Howard Aldrich, Martin Ruef, and Nancy Carter have written about homophily in startup founding teams (see the 2003 paper). They find that entrepreneurs pick founding team members based on trust and people who are similar to them, not based on filling out skills.
Knowing this, I am unsurprised to see that another group also involved in startups, venture capitalists, make co-investment decisions based on homophily. Abstract from a new paper by Paul Gompers, Vladimir Mukharlyamov, and Yuhai Xuan:
This paper explores two broad questions on collaboration between individuals. First, we investigate what personal characteristics affect people’s desire to work together. Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance. Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions. We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously). Moreover, frequent collaborators in syndication are those venture capitalists who display a high level of mutual affinity. We find that while collaborating for ability-based characteristics enhances investment performance, collaborating for affinity-based characteristics dramatically reduces the probability of investment success. A variety of tests show that the cost of affinity is not driven by selection into inferior deals; the effect is most likely attributable to poor decision-making by high-affinity syndicates post investment. Taken together, our results suggest that non-ability-based “birds-of-a-feather-flock-together” effects in collaboration can be costly.
The key finding here is that investing based on affinity with the co-investing VC correlates to poorer investment performance. I think the methodology developed by Gompers et al. would be interesting to apply to startups to see if their survival (and/or other performance measures) relates to the affinity/homophily of founders. It's easier for a startup to fail and disband than it is to get out of an investment deal, so I don't think the two are directly comparable in this sense. My guess is that there are differences among homophilous versus non-homophilous teams on survival rates and growth in the early stages (first five years?), after which the differences diminish. I've seen research on homophily and turnover within the startup team (e.g. The Founder's Dilemmas) but not on performance outcomes.
Does anyone know of a dataset on founding teams that contains the names of previous employers and degree-granting institutions for each founder?
I don't know of a dataset with this info. However, one way is to ask the founders of the Startup Genome Project. They may be able to benchmark the 10,000 startups on this criteria.
Posted by: Carlos Tobin | June 18, 2012 at 07:33 PM