Operator experience has become critical in venture capital over the last few years. Pure-play financial VCs are falling out of favor with startups compared to investors who bring building experience alongside their cash.
But not all operating backgrounds are equally helpful. If a VC has experience in a different field, it may not translate well — if at all — to a startup, and advice around certain business decisions could quickly become outdated. There is a growing group of VC funds led by folks who think they might be better suited to back companies because they are currently startup founders themselves.
These firms and founders may be onto something. Recent data from AngelList, pulled for Flex Capital, shows that the founder-led funds raised through its platform outperformed the other funds raised on AngelList.
In fact, across all percentiles of fund performance, VC funds led by active founders outperformed those without that structure when comparing multiples on invested capital, according to the data. Funds in the 90th percentile saw performance metrics that nearly doubled the numbers from firms without a founder at the helm.
Now, let’s be clear, this data definitely doesn’t give a full picture. For example, we don’t know how founder-led funds compare to operator-led firms. This dataset is just based on funds raised on AngelList, which is obviously limiting, and it’s unclear what the structure of these firms look like; some may be led by a founder but have full investment teams.
But it does pose the question: Do active founders make better investors than, essentially, anyone else?
For Jeff Lu, a general partner at Flex Capital, the value of this model is clear.
His firm has three founding partners, two of which are currently working as operators, and Lu, who serves as a full-time investor. “I had to pitch Flex a thousand times over the last three years, and not once have I ever had to explain to a founder why this is better,” Lu told TechCrunch+.
AngelList itself might have a hand in helping active founders become investors: The platform makes starting a fund cheaper and easier to get off the ground. Ankur Nagpal, the founder of Ocho and a solo GP at Vibe Capital, said that the ease of raising on AngelList in many ways makes it easier than angel investing.
“If you are already investing your own capital, why not have leverage on that?” Lu asked. “Why not invest $100,000 that will benefit your $100,000 [that’s] already in?”
There are potential benefits for active founders who become investors, too: Current founders may be able to offer better advice than former operators. Nagpal said that when he originally launched Vibe Capital, his experience running his prior startup felt stale despite it only being a few years old. Running his new startup Ocho alongside his investing makes him feel like he can offer more relevant advice, he said.
“It was no more than two years that I already started feeling like, ‘Do I know shit anymore?'” Nagpal said. “I was already feeling things were getting dated two years in.”
And it goes beyond just giving advice. Being an active founder gives VCs an inside view into where to invest, which may be one of the leading catalysts to the performance numbers being higher for these funds raised on AngelList.
“As a founder, having been in the trenches, you have a good bullshit detector, and you are good at identifying talent,” Nagpal said. “You are seeing trends unfold as they happen. You can invest in companies that solve your own problems. You see these things faster and move quicker.”
But this model isn’t perfect for either the founder or the VC. Nagpal said he tries to be transparent with companies he’s investing in, telling them that he’s a founder first, VC second, and will spend as much time as he can working with portfolio companies. But at the end of the day, his own startup comes first.
This shouldn’t deter anyone from working with an active founder turned investor. Not every VC firm is going to be able to offer the same time and resources as, say, an Andreesen Horowitz or an Accel, regardless of whether the investor is an active founder, Lu said. Even investors who aren’t active founders still have other things going on, like hobbies and family obligations.
“The reality is, we all have some other thing going on in our lives that we are passionate about,” Lu said. “Dual threat CEOs, their hobby is to invest. At the same time, the experience makes them better CEOs and investors.”
It’s important to note that women founders are largely left out of this trend. While having these side gigs is largely seen as a positive by VCs for male founders, multiple women founders have told TechCrunch+ that they aren’t given the same luxury. In fact, they are advised against it.
Lu said he hopes this changes because more women adopting this model would mean more women investors and likely more money heading to women-run companies.
While the number of these funds has grown in recent years, it’s hard to track how big of an impact they actually have on the overall ecosystem. Based on market conditions, it’s also unclear whether this trend will continue at all. VCs love to say that a down market is the best time to invest, but those same market conditions mean founders may not have the extra time to launch a fund.