Research Brief

Who Gets Venture Capital?

Experienced founders with good products still need great employees to attract early investment, study finds

Among particularly ambitious entrepreneurs, landing an infusion of venture capital is a lot like winning the lottery: an achievement against incredibly bad odds, which  makes even their grandest plans more realistic. Peers grill them endlessly to find out how they did it.

Economists also have looked for the formulas most likely to attract venture capital. Many studies find that an experienced executive team (sometimes dubbed “the jockey” by researchers in the field) is the most important factor for landing outside investment. In surveys, VCs tend to rank business characteristics such as product, model or market (“the horse”) as distant seconds. 

A study suggests that a third factor — the team — is at least as important to winning funding. Investors prefer startups where even nonexecutive employees are well educated and come from high paying jobs at large companies, according to a study in Journal of Business Venturing Insights. 

“Employees appear to play a large role in attracting investors, an even larger role than the executives,” write authors Aarhus University’s Tekin Esen, Aalborg University’s Michael S. Dahl and UCLA Anderson’s Olav Sorensen.

“That does not mean that founders do not matter,” they continue. “But it may mean that they represent something like a necessary-but-not-sufficient condition” to win the funding. The makeup of the workforce below top management is more likely to predict success or failure of fundraising efforts than characteristics of either the horse or jockey, the study finds.  

The researchers collected data on 244 startups in Denmark that received first-round VC funding between 1995 and 2016. They matched each of these winning startups to five other companies in the same industry, with similar time in business, that did not raise funds. Danish government records that described each company’s workforce, paired with VC investment records from VentureXpert, allowed the authors to go beyond the jockey-and-horse scope of most research in the field to look at differences in employee characteristics as well.

Like past studies, the research in Journal of Business Venturing Insights finds that founders and top management from funded companies had more years of education, more experience at large companies and higher pay from past employers than their unfunded counterparts. Top management teams also were larger in the funded group. Leaders who had previously been unemployed, or had worked at small firms, appeared to ding the chances of raising funds.

Investors appear to prefer the same characteristics in lower-level employees, according to the findings. Looking at these workers, the strongest predictors of funding were, in order of importance: the number of employees below top management, their years of education and their pay at previous jobs. (More, in each of those categories, represented a higher likelihood of funding.) 

The authors note a couple of surprises in their findings. Among top management and lower-level employees, industry experience appeared to be a detriment. The unfunded companies had more of it. And investors appear to prefer younger top management teams, even though older founders are associated with more experience and higher likelihoods of success. 

They offer several reasons that the characteristics of the entire team, rather than just its leaders, appear to be of great importance to investors. The soliciting enterprise will need leadership that can handle an operations ramp-up that new investment would spark, and VCs like to work with people with proven track records. Having an experienced founder, they note, does not guarantee that they can recruit, retain and motivate others with strong backgrounds. A large group of employees that previously were highly valued (aka, highly paid) at large companies may be some comfort to investors hoping to turn a startup into a much bigger enterprise.

Featured Faculty

  • Olav Sorenson

    Joseph Jacobs Chair in Entrepreneurial Studies; Professor of Strategy; Faculty Research Director, Price Center for Entrepreneurship & Innovation

About the Research

Esen, T., Dahl, M. and Sorenson, O. (2023).  Jockeys, horses or teams? The selection of startups by venture capitalists, Journal of Business Venturing Insights, 19, e00383.

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