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
FAQs
Using the VC method, the value of the target entity is estimated as the value after a few years (the so called 'exit-value'). That value is then discounted to the present value using a discount rate. The DCF method is used for companies where cash flows can be reasonably estimated.
Is venture capital good for startups? ›
Venture capital can come with high risks and high rewards for both investors and startups. Startups can secure funding through venture capital without needing to make monthly repayments, but they may need to give up some control over the creativity and management of the company.
How much do startup founders pay themselves? ›
Based on various sources, a startup founder at a seed stage are paying themselves around $100K-140K. Pilot recently published a survey of 750 startup founders <here> which has the average at $121K and mean $115K for 2023. But interestingly says that 40% of founders pay themselves less than $100K.
What happens to a startup when venture capitalists replace the founder? ›
Research: What Happens to a Startup When Venture Capitalists Replace the Founder. It actually makes success more likely. Entrepreneurs often seek external capital to accelerate their growth. This is especially true in hotly contested markets where fast growth can be the difference between success or failure.
What do VCs look for in startups? ›
VCs will want to know what milestones — particularly those related to growth and revenue — you will hit and when. If your startup has no immediate plan for revenue, say, because product development will take time, you should be ready to list other benchmarks you will achieve in lieu of revenue.
What percentage of startups raise venture capital? ›
Myth 1: Venture Capital Is the Primary Source of Start-Up Funding. Venture capital financing is the exception, not the norm, among start-ups. Historically, only a tiny percentage (fewer than 1%) of U.S. companies have raised capital from VCs.
What is the dark side of venture capital? ›
Competition for deals: Competition for deals is another common challenge faced by VC firms. With many VC firms vying for the same deals, it can be difficult for a firm to stand out and secure the best investments. Misalignment of interests: Misalignment of interests is a common problem in VC.
What is the average size of a VC fund? ›
A typical VC firm manages about $207 million in venture capital per year for its investors. On average, a single fund contains $135 million. This capital is usually spread between 30-80 startups, though some funds are entirely invested into a single company, and others are spread between hundreds of startups.
What are the disadvantages of venture capital? ›
Disadvantages
- Approaching a venture capitalist can be tedious.
- Venture capitalists usually take a long time to make a decision.
- Finding investors can distract a business owner from their business.
- The founder's ownership stake is reduced.
- Extensive due diligence is required.
- The company is expected to grow rapidly.
$50M to $150M
We found the lowest salary in this category to be $235,000. The highest salary for a CEO in a company with between $50M and $150M in revenue is $500,000. Of the participants in this category, the median salary is $300,000.
| PAY RANK | CEO | TOTAL PAY (MILLONS) |
|---|
| 1 | Sundar Pichai | $225.99 |
| 2 | Michael Rapino | $139.01 |
| 3 | Tim D. Cook | $99.42 |
| 4 | Peter Zaffino | $75.31 |
44 more rowsJul 4, 2023
Startup Ceo Salary
| Annual Salary | Hourly Wage |
|---|
| Top Earners | $132,000 | $63 |
| 75th Percentile | $100,000 | $48 |
| Average | $82,146 | $39 |
| 25th Percentile | $54,500 | $26 |
The average venture capital firm receives more than 1,000 proposals per year. Approximately 30% of startups with venture backing end up failing. Around 75% of all fintech startups crash within two decades. Startups in the technology industry have the highest failure rate in the United States.
Why do startup founders fail? ›
According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.
What is the success rate of venture capitalists? ›
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.
What is the valuation method used by venture capitalists? ›
The Venture Capital Method has 2 steps: Step 1: Calculate the terminal value of the business in the harvest year. Step 2: Track backward with the expected ROI and investment amount to calculate the pre-money valuation.
How to value a startup business? ›
How to Value a Startup — 10 Real-World Valuation Methods
- Standard Earnings Multiple Method. ...
- Human Capital Plus Market Value Method. ...
- 5x Your Raise Method. ...
- Thinking About The Exit Method. ...
- Discounted Cash Flow Method. ...
- Comparison Valuation Method. ...
- Customer-Based Corporate Valuation Method. ...
- Combo Platter Method.
The “Weighted Average Cost of Capital” (WACC) refers to the cost to a company of obtaining financing both from investors in the form of equity, and from banking institutions in the form of debt or other banking instruments (e.g. bonds).
What is the NPV of a startup? ›
Net present value (NPV) is used to calculate the current value of a future stream of payments from a company, project, or investment. To calculate NPV, you need to estimate the timing and amount of future cash flows and pick a discount rate equal to the minimum acceptable rate of return.
