By and large, the flywheel effect is considered to be a good thing. As ecosystems mature and the list of success stories grows longer, there are more experienced entrepreneurs around to lead the next generation of startups. Some are founders transitioning from first-time to serial entrepreneurs. Others are employees who have played key roles in building startups before going on to establish their own businesses. From a VC point of view, there are a lot more people around who have had an opportunity to hone their business chops. This has been happening here in the U.K. and elsewhere in Europe in quite a big way.
But spare a thought for first time founders. They have good ideas but not necessarily any background in launching and growing new companies. So, will the – young and bubbling with ideas – lose out as potential backers look for safe pairs of hands in the shape of alumni from companies that have already succeeded?
It’s a question that arose when I spoke to Hector Mason, co-founder of demo-day organiser Onstage and a partner at VC fund, Episode 1. Previously known as Focal VC, Onstage was founded to allow startups to take part in demo days, without first having participated in accelerator programs. In 2024, around 4,000 companies applied to take part in two events. Only a relatively small number were selected to actually pitch, with partner VCs playing a role in the process. Data released by Onstage suggests that the U.K. startup scene is increasingly populated by people with a track record.
The Experience Premium
For instance, among the top 50 selected founders, 23% had prior experience of raising funds and the same percentage had a track record in product development. A fifth could boast C Suite experience and more than half (52%) were serial entrepreneurs.
:Arguably, this shouldn’t come as any great surprise. It’s only natural that VCs seek to maximize returns for themselves and their Limited Partners. Looking for evidence of experience is a way to increase the chances of success and limit risk. It was a point made by Harry Nelis, a partner at VC Accel when I spoke to him a few weeks ago. As he explained, investors often look favorably on “interesting people” coming out of successful companies.
“This isn’t new,” he added. “Way back it was known that Oracle had great sales people. They became attractive to the industry.”
Mental Shortcuts
As Hector Mason sees it, there is a tendency for founders to come from similar backgrounds.
“That’s both good and bad,” he says. “It allows VCs to take huge mental shortcuts, for instance, by backing people who’ve built businesses before, perhaps as early employees. Those people have some kind of a playbook to avoid mistakes. That can accelerate company building. “
On the other hand, less experienced talent may find it harder to secure a sympathetic hearing. “From a diversity point of view, mental shortcuts are not always positive,” he adds.
Mason cites the example of someone who has a great education and who goes on to get a good job in a blue-chip company or a successful startup. In part, the success they enjoy has been down to that education, feeding into a stellar career early in life. Someone from a less privileged background may not enjoy the same opportunities.
“VCs look for the blue chip experience,” Says Mason. “But there is so much opportunity around the edges – the less obvious founders.”
Finding Iconoclasts
The question is, how do you identify founders who are likely to succeed, even if they lack experience?
Mason’s experience at Episode One suggests that founders who have had “really interesting” early lives are often well equipped to succeed. “That could mean they have been curious individuals and acted on those curiosities. Or they have built something without being asked or being paid,” he says. “Or it can be people who have come through challenging circumstances. For instance, immigrants or people who have lost a parent. They will have developed resilience.”
Mason says the Episode One investors look for Iconclasts, using AI to and in-depth interviews to spot the right personality types. As he points out, young founders can have a refreshing impatience and desire to forge ahead.
That said, Mason acknowledges the importance of business skills, particularly as a business grows bigger and more complex. However, gaps can be filled.
“Young people just want to build quickly. As they expand, they have to introduce processes. That’s a learning curve that all young founders have to go up. It’s also a learning curve you can hire around. Hire people who are better than you. You would want to hire a Head of People and a Head of Ops,” he says. “So you get up the learning curve yourself but also hire.”
Onstage’s demo days are also intended to provide a meritocratic means to get in front of VCs. At the very least, the open application process means that founders can put themselves forward, even if they don’t have access to a network of investors or advisers. To date, $480 million has been raised by companies taking part in its demo-day events. In addition, it is a forum where startups can meet potential hires and customers, either at the pitch day or via social media content afterwards.
There are, of course, a range of diversity issues that extend well beyond the experience of founders. The British Venture Capital Association acknowledges that women and members of ethnic minorities often struggle to access capital.
There are various solutions. These include services that connect startups to investors, and accelerators aimed at certain groups. At the demand side of things, it’s generally considered a good idea to widen the pool of decision makers in VC firms. According to the BVCA, progress is being made. Eighteen percent of investment professionals come from ethnic minority backgrounds, and 27% of decision makers are female. As the association admits, however, there is more to do, particularly around increasing diversity at senior decision making levels.
And we probably shouldn’t overstate the problem. surveys suggest that Seed and Series A investment in the U.K. is holding up well, benefitting both first-time and experienced founders. So let’s celebrate the flywheel effect, while not forgetting to provide opportunities new founders and those from backgrounds that sit outside the VC networks.,
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