10-year research reveals secrets of start-up success

Silicon Valley and its colony of technology start-ups are often the spurious backbone of social commentary. Whether it’s end-of-history style think pieces proclaiming Tinder is heralding some sort of dating apocalypse, or book-length polemics extolling the ‘sharing economy’ as the foundation for a post-capitalist social order, the mysterious group of websites and internet apps founded on the US’ West Coast are regulatory cited as the cause of social malaise or bringing us to the cusp of some brave new world. Everything is the ‘Uber of X’ and the internet is constantly ‘changing the face of Y’.

A new study by one of the biggest seed investors in the world of technology start-ups, however, gives a glimpse into what is really going on in the inventive hubs of the Pacific shores. First Round Capital is a venture capital firm that was founded in 2004 and provides seed-stage funding to technology companies during their first 18 months. It has grown to be the third busiest venture capital investor in the US in terms of deals made, and has worked with big and diverse names such as Uber, Warby Parker and Wikia.

The firm has analysed and released its data going back to 2005. As it noted, venture capitalists “are constantly telling the entrepreneurs they invest in to make data-driven decisions. But as an industry, we haven’t been very good at doing it ourselves”. With a wealth of data accumulated over the years, they “were able to sit down with 10 years’ worth of our proprietary investing data in front of us — since we’ve been capturing data about founding teams in our community since we made our very first investment in January 2005”. First Round looked at its data from 300 companies and almost 600 founders to determine “characteristics that accompanied successes and not quite successes”, through “looking at how much their value has grown (or shrunk) between our initial investment and their fair market value today (or at exit)”.

Start-ups with female founders, on average, outperformed male-founded firms by
63 percent

Education and location
That the Bay Area is the centre of gravity for tech companies is no secret. It’s understandable why young firms would want to set up shop there: the area has a pre-existing support infrastructure, such as lawyers and other third parties that specialise in aiding start-ups. However, within this, there is a trend towards a consolidation of start-ups within the city of San Francisco, at the expense of other Bay Area locations.

As First Round said: “For the first five years of [our company], 2005 to 2009, we invested nearly equally between San Francisco and the rest of the Bay Area. During the last five, the pendulum has swung decisively toward San Francisco with 75 percent of our Bay Area investees starting their companies in the city over that period.”

Yet despite the Bay Area being the natural home of start-ups, performance isn’t necessarily connected to the region. Using a sample of 200 companies, First Round found the 25 percent located outside the Bay Area and New York outperformed their coastal counterparts by 1.3 percent. However, the fact that only a quarter of firms were outside these hubs suggests attracting investment in such regions is harder, with only the very strongest and dedicated making the cut.

First Round’s data also provides an interesting insight into the link between universities and start-up performance. While there is a perception that there is a Stanford-to-the-Valley pipeline, with graduates from a few elite universities dominating technology companies, top firms actually recruit from a variety of institutions. Apple, for example, recruits heavily from San Jose State University and the University of Texas at Austin.

However, the data does show that the alma mater of company founders matters: founding teams with alumni from at least one “top school” (defined as Ivy League universities, Stanford, MIT and Caltech) accounted for 38 percent of First Round investments and outperformed those without by 220 percent.

Breaking the bro culture
Another stand out statistic is that start-ups with female founders, on average, outperformed male-founded firms by 63 percent. Silicon Valley and the technology industry are often seen as dominated by men and sometimes fostering a sexist environment, leading many commentators to accuse such companies of having a “bro culture” and being staffed by “brogrammers”. Companies that are guilty of creating such a workplace culture may not only be detestable, but also missing out on talent.

The data also challenges the idea of the lone-wolf tech start-up guru. “The history of the world is but the biography of great men”, wrote Thomas Carlyle in the 19th century; the way technology firms are often written about, one could be forgiven for thinking the story of the Silicon Valley was also a string of such biographies. Yet despite the constant adulation to the ‘Great Men of Tech’ such as Steve Jobs, Mark Zuckerberg and Elon Musk, success is more likely to come from small collectives of people working together. Data showed single founders were outperformed by founding teams by 163 percent and on average received an initiation valuation of 25 percent less. While Silicon Valley may be the new frontier of capitalism, it doesn’t seem to have much bandwidth for rugged individualism.