The most dangerous superstition in the venture capital world: the more emphasis placed on the founder's education, the worse the investment returns.

null

Author: Odin

Compiled by: Deep Tide TechFlow

Deep Tide Guide: Global VCs are all shouting “Invest in people, not projects,” but data from the University of Chicago reveals a harsh truth: investors tend to make the worst decisions by over-relying on founders’ educational backgrounds.

This obsession with credentials costs the industry hundreds of millions of dollars each year. Ironically, the investors who actually make investments—Thiel and YC—look at much more than resumes; they consider the complex whole formed by founders and ideas. For crypto investors, this serves as a reminder to beware of institutions that only pattern-match elite school backgrounds.

Long ago, eight researchers from Shockley Semiconductor walked into the office of a young San Francisco banker, Arthur Rock. This “Rebel Eight” proposed a plan: they wanted to start a competing company. Rock saw something in them—perhaps that rare kind of talent that’s bursting with potential but has nowhere to go—so he helped them raise funds and founded Fairchild Semiconductor—widely regarded as the seed of Silicon Valley. This is how Rock, the first believer in the team, became the first modern venture capitalist.

Rock’s decades-long belief was that supporting talent is at the core of venture capital. He liked to say that a great management team can find good opportunities even if they need to jump out of their current market.

His peers had different views. Tom Perkins of Kleiner Perkins focused on technology—whether it was proprietary or clearly better than alternatives. Don Valentine, who founded Sequoia after marketing at Fairchild, was obsessed with markets. In the mid-1980s, when Sequoia considered early investment in Cisco, most peers rejected it; the founding team was seen as weak. Valentine still invested, reasoning that the networking market was so huge that even an average team could sell a lot of equipment.

These three shaped three different philosophies of American venture capital; but Rock’s cultural stance won out. “Venture capital is a people business” is not only a great slogan but also places founders at the story’s center. If you’re pitching capital to founders, this is exactly what they want to hear.

But is it really that simple? What does the so-called “people business” actually look like?

Normative Conformity

Today, almost every VC firm touts founders first.

In 2016, four economists (Paul Gompers, William Gornall, Steven Kaplan, and Ilya Strebulaev) surveyed 885 venture investors across 681 companies to understand how they make decisions. This study is the most thorough analysis of industry decision-making to date, seemingly settling Perkins and Valentine’s philosophies.

About 53% of early respondents listed founders as the single most important factor in deal selection. Business models and products (Perkins’ traditional focus) were chosen by about 10%. Markets and industries (Valentine’s focus) by about 6%. The rest were spread across valuation, fit with the fund, and the investor’s own value-add capabilities.

“96% (92%) of venture firms consider the team an important factor, 56% (55%) see the team as the most critical factor for success (failure). Teams are most important across all sub-samples, especially in early-stage and IT VC.”

— “How Do Venture Capitalists Decide?”, Gompers, Gornall, Kaplan, and Strebulaev

Looking at other responses in the survey, 9% of investors admit they do not use any financial metrics, rising to 17% among early-stage investors. An industry so reliant on qualitative judgment should have reflected on what standards they use and how they track outcomes.

Unfortunately, the answer remains vague promises—invest in “the best founders”—without clarifying what that means or why.

“Research shows that venture investors are poor at introspecting their decision processes. Even in controlled experiments that greatly reduce the amount of information considered, VCs lack a deep understanding of how they make decisions.”

— “Lacking Insight: Do Venture Capitalists Really Understand Their Decision-Making?”, Andrew Zacharakis and G. Dale Meyer

Thus, the founder-first approach has fostered a lazy thinking epidemic, permeated by biases and credentialism. This, in turn, manifests in declining performance and frequent scandals involving fraud and negligence.

The Billion-Dollar Blind Spot

In 2022, Diag Davenport, an economist at Chicago Booth School of Business, put a price on the industry’s losses caused by this overly simplified attitude.

Davenport built machine learning models on data from over 16,000 startups, representing commitments of over $9 billion. He trained the models only on information available to investors at decision time, then asked: how many investments could have been identified beforehand as inferior to simply putting that money into standard public market alternatives? The answer: about half.

By excluding the worst half of investments and reallocating capital to public options, Davenport found that VC returns in the sample could have been 7 to 41 percentage points higher. In his data, this equates to over $900 million in avoidable losses. The cost of poor investments, expressed as a spread over external options, is roughly 1,000 basis points.

