Venture Capital, Meet Human Capital

Is it the new widget or new idea or the people behind the new widget or new idea that really excites venture capitalists?

Virtually every company says its success hinges on the people they employ. And of course it’s people first, then planet and profit in the triple bottom line. What is not entirely clear is where venture capitalists prioritize that hierarchy as they put together their deals, at least beyond the anecdotal or intuitive, and who the people they fund are.

Apparently people – or human capital as the term of art goes – figure quite prominently when the venture mavens pencil out where to send their funds.

The first Venture Capital Human Capital Report from the private investment research firm CB Insights this month notes that “venture capital is a critical lever in the United States to spur innovation, entrepreneurship and economic growth. Thus there is naturally a great deal of attention paid to deal and funding dollars.

“But when we ask venture capitalists what gets them excited about the young, emerging, and often unproven companies in which they invest, we never hear about deals and dollars. Rather the first answer is frequently the ‘team’ or ‘the founders.’ This demonstrates just how crucial human capital is in VC investment decision-making.”

Given that, the report continues, “there is a dearth of data-driven insight and information about the entrepreneurs behind these companies.”

Part 1 of the CB Insights study examines nearly 200 early-stage Internet startups that raised VC in the first half of 2010 with a specific focus on race, age, and experience and the number of founders per company. Part 2 of the report, scheduled for release later this month, will look at the gender and educational background/pedigree of founders.

The report says that company founders over the past six months were overwhelmingly white – 87 percent and that Asians and Pacific Islanders, at 12 percent white comprised the second largest group of founders. Black entrepreneurs represent just 1 percent of founders. More telling perhaps is that 89 percent of founding teams are composed of a single race – 83 percent are all white – while 11 percent of startups were composed of a racially diverse staff.

In other major report findings:

– Most of the venture capital resides in three regions: California (mainly Silicon Valley), New York (mainly the New York City), and Massachusetts (Boston). Almost 80 percent of the funding handed out in the U.S consistently comes from these three locations.

– Asian teams in California raised median funding rounds of $4.4 million, as opposed to the $3 million raised by mixed or all-white founding teams. In other locations, the trend was more equal, even somewhat reversed in New York and Boston.

– The average age of founding teams getting funds was in the 35-44 year age range. The highest median funding did go to those in age range 26-34 years old; no founding teams in the 18-25 year range received any funding in California.

– Nearly 40 percent founders getting funds were former CEOs or had founded prior companies. Other common previous roles were executives in Sales, Marketing, and Product Management.

– The majority of companies have two or more founders, but over a third are led by one founder. More founders does not necessarily result in larger funding rounds, but the highest median funding generally goes to companies that have two or more founders. Co-founder companies are the norm in California, but 40-50 percent of the start-ups in New York and Massachusetts have only one founder.

The report strongly suggests that to get VC funding, the people involved should be  mostly white, have lots of experience and live in California, New York or Massachusetts.

Because this is a first report covering a brief time period,  including a period of economic recovery following a long venture capital funding drought, it’s mostly  interesting as a snapshot and a first effort – subsequent reports over the next few years likely will be more revealing about VC trends and human capital.

writer, editor, reader and general good (ok mostly good, well sometimes good) guy trying to get by

2 responses

  1. These aren’t terribly surprising results. I spend some time with Angels in the Chicago area and they’ve been telling me this for years. What we do focuses almost exclusively on workers and what incentivises them to do worthy work, so this is nothing new to us.

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