Discovering the next unicorn founder with data, not gut instinct

April 25, 2021 View comment (1)
Honey co-founders Ryan Hudson (left) and George Ruan turned out to be star entrepreneurs, despite their seeming lack of a dream pedigree.
(Courtesy of Honey)

Another week passes and another batch of private companies joins the vaunted list of billion-dollar startups. Five new ones were added in just the past week alone.

Each of these financial triumphs features premier venture capital firms assigning lofty price tags to companies that they see as the next big thing. When investors decide to make their bet, they're looking heavily at the founder, someone who they hope can make the valuation leap from nothing to 10-figure prize. And all too often, VCs decide based on gut instinct. But what if they could use data to help pick out a winner?

It's easy to picture the classic unicorn founder as a stereotypical 25- to 34-year-old out of Stanford or Facebook (or some accelerator like Y Combinator). We often assume top founders will check at least one of those boxes.

But the reality is that most of the star entrepreneurs coming into prominence show
none of those kinds of attributes, according to a unique dataset amassed
by Ali Tamaseb (pictured), a venture capitalist with the Silicon Valley deep-tech firm DCVC. His findings call into question whether the big VC firms really know what to look for in their quest to find the great company-builders of the future.

"The biggest signal I observed in the data is that a bunch of things don't matter, like age and university and being technical and this kind of stuff," Tamaseb told me. "What matters is having a history of having generated value, even if that value was small."

Tamaseb, a one-time neuroscience researcher and later an entrepreneur, set out four years ago to better understand the difference between ordinary founders and "Super Founders," the title of his book that's due out May 18.

For his book, he collected a trove of proprietary data about companies founded between 2005 and 2018 (partly relying on PitchBook's platform), which would help paint a picture of promising founders using larger, less biased samples and avoid anecdotes or widely held archetypes. Tamaseb says he broke ground by amassing some 30,000 datapoints on the formation of US companies, including number of competitors, market size, and the founder's age, university background and previous training.

"There's a lot of stereotypes about what makes for a successful team, what makes for a successful market idea," Tamaseb said. "A lot of the perception of the general entrepreneur and the ecosystem comes from what they see in the media."

The founders of Honey, a scrappy fintech company based in Los Angeles, turned out to be antiheroes with a great shot at unicorn stardom despite their seeming lack of a dream pedigree. George Ruan and Ryan Hudson bootstrapped Honey, a provider of coupon codes for online shoppers, because they couldn't get VC funding for the first couple years. After eventually getting backers from outside Silicon Valley's venture establishment, Honey took off and in late 2019 it was acquired by PayPal for $4 billion. Ruan and Hudson didn't have great connections or big names on their resumes, but they had produced a few small ventures along with their failures.

"These people are more likely to found billion-dollar companies compared with people who have the perfect pedigrees," Tamaseb said.

But in the hustle-bustle of Silicon Valley, this often goes unnoticed at VC firms, whose bias and penchant for so-called pattern matching when sizing up seed-stage founders results in missed opportunities. And entrepreneurs often shortchange themselves, Tamaseb says, if they measure themselves against the profile of the mythic tech founder.

To be sure, the market at this moment may be skewing deal trends in ways that even Tamaseb can't account for. Highly unusual economic factors—he calls this climate an "anomaly"—suggest that this cycle's newly minted star founders are commanding $1 billion-plus valuations in part because tidal waves of capital are sloshing around the global market.

If it seems to you like a fresh herd of unicorns has recently arrived on the scene, you aren't imagining things.

Indeed, in the past week alone, investors valued five more startups at $1 billion or more, bringing the total this month to 26, PitchBook data shows. What was once a remarkable milestone worthy of special mention has become ever more common.

Among the recent entrants to the billion-dollar ranks were Signifyd, a fraud protection company valued at about $1.34 billion, and Deel, the creator of a remote-hiring platform that drew a $1.25 billion valuation in a new funding round. None of these deals made big waves by themselves. But what's notable is the fact that clusters are happening with such breathtaking frequency, which speaks to how investors today source deals and place their bets.

Having an overabundance of capital waiting to be put to work is unleashing legions of investors with ever-larger war chests that are making more aggressive, competitive bids to fund startups at ever-earlier stages. My colleague Marina Temkin focused on this arms race in a story earlier this week that highlights the way valuations are soaring as hedge funds like Coatue Management and Tiger Global increasingly compete—often against powerful, mainstream VC firms.

"If you're a $1 billion fund, you need a minimum $5 billion exit to move the needle for you," Tamaseb said. "If you're a $100 million fund, you need a $500 million exit. And it turns out we have a lot more funds that are closer to being billion-dollar mega-funds that are funding these companies than there are $50 million funds."

Image of Ali Tamaseb by Ben Krantz

This article appeared as part of The Weekend Pitch newsletter. Subscribe to the newsletter here.

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