Davenport trained two parallel algorithms: one predicting which startups would be top performers, and another predicting the worst performers. When comparing the signals each relied on, a strange pattern emerged. The algorithm built on good outcomes depended on product features, while the one built on bad outcomes heavily relied on founder backgrounds. When investors made good decisions, they scrutinized ideas more carefully. When decisions were bad, they seemed to scrutinize teams more.

To test over-weighting, Davenport built a separate model using only founder education data, then asked: for two companies that look equally promising under the full model, would their investment outcomes differ because of their performance under the education-only model? The results showed investors systematically over-weighted education, especially in the worst-performing startups.

“Investors seem convinced that a founder-first worldview is correct. This may lead them to overlook predictive features, and the feedback loop of ignoring or not learning from results persists, consistent with models and evidence presented by Hanna et al. (2014).”

— “Predictable Bad Investments: Evidence from Venture Capitalists,” Diag Davenport

Davenport’s paper is part of a growing body of research reaching similar conclusions, indicating that investors over-weight superficial founder attributes, leading to predictable poor investments (missed errors) and missed opportunities (missed errors).

There is a structural explanation: success in VC is more easily measured through incremental funding rounds than distant exits, so if decision-making becomes a simple checkbox exercise, funding friction decreases.

At some point, the industry convinced itself that the ability to raise capital is itself an ideal founder trait, creating a recursive logic. Investors began pattern-matching on founder archetypes most likely to raise the next round, making those archetypes more fundable, reinforcing the pattern. As a result, return quality declines overall, while capital velocity (and fee income) accelerates.

This cycle is explained by economist Daniel Kahneman, who describes how even complex professionals are tempted when simple, coherent ideas align with the right incentives—even if they produce clearly poor outcomes.

“Our statistical evidence of failure should shake our confidence in judgments about specific candidates, but it doesn’t. It should also temper our predictions, but it doesn’t. We know as a general fact that our forecasts are almost no better than random guesses, but we continue to feel and act as if each prediction is valid.”

— “Blink! The Perils of Confidence,” Daniel Kahneman

The Paradox of Great Investors

This creates an intriguing puzzle. Data shows that over-weighting founder attributes leads to worse decisions, especially in the worst deals. Yet some of the most successful companies in the industry are led by the most aggressive founder-first advocates.

Founders Fund has supported unusual people for twenty years—before others would. Peter Thiel even created the Thiel Fellowship, targeting young entrepreneurs without college degrees, which has produced incredible success stories.

Y Combinator has operated for twenty years based on the premise of identifying great founders. In fact, the program has been shown to reduce the influence of credentialism by providing investors with alternative signals.

If founder-first thinking is just a systemic pathology, then the companies most committed to it should be the worst performers. Instead, they are the best.

The answer is actually quite straightforward. When top investors say “founder-first,” their meaning is much more nuanced than the superficial industry explanation.

The Great Person Fallacy

The desire to reduce founder success to a predictable checklist is a modern manifestation of the Great Man theory; believing history is shaped by inherently great individuals, ignoring how success itself forges these qualities.

“A successful company with a strong track record? The leader appears visionary, charismatic, and a strong communicator. A struggling company? The same leader looks indecisive, misleading, or even arrogant.”

— “The Halo Effect,” Phil Rosenzweig

For example, entrepreneurs like Elon Musk have shaped investor expectations of hardware tech founders through stories of cross-domain superfluidity, discipline, and decisiveness. So, this is what they look for in first-time founders—without realizing Musk developed these traits over time, depriving others of the chance to do the same.

Consider Thiel’s investment in Mark Zuckerberg, the Harvard dropout. Today, it’s often cited as an example of Thiel’s early ability to identify great founders. But contemporary records show Thiel was attracted to Facebook itself, its early traction, and Zuckerberg’s specific framing of online identity issues.

If Zuckerberg had started a flower delivery startup, would Thiel see something in him? It’s hard to imagine. The real magic was in the ideas about how social networks should work and the particular form Zuckerberg had already given it.

Indeed, at the DealBook conference, Peter Thiel was asked how he evaluates founders, and his answer aligned with the Facebook example:

“I don’t separate ideas, business strategy, and technology too much. It’s all some kind of complex bundled deal.”

