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Venturing a Guess on Human Capital

A new report aims to begin to analyze the characteristics of the entrepreneurs that receive startup funding.

August 10, 2010
Related Topics: Technology, Mentoring, Learning and Development
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Some of today’s largest companies have their roots in small startups. Until now, little statistical data has been available about the men and women who founded them. A new report aims to deliver insight into the human capital behind these entrepreneurial companies.

“There’s lots of ideas around what it takes to get venture backing, but a lot those things are hard to quantify or do any sort of statistical analysis of because you can’t measure tenacity, you can’t measure your ability to pitch to an investor,” said Anand Sanwal, CEO and co-founder of CB Insights, an information services firm based in New York that tracks and analyzes venture capital activity.

When entrepreneurs seek funding to turn an idea into reality or monetize a new product, they often turn to venture capital to get a boost. CB Insights’ recent “Venture Capital Human Capital Report,” released in two parts in August, provides information about the people who receive venture funding.

“There’s lots of entrepreneurs who are probably pitching similar ideas, and so what is the distinguishing feature between those entrepreneurs? It comes down to the person behind the idea,” Sanwal said.

Venture capital firms typically provide funding to small companies that may be seen as too risky for traditional financing. Some of the economy’s biggest names received an initial boost from venture capital firms, and many continue to receive funding and support. Companies such as Intel, Microsoft, Facebook, Google and Twitter, among others, broke through in part due to this type of financial support.

While a great idea is what often gets the headlines and the dollars to make it happen, an often underanalyzed but important component of what venture capital firms invest in is the company’s human capital.

“There’s this adage in the industry that you bet on the jockey, not the horse,” Sanwal said. “They always mention it’s all about the team. It’s not just the idea, but it’s about the people who have brought the idea.”

Sanwal said venture capitalists typically look at three dimensions when sizing up an investment: market, momentum and management. While market opportunity can generally be quantified and the momentum of a company can be tracked and plotted, management has been harder to quantify but just as essential as a novel idea or product.

“Ideas are essential, but without execution they’re not worth a lot until you can execute on them,” Sanwal said. “Execution is all incumbent on the founders of these companies.”

The quality of a company’s management is a key lever that venture capitalists will look at when deciding to invest in a company. “They want to find those people who have not just a vision, but who give them the confidence that they can execute upon that vision and see opportunities and manage an organization as it grows,” Sanwal said.

CB Insights collected and analyzed data on five dimensions of the founders of venture-backed companies: race, age and experience, number of founders per company, gender and educational background. Not surprisingly, the majority of founders studied were largely white (87 percent), male (92 percent) and highly educated (51 percent hold a master’s or doctorate).

The next largest racial group was Asian/Pacific Islander (12 percent). Interestingly, all-Asian founding teams were more successful fundraisers. On average, they raised $4 million, compared to $2.3 million for all-white teams and $2.2 million for mixed-race founding teams.

While the data was much as would be expected, Sanwal said the age of the average founding team was 35 to 44 years old. “We tend to read about these whiz kids or wunderkinds in the Internet space getting funded all the time,” he said. “The actual demographic data when we looked at it tended to be a bit higher than we might have imagined.”

In California, for instance, they found no founding teams that averaged 18 to 25 years old, giving the lie to the stereotype of college students working on the next big company late at night in their dorm room.

Sanwal said the number of one-person-led companies was also surprising. More than one-third of companies were led by a single founder.

“There’s a theme that’s prevalent within the venture capital community and amongst entrepreneurs that you don’t want to be a one-founder-led company because having multiple founders makes sure that you’re getting feedback and that you were able to convince somebody else of your vision, that it’s not just you being myopic about what your idea is,” he said.

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