The ‘Problematic,’ VC-Threatening Study That Has Split Harvard Professors

Start-up founders barely matter, according to new research.

Illustration by II

Illustration by II

In venture capital, the strength of a start-up’s founder and leadership team is considered the most important factor when deciding whether or not to back it. A new study, however, casts doubt on how much the founder actually matters — at least in the early stages.

In a survey of 470 start-up founders and CEOs, Harvard Business School professor Tom Eisenmann found that personal attributes including age, education, and personality traits had no significant connection to the valuations of early-stage companies.

This is in opposition to previous research and the common thinking among venture capitalists, who often frame their investment strategy as backing the jockey over the horse. According to Eisenmann, however, “pretty much none of this stuff moved the needle.”

“It didn’t hurt,” he added, speaking to II by phone. “But it wasn’t predictive of success or failure.”

The survey, which focused on ventures that raised their first round between January 2015 and April 2018, was conducted this spring as part of a larger research project by Eisenmann, who is publishing a book next year on why start-ups fail. The sample included start-ups that had raised more than $500,000 and less than $3 million, and excluded biotech, energy, and material-science based startups because “the drivers of success and failure for science-based businesses are going to be different than more typical software and service companies,” according to Eisenmann.

Respondents were asked 47 questions on everything from their confidence in their firms’ financials to how others would describe their personalities. One question asked founders and CEOs whether the equity of their firms was worth much more, more, less, or about the same as when they first raised the money from angel investors or VCs.

Eisenmann then used the responses to this last question to look for patterns among the stronger and weaker performers.

“There were several factors that you might’ve expected to be strongly correlated that weren’t,” the Harvard professor said. “Especially in the early stage, there’s so little to go on because there’s no operating history, so a lot of early-stage investors put a lot of stock in their assessment of founder fit.”

Evidence that venture capitalists favor the jockey over the horse can be found in another survey-based study led by a Harvard professor that was published in the Journal of Financial Economics at the beginning of this year. Business school professor Paul Gompers and his co-authors polled 885 institutional venture capitalists across 681 firms to learn how they made investment decisions. Almost half (47 percent) ranked the management team as the most important factor, versus 37 percent who said that business-related, or “horse,” factors were the most important.

Asked about his colleague’s findings, Gompers said the results of Eisenmann’s study were “problematic on several fronts,” pointing to the limited sample and potential for selection bias among the respondents.

“Long-term studies over decades in comprehensive data with tens of thousands of companies show that some founder characteristics are related to outcomes,” he wrote in an email to II. “Successful serial entrepreneur and top school are all related to successful outcomes (i.e., exits)… it’s clear that the jockey is critical to success.”

For his part, Eisenmann acknowledged the limitations of the survey, explaining, for example, that respondents were likely overly optimistic when evaluating their own firm valuations. In addition, as Gompers pointed out, successful entrepreneurs may have been more likely to respond to Eisenmann’s survey than failed entrepreneurs.

“With this kind of work, you can get people feeling better about how they’re doing than they actually are,” Eisenmann said. “That’s always an occupational hazard with survey work.”

Despite these limitations, Eisenmann did find some factors that appeared to be statistically significant for early-stage start-up success. These included companies with “lean start-up” management practices, an approach that focuses on discovering quickly whether or not a business model is viable. Other factors that had a significant positive impact were having professionalized human resources functions and high confidence in the company’s profitability.

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Meanwhile, variables such as whether founders had an MBA and if they had earned any degrees from an elite university did not appear to matter — which was ironic for Eisenmann, who teaches aspiring entrepreneurs at Harvard Business School.

“At least statistically it doesn’t hurt,” he said.

Overall, however, Eisenmann said the findings suggested that early-stage investors could benefit by expanding the definition of “jockey” to include not just the founder and CEO but all the other human capital components of a start-up, including strategic partners and other resource providers.

“The bulk of early-stage investors are very, very focused on the founder and founder fit,” he said. “You don’t want to stop doing that, but you want to look broadly at all the parties connected with the start-up.”