Research: VCs Reward Self-Presentation Over Qualifications

From Warren Buffett to Marc Andreessen, it’s become increasingly common for venture capitalists to subscribe a mantra of “backing people, not companies.” This is understandable, as the success of a startup depends largely on the capabilities of its founders. But of course, it’s a lot harder to objectively evaluate the potential of a human being than that of a specific business plan or technology.

While there are some quantitative metrics investors can look to, many find themselves making major financial decisions largely based on information that’s self-reported (and potentially inflated) by founders — and one need only look to widely-publicized failures from charismatic founders such as Theranos or WeWork to see the costs of such investments. What can VCs do to ensure they’re investing in people for the right reasons? And what can founders do to demonstrate that they’re really a good investment?

In our recent research, we explored the factors that drive both VCs’ early-stage investment decisions and startups’ long-term success, with a particular focus on the impact of founders’ actual expertise versus how they present themselves. We used LinkedIn to collect data on both experience and self-reported skills from the founders from more than 4,000 U.S. ventures. To quantify actual expertise, we looked at the founders’ past entrepreneurial experience, whether they had worked in managerial positions, and whether they held master’s or doctoral degrees in STEM fields related to their startups’ domains. Conversely, to measure the expertise that founders were choosing to signal to potential investors, we used data from the self-reported Skills & Endorsements section on their LinkedIn profiles (as these skills are largely a form of impression management, rather than an accurate reflection of expertise). Finally, to determine these firms’ short- and long-term successes, we used Crunchbase data to track both the amount of funding each venture raised and whether it eventually achieved an exit through an acquisition or IPO.

Interestingly, the correlation between founders’ actual and signaled expertise was pretty low across the board: Skilled individuals did not necessarily invest in self-presentation, while those who signaled higher skill levels didn’t necessarily have the most experience or qualifications. This trend likely contributed to our second finding: Actual expertise was the strongest predictor of a successful exit, but when it came to funding, expertise signaling made much more of a difference than actual experience. In other words, while longer-term outcomes depend more on actual expertise, shorter-term fundraising success may depend more on effective self-presentation.

These findings have implications for founders and investors alike. For investors, our research illustrates the challenges associated with reliably evaluating startup founders. Although most investors presumably aim to make decisions based on founders’ actual expertise (especially since the data shows that this is what correlates with long-term success), our findings suggest that self-presentation in fact has a major influence on how founders are evaluated. Furthermore, while acquisitions and IPOs have built-in due diligence processes that give decision makers the chance to take a deeper dive into founders’ backgrounds, early-stage investments are often undertaken with less thorough consideration. As such, to avoid making investments that ultimately fail to pay off, investors should check their assumptions and do their best to make funding decisions based on founders’ actual experience — rather than being swayed by signals alone.

At the same time, for founders, our results points to the importance of not just having expertise, but effectively communicating it. To secure venture financing, experience, qualifications, and even technical skill may not be enough. While these “hard” competencies remain valuable and do predict long-term outcomes, without early-stage funding, such outcomes are unlikely to ever materialize. Our research also suggests that those with the strongest actual skillsets may be the least likely to signal those capabilities publicly. As such, founders shouldn’t shy away from a bit of (honest) self-promotion, and should remember that raising the funds they’ll need to succeed will hinge on their ability to signal expertise to investors.

Clearly, cases such as those of Theranos and WeWork — in which seemingly high-potential, charismatic founders end up dramatically underdelivering — may be a lot more common than one might think. And while real-world interactions between founders and investors are no doubt more nuanced than the limited signals we were able to capture in our LinkedIn dataset, our findings may help to explain why there can be such substantial discrepancies between how VCs evaluate founders and those founders’ actual ability to deliver: Investors tend to focus on signals of expertise, rather than the actual experience and qualifications that drive long-term success. And while expertise signaling can be an effective way for founders to highlight their skills, investors would be wise to differentiate between buzz and real potential — or risk investing cold, hard cash into little more than hot air.

Editor’s Note (4/20/22): We’ve updated the piece to add Crunchbase as a source of data for companies’ funding, acquisitions, and IPOs.