Key takeaways from our empirical study
At Capnamic, we always apply the 3 T’s when making an investment decision — team, timing and technology (read more here). While the best timing as well as the best technology can be quantified, the data-driven determination of the “best team” remains difficult. To define more quantitative measures as well as to test our hypotheses derived from experience, we conducted an empirical study* to answer which measurable characteristics of the founding team ultimately have a positive impact on the exit valuation and exit type (failure, trade-sale, IPO) of a startup. Find below our 8 key findings.
1 — Experience in leadership roles as well as analytical skills are key to success — long work and same-industry experience are not
Founders’ prior total work experience in general (which also can be seen as a proxy for age) and work experience in the same industry as the new startup do not systematically affect the exit value or type of a startup. However, founders’ prior work experience in a management position (C-level, VP, Head of, Director, …) and founders’ backgrounds as consultants significantly increase the likelihood of achieving a successful exit (likelihood of failure decreases, likelihood of IPO increases).
So what: Yes, we are seeking strong leaders to build a great product first and an even greater company afterwards. The ability to lead, manage and inspire your team is crucial. Additionally, advanced skills of communication and structuring work can often be found among former consultants.
2 — “Serial entrepreneurs” are not doomed to systematically achieve successful exits
Surprisingly, founders’ prior entrepreneurial experience (measured by the number of previously founded companies) is not found to significantly impact the exit value or type (but: a distinction between successful and failed previously founded companies could enable to disentangle the outstanding serial entrepreneurs from the underperforming ones and may lead to other results).
So what: Interesting. We believe in founders with the ability to build multiple companies. On the other side, we conclude that “first-time-founders” do not need to be more afraid to fail than Serial Entrepreneurs.
3 — Higher education and 4 — one business person makes the founding team stronger
Higher graduation levels of founders’ formal education (measured on a four-point ordinal scale from no university degree (worst) to PhD/MD (best)) — independent of the respective course of studies — significantly increase the exit value of a startup. Considering the particular courses of studies, the founders graduated in, founding teams with at least one person with a business-managerial degree (business administration, management, economics, …) — independent of the respective graduation level — achieve higher exit values and more successful exit types.
So what: We agree to 3 while being absolute fans of unconventional CVs. 4 really sounds like only having a numbers cruncher — BUT all managers should be driven by commercial traction and financials in the end.
5 — Complementary teams combining natural sciences and business outperform the rest
Furthermore, heterogeneous teams consisting of founders combining business-managerial, natural science (engineering, physics, mathematics, biology, …), and IT-related educational backgrounds perform better in terms of both exit value and type. Additionally, the higher the degree of general heterogeneity in the founding team (so basically combining any background) the higher the exit value and the better the exit type.
So what: Nothing to add — diversity rules. Fully agree and happy to have a lot of portfolio examples at Capnamic.
6 — “Hubs” have a beneficial influence on exit success
Startups headquartered in a hub (here: city with a minimum population of 1m) realize higher exit values and more successful exit types compared to those located in more rural areas.
So what: Partially disagree — we are proud of our provincially located teams but also see them moving to larger cities when international expansion kicks in. However, hubs can definitely help building powerful networks fast — especially in the beginning.
7 — Larger teams are better and 8 — Gender does not have any impact
Larger founding teams on average achieve higher exit values. In addition to that, the empirical analysis proves that founders’ gender does not have a significant impact on the exit value or type.
So what: Our remark regarding large founding teams is that there has to be a CEO or one person pushing decisions within the management. Like a higher heterogeneity in educational backgrounds, gender diversification is beneficial for startups.
Concluding our findings, we think that a lot of the key findings can be seen as “boxes to be ticked” and interpreted as dummies supporting the decision process. However, a blind application of them would be dangerous and is not recommended by us.
*Study: Our former intern Jan graduated from University of Cologne writing his thesis together with us. The regression analysis is based on data from 245 European startups collected from the crunchbase.com database and 534 founders, on which the information was mainly obtained from their individual LinkedIn profiles. Only companies founded after January 1st, 2002, which have experienced at least one funding round by VC investors and successfully exited or failed, were considered. Feel free to reach out for the raw .csv file.