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Raising Venture Capital II: Does it Pay to Be Privileged?

Having studied a lot of social history at school and university, I find the topic of class fascinating. It’s a real taboo subject in the UK in particular, and as much as we might love or loathe its existence, it’s intrinsically woven into Britain’s past, present and future.

Here, I aim to grapple with this taboo head on and share my take on whether it really does pay to be privileged when it comes to raising venture capital.

I also want to discuss what a startup founder can do to alleviate some of the disadvantages or stigmas that can come from having either a privileged or less privileged background when it comes to the fundraising process.

And, by privilege, I refer to a privileged upbringing, education and / or career. A broad socio-economic definition, if you will.

My story

From a personal point of view, I arbitrarily see myself as on the borderline of being privileged and not. I attended a ‘standard’ private school in the Midlands (i.e. not Eton, Harrow, Uppingham etc.). For me, my school instilled in me one of the two key benefits to be had from attending a top school — it gave me self-confidence, but it did not necessarily yield the personal network that could propel me into a hotshot industry.

As an impressionable youngster, my first idea of entrepreneurialism came from Lord Alan Sugar, a self-professed ‘cockney lad’ and (until recently) Labour supporter. Through my school years, I thought entrepreneurs were swashbuckling mavericks who simply tore up the rule book and stuck their fingers up at the old class system. The realm of startups and entrepreneurs seemed one where the Great Chain of Being didn’t apply.

But, as I went through university, I admittedly became more cynical. I realised that you can’t simply ride along on the back of an incredible innovation, but that you also need cash and contacts. Startup success stories, such as Facebook and Google, are awash with beginnings at the great Ivy League colleges. Although the US class system differs from the UK, the typically inhibitive cost of these US colleges leaves a prevailing odour (to an outsider, at least) of upper middle class affluence.

On the other side of the fence, as I was leaving university, I wanted to get into the investment industry but thought that my lack of connections might rule me out. However, it turned out that my partner’s mum (not an investor but an oncologist) indirectly knew an industry bigwig and very kindly helped me get my foot in the door, by teeing up two weeks’ work experience at a large asset management firm.

The message here is that you are likely connected with someone relevant, however tenuous that connection might be, and that people are willing to help more often than not. Even if your own family and friends are less connected than a hermit, there’s always someone.

In large part because of this random connection and consequent work experience, I managed to land a graduate job in private equity. But it also helped that I was slightly less polished than my peers; it gave me a point of difference.

Funnily enough, subsequent to moving into private equity, my then-colleagues told me that getting a job in VC relied on knowing a VC. So, a role in VC always appealed but I have never actually applied for a single role in the industry as I didn’t think this was an avenue open to me. Fortunately, I was headhunted for the role at True out of the blue. I was in the right place at the right time, and managed to take the opportunity when it came along. And, since I joined, I’ve found that VC can be a very meritocratic and diverse industry.

Correspondingly, my perception of whether a privileged background plays a significant role in building a startup and raising venture capital has been moderated.

Although a large contingent of ‘unicorn’ founders come from relative privilege, this is by no means a rule of thumb. There are many who came from ‘normal’ backgrounds, such as The Hut Group founder, Matt Moulding, whose parents were a tarmac contractor and antiques trader.

However, it’s important to note that there is a dearth of startup founders from around the breadline. Unfortunately, there is no quick fix here — this particular problem can only be addressed through serious structural changes in education and other areas.

It certainly helps to be privileged for some parts of the fundraising process, but it can be a burden at others.

Below, I unpick my thesis behind each stage of the investment process and suggest ways a founder from either a privileged or unprivileged background could address some of the hurdles they face.

I have used a typical seed stage VC origination funnel to get to one investment, with my thoughts on where it’s a positive (green) and negative (red) to have a privileged upbringing.

So, what do these numbers mean? Let’s use some ‘back of the hand’ maths here. Overall, a startup who applies to a VC for seed funding has broadly a 0.20% chance of receiving funding (yikes!). These numbers do, of course, fluctuate between funds.

If we take founders from privileged backgrounds: let’s say they have a 40% advantage vs. the average founder at the application phase in terms of getting through to a first meeting. But then, my reckoning is that they might have a 10% disadvantage at both meetings 1 and 2. This means that ‘privileged’ founders might have a 0.23% chance of investment, a marginal leg up on the rest of the field.

Although class and professional background does play a part in raising funds, I truly believe that social mobility is more achievable in the startup space than in many other walks of life.

Pre-application

By ‘pre-application’, I mean the period of time from conceiving the idea for a startup right up to going out to seek venture funding.

This stage doesn’t directly relate to raising venture capital, but I thought worth covering here.

