people. Some investors can just look at 10 strong possibilities and say, ‘That one.’ Some can just smell it a little better.”

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