The Harvard-Stanford Shuffle: Social Proof and Pedigree (Newsletter #1)

College admissions have been a lightning rod issue for years, including a prominent Supreme Court case. While I definitely have an opinion, I'll stay in my lane -- and focus on the ties to the venture capital world..

If you look at most Silicon Valley style fund portfolios (I label them "West Coast funds," though they're not all based around San Francisco), you'll quickly see a lot of familiar logos - Harvard, Stanford, Penn, Princeton, etc. Those same logos are just as common for General Partners (GPs) at larger funds, and West Coast funds. If you're an institutional investor (endowment, pension fund, large family office), it's sensible to take the most logical, lowest risk GP selection path -- it's much easier to justify investing in a band of Ivy League MBAs vs. a rag tag group of state school graduates. And, if you're a GP, it's easier to bet on pedigreed founders - LPs will not fault you for betting on a Harvard MBA or Stanford graduate. Many successful past founders also tend to have top tier degrees - further fueling the collective investment fire.

So far, none of this should be surprising -- or controversial. Big LPs want to pay for perceived top tier quality, GPs are not valuation sensitive, and Ivy League grads are generally more interested in building huge businesses (going for broke, and on the decacorn path). If you can shop at Hermes or Versace, why shop anywhere else?

This social proof style of investing is completely rational -- and generally the least risky reputationally. However, it also only works for a small segment of the population. Most consumers can't buy a $1325 polo shirt, or $2925 blazer -- and should not. And while high end purses can actually be great investments, high end clothing generally loses most of its value as soon as the tags are off.

You'll never confuse me with a fashion connoisseur - my wardrobe is generally utilitarian and practical. Names like Nike, AllinMotion (Target), and Old Navy comprise most of my closet - and my shoes are generally all hiking or running shoes. I also don't have any purses, though I might eventually own a Birkin or a Kelly (jointly with my wife...since some lightly used purses could be good investments). In the end, I only care about paying for function, or investing to make money.

I'm no different with investing in founders, and companies - my main objective is to make investor's money. Betting on Ivy League graduates might feel good (a bit like buying that $1325 polo shirt, or these $795 towel shorts for the beach), and give me the assurance of investing in "quality." While there is a clear quality difference in a Hermes polo and a $20 Target polo, they're both still 100% cotton, and have 2 buttons. Hermes will last longer and look and feel better...but 66x better?

The valuation difference between an HBS led startup and a state school led startup is not 66x, but it's a material difference (in most cases). I'm generalizing here, but paying $10-20m for a pre-seed HBS/Stanford deal is very different than paying $2-5m for a state school deal with similar traction. Before I wander into a more controversial section, I need to clear up a few things:

1. I have backed a few HBS founders, and Ivy League grad founders (though not many)

2. Not all Ivy league graduates fall into the same bucket, and data can always be manipulated (to some extent)

3. I'm using Harvard and Stanford as examples - there are plenty of other Ivies with worse stats, though both schools are common in West Coast circles

4. “State schools” can be some private schools too - generally schools ranked 20th, or worse

There is a ton of data, and great insights in Ivy League data, including some surprising findings -- though the easiest takeaway is this chart. 70.3% of Harvard's class comes from the top 20% income families - with the lowest percentage coming from Caltech (still boasting ~60% representation). Princeton has a nearly 80% rate -- and many Ivies boast 20% of their classes from the top 1% of America. This is not a higher education focused blog, so I'll generally stop here on stats and class data. However, there are clear implications to the venture world.

As I've stated many times to LPs, my mission is to make them as much money as possible, while maintaining as little risk as possible. I don't have a social mission, and steer clear of any political ties. The only thing I really care about is maximizing returns vs. risk. If you only remember one paragraph from this article, this one is the most significant:

Many GPs will add a few points on their "team" section for an Ivy League credentialed founding team -- I do the exact opposite. While having top tier credentials helps raise future rounds, and gives the right keys to the right future doors - it can be a very bad sign for me. I want to see a real hunger, competitive fire, and deep seated need to win. I need to see a chip on a founder's shoulder - and a relentless will to succeed under any circumstances -- with a desire to fight until the end (with a great, good, and not so good outcome). Valuing money and not being used to having any resources is key for capital efficient scaling, and raising a realistically priced pre-seed/seed round. Being "all-in" is the final criteria -- where the success (or failure) of the company is an all encompassing mission.

An Ivy credentialed founding team can fail miserably in one startup, and much more easily raise future funding at a new startup. A less credentialed founder can't afford to let a company fail - they might not get another shot for a long time (if at all). The cost of failure is very different -- and the stakes are dramatically higher for the state school founder. It's the difference between having 3 or 4 Game 7s vs. just one -- if you only have one shot, and one game, you're going to leave absolutely everything on the floor. This link is a great visual example (fast forward to the 7:00 mark) - Ray Bourque played for 21 seasons without a championship, and won the Cup in his 22nd (and final season). You can clearly see the emotion -- and how much it meant, especially at the age of 40 (knowing this was likely his last shot).

There is no single founder type, or background -- though there are certainly patterns and commonalities. Most of my angel and fund investments were in founders that went to 2nd or 3rd tier schools, grew up either lower or middle class, and were first-time founders. It's much easier to get used to adversity, and creatively solving challenges when you've done it most of your life -- vs. hitting real challenges for the first time as a founder. I also love seeing founders that had high school and college jobs, and founders that took scholarships for undergrad or grad school. All of these experiences are useful for being a founder - and signs that they have the right personality traits.

Some colleagues probably think I'm crazy for giving a UGA or Rutgers founding team a better rating than a Harvard/Stanford/Penn team. But, I very rarely see the right soft skills in Ivy graduates for my thesis. Building an efficient company, and selling for $40m or $70m in 3-5 years in an unsexy industry is not all that appealing to most founders -- but it's also a great path for the majority of founders/startups. Most exits are not over $100m, and few companies ever become unicorns (or retain their horns upon a liquidity event). Part of this thesis is finding hidden gems, and incredibly hard workers that know how to get quick results. While the non-Ivy world is much bigger than the Ivy League ecosystem, it's also an often overlooked, or undervalued founder source.