Why are so few of Europe’s VCs former founders?

Two weeks ago, London-based VC firm Plural raised its second and largest fund to date. The close was noteworthy not just because it defies a dismal VC fundraising environment, but also that it came from one of the few operator VCs present in Europe.

An operator VC is a firm that is typically launched by former startup founders, as opposed to investor VCs that tend to be led by financial professionals. Some of the best-known names in the venture world, including Marc Andreessen and Peter Thiel, created businesses before launching their own funds.

Operator VCs have been around for as long as Silicon Valley in the US, but the concept is less established in Europe. Only around 8% of the region’s VC firms have former operators at their helm, compared to as much as half of US VCs.

That large gap begs the question, why are so few European founders willing to take the leap into VC?

As with most comparisons between Europe and the US, many point to the maturity of the US VC market to explain the disparity.

A well-established ecosystem helps former startup founders transition into VC roles more easily. But in Europe, there’s no lack of successful founders to explain why there are so few operator VCs. Over the past decade, the region has seen multiple outsize exits, and tens of thousands of angel investors have emerged.

It is more likely that a relative lack of LP capital is creating a major barrier for operator VCs. Government agencies are still the primary source of fund commitments in many countries. A 2023 working paper from the European Investment Fund found that fundraising was the biggest challenge for European VCs with a lack of sufficient private domestic limited partners being a major factor.

This is particularly true for pension funds, which are a huge source of capital in the US. Last year, just 0.024% of the $3.4 trillion in assets under management held by European pension funds went to VC, according to Atomico’s State of European Tech 2023 report. And that’s not including assets managed in the UK which, if added, would halve the share going to VC.

Regardless, Europe now has hundreds of unicorns and a VC ecosystem worth several billion euros, with fundraising totals crossing the €100 billion ($107 billion) mark in 2021. Despite the VC downturn, things have been going well for the region’s VC market. This leads to the second question: is the dearth of operator VCs a problem?

While there’s no definitive proof that operator VCs make for better investors, there is evidence to suggest they do. A 2022 paper by economists Paul Gompers of Harvard Business School and Vladimir Mukharlyamov of the McDonough School of Business at Georgetown University found that founders who became VCs after successfully exiting their startup are 28% better at backing successful companies than investor VCs. They defined success as a portfolio company being exited at a higher value than the total funding received.

Why? One possible reason is that operator VCs are likely to have extensive networks gained during their time as startup founders or decision-makers. This can produce better access to dealflow opportunities.

Not only does having a strong network allow for earlier insights into up-and-coming startups, but many founders prefer to work with investors they know and can trust. Operator VCs are more likely to receive referrals from their peers and former colleagues, which can help convince founders to take VC investment. The same network can also be tapped later on to help portfolio companies recruit talent.

As well as potentially having better access to deal flow, there’s a case to be made that operator VCs could add more value to their portfolio companies. Having a more intimate understanding of what it takes to scale a startup and what challenges can lie ahead allows operator VCs to engage with founders on a deeper level, offering advice based on personal experience and not just theoretical frameworks.

This is not to say, however, that all operator VCs are better than investor VCs. Gompers and Mukharlyamov’s data also show that founders who did not successfully exit their startups did worse on their investments than career VCs.

A person who knows how to scale a company isn’t necessarily good at financial analysis or market forecasting. Additionally, in some cases, potential biases and attachment to past experiences may hinder an operator VC’s ability to make the right choices for portfolio companies.

Whether operator VCs or investor VCs are better is, in my opinion, a bit beside the point anyway. What matters is diversity.

Diversity of thought, backgrounds and experiences can only lead to a better and healthier VC market. Startups aren’t expected to have teams of people who all share the same background, and VCs shouldn’t either.

By combining operation and financial skills, VC firms can be more effective both when helping portfolio companies and when generating returns. The US learned this a long time ago, and Europe needs to as well.