Do Entrepreneurs Make Good VCs?

Abstract

Using hand-collected data on the backgrounds of venture capitalists (VCs), we show that in a typical venture capital firm in our sample, 14% of VCs have been entrepreneurs before becoming a VC, referred to as entrepreneur VCs (EVCs). We use the local supply of EVCs as an instrument to establish causality and find that EVCs have a positive impact on venture capital firm performance. In addition, the positive relation between EVCs and firm performance is stronger for smaller, younger venture capital firms, and for firms specializing in early-stage investments and in high-tech industries. Contrary to VCs’ prior experience in entrepreneurship, neither prior experience in Wall Street nor in Main Street is significantly related to firm performance. We also find that EVCs have better individual performance. Overall, our results are consistent with the idea that EVCs have a better understanding of the business of starting and developing a new firm due to their first-hand entrepreneurship experience, which helps enhance firm performance.