Does Europe need more “founder VCs”?

Written by Dan Gray

“Europe needs more VCs with experience building startups.”

This is a common sentiment in a market known for risk-averse investors who focus on “crunching the numbers,” and the idea deserves further scrutiny.

In theory, increased risk appetite among founder VCs would reduce pressure on due diligence and benefit founders. However, the same is true for other startups competing for that funding, although funding could be a little easier. It may speed up the process, but it doesn’t necessarily change the outcome.

More importantly, founder experience doesn’t seem to help investors’ performance. A 2022 research report published by the National Bureau of Economic Research examined the investment performance of 13,000 U.S.-based VC firms. Here are our findings regarding the percentage of successful investments:

• Founder VC (successful startups): 29.8% (12.4% IPO)
• Founder and Venture Capitalist (Failed Startups): 19.2% (9.4% IPO)
• Professional VC: 23.3% (71.% IPO)

The 29.7% entrepreneurial success rate of founders who became VCs cited in this paper reveals the following:

• Founder VC (all): 22.3% (8.7% IPO)

Therefore, founder VCs generally underperform compared to professional VCs. It’s a bitter pill to swallow, but it’s consistent with data that suggests risk-averse, numbers-heavy companies have outperformed their peers across the pond over the past two decades.

halo effect

An interesting factor that this study attempts to quantify is the “halo effect.” It starts with how founders get into VC. 89% of successful founders join the companies that invested in their company, compared to 85.4% of unsuccessful founders.

In theory, that should make future success even worse. Failing founders join companies that made bad investments (possibly worse); successful founders join companies that made good investments (possibly better). This introduces a variety of intangible assets, such as a company’s brand strength, access to deal flow, partner trust, and quality of coaching, which shape these statistics.

operator handicap

This is all very counterintuitive. Indeed, founder VCs will have a deeper understanding of the growing pains of a startup, and will also have a deeper understanding of running and scaling a company. Aren’t they ideal partners?

Silicon Valley legend Fred Wilson of Union Square Ventures expressed his thoughts on this in 2017: And it’s very helpful. ”

Fundamentally, founders are executors and investors are strategists. Although these are highly complementary skills, one usually cannot do the other’s job, and experience on the other side of the table can actually cause confusion.

The true meaning of “Europe needs more founder VCs”

The argument that due diligence is less necessary in venture capital has become less convincing in recent years. Then, if you take performance out of the picture, you’re left with his one concern that remains. It means that money flowing into venture capital in Europe is simply decreasing, and if that changes, almost everyone will benefit.

It makes no sense at all to reflect this as pressure on VCs who cannot control the available inflow. Instead, the asset class needs to become attractive to a larger pool of institutional capital. For example, public pensions account for a staggering 65% of venture capital in the US, but only 16% in Europe and 12% in the UK.

This leaves two important lessons for all stakeholders in the future of Europe’s startup ecosystem.

1. European LPs are certainly more conservative than their US peers, so venture capital firms need to adopt better standards that increase transparency and accountability. More capital requires greater accountability.
2. Governments should also do all they can to enable and encourage institutions to invest in venture capital, and this may include enforcing such standards through regulation.

Dan Gray is the Head of Marketing at Equidam, an advisor and startup evaluation platform supporting impactful entrepreneurs in emerging markets.

Illustration: Dom Guzman