Fast Company

Report: Is Human Capital the New Venture Capital?

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How often do we hear about how many millions of dollars a startup raised in this round or that? Venture capital is likely the most oft-cited figure for measuring the potential for a new business' success, but research firm CB Insights aims to change that misconception in a new report measuring human capital--not venture capital.

"When we ask venture capitalists what gets them excited about the young, emerging, and often unproven companies in which they invest, we never hear about deals and dollars," reads part I of the report, released this morning. "Rather, the first answer is frequently 'the team' or 'the founders.'" In their first-ever VC Human Capital Report, CB Insights attempts to apply the "same rigor we apply to our quarterly tally of deals and dollars to provide an objective, data-driven perspective into the people dimension behind the deals and dollars we so often read about."

The study focuses on 165 early-stage Internet startups that raised VC in the first half of 2010, specifically looking in part I of the report at race, age, and experience of company founders. Are these the right characteristics we ought to use to measure start-ups? Is race a valuable or even appropriate metric? Here are some of the report's more interesting findings.

In yet another illustration of the unfortunate disparity that exists in the U.S., CB Insights discovered that 87% of company founders in the past six months were white, whereas black entrepreneurs represent just 1% of founders and Asians 12%. What's more, close to 89% of founding teams are composed of a single race--83% are all white--while just 11% of startups were composed of a racially diverse staff.

The report also shows the differences in average funding these teams received across three states: CA, MA, and NY. In California, for example, all-Asian teams typically received far more seed funding than all-white or mixed groups; in Massachusetts and New York, however, these figures dramatically differed, and the report concludes that "racial composition of founding teams and amount raised show no trends across [the] big three states."

It seems most every successful startup is founded by some kid fresh out of college, so you'd think the average age of founders would match up with Mark Zuckerberg. But CB Insights finds that "wunderkids are not the norm," with 67% of all founding teams falling within the 35-54 age group, with only 33% in the 18-34-year-old range. However, VCs do love a young startup, but not too young--companies with the average age between 26-34 receive the highest median funding, while those between 18-25 receive the lowest amount. These national figures were matched in California, but differed in MA and NY, where "whiz kid teams" tend to receive more funding.

Furthermore, these figures show how younger innovators are shifting from California to New York. Massachusetts leads in older generations, with nearly half of all start-up teams composed of the age group 45-54.

In terms of experience, CB Insights found that 39% of founders were formerly CEOs or founders of other companies, concluding perhaps obviously that experience is a valued characteristic.

It's hard to say what value CB Insights report will offer new startups. Clearly, massive inequity still exists in the U.S. when a high majority of startup founders are white, whereas just 1% are black. And clearly, on a state-by-state basis, New York is growing as a home for young entrepreneurs and fresh innovation.

Is human capital the new venture capital, though? I doubt it. Neither measurement provides insight into that all-important X factor that's crucial for successful company founders. This report, rather, shows but an interesting snapshot of the state of entrepreneurship today.

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