Start-up Founders still not transitioning into VC
A recent story from Sifted caught our eye:
They pointed out that the majority of VC partners originated within start-up incubators representing even including Founders & Entrepreneurs only 26.5% of VC Partners (Vauban).
What this says to us is that entrepreneurs are either not able to make the move across into management at a VC fund or are unwilling.
What might the factors be that are causing this? and where could we better leverage this significant experience?
- Pre-dominant focus within VC upon Series A & later rounds.
The lack of supporting data points within this chart highlights that potentially the majority of funds goes to Series A & beyond which is more focused on the traction, generation of revenue rather than the development of product. This potentially limits the suitability of the fund to have a start-up founder, with a focus primarily on those in Leveraged Debts, Private Equity or Investment Banking Background.
2. Large Investor Networks nurtured by Bankers rather than Operators & Founders.
The critical purpose of an LP is that they can bring some weight to the table. For lots of start-up founders, this can be very difficult as Fundraising can be handled by the VC, they get limited airtime, many say no & only a few, normally the most active engage with them. As a result, they may not be able to bring in as many clients as a potential Director at an IB or PE fund.
3. The data above is skewed by the presence of more than one characteristic.
The data is skewed by the presence of individuals with both in their background. Clearly, IB & Consulting can attract intelligent, personable and creative individuals, people more likely to have the business acumen to understand value add, frameworks etc.
As a result, consultants & IBs could very well launch a start-up and count as both, identifying with one more than the other as a result.
Now why wouldn’t a start-up founder want to be involved as a VC?
1) They have fallen in love with their next bright idea
One thing that must be accounted for here is that after a successful exit, or even a shut-down a founder is likely to begin their next program, they are more likely to be successful as VC’s back serial entrepreneurs with less diligence, but with good reason, evidence from this paper highlights the effect of a successful exit as a serial entrepreneur, which highlights a bad reputation or multiple failures is not the end. The point that founding a company is not the end for founders and it only becomes easier with greater name recognition as well is clear that the feeling of ‘lets run it back or ‘why not do it again?’ runs thick.
The point that founding a company is not the end for founders and it only becomes easier with greater name recognition as well is clear that the feeling of ‘lets run it back or ‘why not do it again?’ runs thick.
2) The shift to the advisory side is not as enjoyable
Typically a Founder, especially who has been involved within the creation of a start-up, in the driving seat will likely have access to some significant capital if successful, but may well act more as an Angel Investor rather than engage with
Why do individuals with finance experience tend to move to VC?
1) Security vs Driving Seat
Most individuals in IB or Finance tend to view their work at times as low impact & low value creation. This, in part, may drive a wish to work within VC helping start-ups actually create real change, utilising the skills gained in finance.
When we compare this to a potential journey of a start-up founder they would essentially be no longer in the driving seat, acting in an advisory capacity. This may be indicative of the wider attitude of founders, a desire for control, strategy & delivery.
When we compare the routes into VC it appears one steps back from creation into advisory, whilst the other shifts into a more active role, supporting and creating opportunities. The distinction between these shifting levels of workstream control & autonomy indicate a key mindset of both groups, and how an advisory role attracts both sides.
2) Equity Considerations
Within Investment Banking & Private Equity, due to the larger nature of associated firms in these industries, competition can be fiercer, progression routes slower for the acquisition of equity, shares within the bank or otherwise. Entry ship into a VC fund either as an LP can occur at a lower level, with carry whilst improving long term earnings.
3) Long term Plan
Typically Venture Capital has been called the sexiest of all of the finance sectors , no biases there. It is a typical and attractive exit route for many in IB or Finance. Merely treating & providing the services as a cutting teeth exercise, valuable opportunities and training prior to a shift to a long term pursuit.
VC can be more impactful, enjoyable & more exciting, say if a company reaches a large Seed, Series A or M&A, rather than just a number of clients with limited client engagement.