— Peter Thiel, Co-founder of Founders Fund

He said he can’t evaluate a founder without assessing the quality of the ideas they’re working on. He can’t evaluate the ideas without understanding how the founder shapes them. Both are inseparable.

The Critical Question

Academic research has also developed a complementary argument. In a 2022 paper published in the Journal of Business Venturing Design, Mattia Bianchi and Roberto Verganti from Stockholm School of Economics and Politecnico di Milano argue that entrepreneurship has long been misunderstood as a problem-solving activity, when in fact it is primarily a problem-discovery activity.

In their framework, the most important creative act of a founder is identifying and defining a worthwhile problem to solve. Everything else—pitch decks, go-to-market plans, product roadmaps—flows from the quality of this initial definition.

“Viewing problem discovery as a design activity rather than mere discovery broadens the potential impact of design practice—from creatively generating solutions to creatively generating problems themselves. Redefining problems in a speculative way is another lever for breakthrough innovation, as unconventional problem framing can open up unexpected solution paths.” — Bianchi and Verganti, “Entrepreneurs as Designers of Worthwhile Problems”

If this framework is correct, then the core dichotomy of jockey versus horse is mistaken. Evaluating founders should focus on what problems they choose to tackle and the specific frameworks they use to understand those problems. Ideas cannot be evaluated in isolation, as they reflect the founder’s materialized beliefs about what the world will look like in ten years. Both are mutually constitutive; any investor claiming to evaluate them separately is likely to do both poorly.

“By their fruits you will know them.”

Nabeel Hyatt of Spark Capital eloquently captures this combined approach. When asked how to distinguish true executors from founders who merely appear to meet many criteria, his answer is surprisingly direct:

“The way we tell the difference between good salespeople and real doers is by looking at what they produce. I’ve never looked at a product or used a website and thought, ‘This person should get a $15 million check.’ You look at the product, then evaluate the person behind it based on that.”

— Nabeel Hyatt, General Partner at Spark Capital

Products embody founders’ ambitions, reflecting their judgment, priorities, and the problems they choose to solve.

An investor who says “I invest in people” but hasn’t examined the product carefully is either investing in superficial patterns or in charisma and personal charm. These are precisely the habits that reliably produce predictable poor investments.

Sam Altman, in a 2016 talk at Khosla Ventures with Keith Rabois, expressed a similar view with slightly different words:

“The hardest trait to identify is determination. There are a few other themes we focus on: clarity of vision, communication skills, and the non-obvious brilliance of the idea. We scrutinize these very carefully. They’re not always easy to judge, but you can usually get quite a lot of data, and they’re less hard to judge than determination.”

He didn’t say the founder’s brilliance. He said the brilliance of the idea—specifically, that it’s “non-obvious”—meaning the founder has chosen a novel problem. And clarity of vision, which indicates how they perceive and articulate that problem. Of course, their determination to pursue it.

In Bianchi and Verganti’s language, he’s describing founders as designers of worthwhile problems.

The Whole Ocean in a Drop

When investors say they invest in people, they might mean two things.

First, they believe attributes like background, resume, charisma, and past funding success signal more than what founders choose to work on. Essentially, they see founders as interchangeable commodities that can be ranked and stacked. This is the version most directly contradicted by Davenport’s data.

Second, a rarer view is that the object being evaluated is a unique alchemy of person and idea. An investor’s job is to assemble a complete picture: the problem chosen, the form of the solution, the character of the team. Only then can they fully perceive the opportunity before them.

The two are easily confused because they use the same language. Both are expressed in language supporting people and celebrating human potential. The first is lazy and well-rewarded by industry norms. The second is difficult, often misunderstood, but clearly the path to higher-quality investments.

The point isn’t that investors should abandon qualitative team analysis and revert to Perkins and Valentine’s methods. The conclusion is simply that teams cannot be effectively evaluated outside the context of what they’re doing, and trying to do so is exactly where pattern-matching problems arise.

This is why the fundamental unit of entrepreneurship isn’t the founder or the idea, but the union of both. Venture investors must stand far enough back to see both, and treat them as a single entity in their assessments.

Rather than obsessing over jockey versus horse, the investor’s job is to identify the centaur.

Note: A 2009 paper analyzed how many companies had changed leadership teams or core products by IPO, providing empirical evidence for focusing more on ideas when evaluating companies. However, this covered periods when VCs often brought in new executives before going public, which seems less relevant now.

Use Odin to run your venture capital firm on your phone.