How Do Successful Founder-Turned VCs Fare Against Other Investors?

With the ease of accessibility and rise in low-cost marketing, Startups are dime a dozen and investors are seeking to invest in startups hoping to get attractive returns on their investment, but the harsh truth is, 90% of startups fail in the first year leading to huge losses, it is very hard to point out the reasons for failure, it can be poor marketing, not so good service or product or just maybe poor management, this leads to huge losses for investors. And at the same time, various founder-investors have constantly invested in successful startups, so a question that pops up in mind is what sets these investors apart from the others?

The Multi-Potentiality of Successful-Founder Venture Capitalists

Though various factors are not under the control of an investor except the capital he invests in the company and how he promotes it, any externalities can make or break that startup. Investing, like a lot of other professions, works in your favour if you have various skills, such as financial analysis, data analysis, or any other trade. The investor’s chance of success increases if he has more commerce-related skills in his arsenal, this is where founders turned venture capitalists have an edge over other investors. An entrepreneur, over time nurturing his business, gains invaluable first-hand insights and knowledge that no formal education can substitute for, a lot of entrepreneurs in the early stages of their business have a high chance of doing various tasks like risk management, inventory management, even customer service, they pretty much become the jack of all trades, which is considered a class of its own.

The studies performed by the National Bureau of Economic Research (NBER) have shown that successful founder-turned-VCs have the highest rate of success on their investments (29.8%) compared to professional VCs (23.2%) and Unsuccessful founder VCs (19.2%). This pattern can also be seen in their careers, a successful founder VC has an average career of 12.2 years with 6.7 investments compared to professional VCs with careers of 11.5 years with 5.8 investments and unsuccessful founder VCs with careers of 9.6 years and 4.9 investments.

The Home Field Advantage

Successful founder VCs have a track record of investing in the type of business they specialized in given that they have insights, knowledge and networks, and only one-third of their investments fall out of their area of expertise, the above-mentioned studies also state that successful founder VCs are highly active in the consumer industry and least active in financial services compared to professional VCs. Successful founder VCs exit from an IPO with greater profit compared to professional VCs or unsuccessful founder VCs. Successful founder VCs have a portfolio of startups which are headed by serial entrepreneurs who have achieved relative levels of success in prior ventures.

There is a high probability of a successful founder joining the VC firm which invested in his startup. They bring a lot of value to that firm, for example, their networks aid them in locating new startups from their industry which allows the firm to invest. As studies have shown only 10% of their investments are not from their network, which just goes to show how networking is a crucial skill that every successful founder VC will bring to the table. Well-connected VC firms have been shown to outperform those who aren’t, by not being well-connected it is shown how their portfolio companies lack the co-centrality factor among them.

The Halo Effect Generation

The value and reputation of a startup take a different turn, the moment investors find out there is a successful entrepreneur on its roster, there is a trust factor that is added to a company, where people find out an individual with experience in the field is leading them. This adds immense value as he can add more experienced individuals from his other successful ventures to the budding company, this presence can also invite other successful individuals who just want to engage with the founder due to his reputation, and he can bring in additional customer base from his other ventures, the arsenal of a successful founder VC is not to be taken lightly.

Conclusion

We have observed how a successful founder VC is more experienced compared to other investors and how they have an affinity to invest in their specializations. A successful founder has a high chance of them gravitating to becoming a venture capitalist. The value they add to a VC firm or as a board member for any business is immense. They enjoy a long career with more investments. The quality of deals they get compared to a VC firm is also different. The value they bring post-investment is also instrumental, in other words, a startup has a high chance of rocketing to success if they have a successful founder VC on its grounds.