‘Privileged’ founders can have a significant advantage at this stage. Setting up and running a business is expensive and there is rarely any revenue at all at this embryonic stage to balance the books. As a result, it’s common for many founders not to take a salary until they at least finalise their first funding round. And the cost of working for free is becoming increasingly expensive, as living expenses in startup hubs such as London and San Francisco soar.

Founders with wealthy backgrounds are likely to have friends and family who can support them at this difficult time. Conversely, for less privileged founders who have little or no financial resources to draw upon, this stage of a startup’s life can be fatal.

Application

Founders from elite backgrounds can often be at a significant advantage at this stage of the investment process, as being well-connected can play a large part in breaking through the application phase, which is where most applications fall by the wayside.

As I touched on earlier, I think connections are one of the main benefits of going to a top private school.

Although the vast majority of VCs do look at every application they receive, every VC in London and elsewhere is more likely to take a meeting if they or someone in their team knows the founder in question. This phenomenon is driven by several factors — for one, most people are naturally inclined to want to help people they know. Also, being a VC is largely about extracting value from your network (it sounds cold, but it’s true) and scratching the back of someone well-connected can help realise this value in some shape or form from somewhere else in the network.

You don’t necessarily have had to attend a prestigious school to have a good network. Universities are also a great place to build these, although the sharp rise of fees and high student loan interest rates have dampened UK universities’ inclusivity — students whose families can stump up for tuition fees up front will likely pay far less in total over the long term than students who have to take out a loan and repay both the loan principal and (in my view) extortionate interest rates over time. For clarity, students now repay 9% of any earnings above £25,725. For many earning little over £25,000 salary (or even a fair amount over in some cases), this effectively becomes an additional tax until the loan is written off some 30 years down the line. Many are in a situation where their repayments are not even covering the interest that is accruing. I’ve done the maths on the compounding effect of student loan interest and it’s frightening.

Post-university, I’d urge founders and prospective founders alike to attend relevant networking events. I find eventbrite a great resource for industry events — think demo days, investor coffee mornings, themed panels etc.. Through this medium, I meet people all the time who are either considering starting a business or are in the early stages of constructing one. Establishing relationships, even if I’m not the right VC for your business, is crucial at this stage. And I am much more likely to want to help these people than someone who has reached out to me cold on LinkedIn.

As mentioned above, it’s also worth thinking about any tenuous connections to be had from your existing network, even if your direct friends and family cannot help. Think friends of friends of friends.

1st & 2nd Meeting

This is where I think ‘privileged’ founders are at a disadvantage for a number of reasons, although there are subtle things that can be done to negate these disadvantages.

Firstly, a common scenario is that a VC analyst or associate is corralled into take a meeting by a partner, if the partner knows a startup’s founder. Although the analyst / associate will of course take the meeting, this dynamic can set the meeting off on the wrong foot. And, although it may not be the analyst / associate making the ultimate decision, you can bet that an investment won’t happen if the analyst / associate doesn’t come out of the first or second meeting feeling pumped about the founder and company they’ve just met.

A great way to avoid this scenario (particularly, if you know the meeting has been ‘encouraged’ by the partner) is to be humble and to show a personal interest in the analyst / associate you’re meeting with. Whatever you do, don’t make them feel like you’re only interested in talking to partners.

Much like a VC should take an interest in your background, ask the analyst / associate a bit about themselves before getting into the nitty gritty.

The second issue to overcome is that most VCs love to see a founder who has come through adversity and is seeking to fundamentally change the world as a result of their experiences. Pain, or even discomfort, is a prolific driver of success. This might sound a bit fantastical, but I’m not necessarily thinking about some Hollywood story of pain and redemption. Pain / discomfort doesn’t have to be extreme. It can simply be a specific pain point you faced in your previous career that you want to alleviate, for example. But if you’ve grown up with a silver spoon in your mouth and never faced any challenges in your life, how will you have the required hunger to change the state of play?

For me, this is a huge societal misconception that wealth / privilege equals happiness. But, unfortunately, it’s often the best proxy we have.

So, if you’re a founder from a privileged background, bring out what drives you, what makes you uncomfortable, what struggles you may have faced in your life. You may be at a significant disadvantage here against fellow founders from less privileged backgrounds if you do not manage to articulate this.

Due Diligence & Investment

I believe that, viewed in isolation, it’s an even playing field at this stage of the investment process.

After a couple of meetings, a founder will typically receive a data request and the VC will also do its own internal due diligence.

A VC will form their views on the founder(s) during the first couple of meetings. By the time it rolls into what we call ‘serious’ due diligence, I don’t think the background of the founder plays a part. It’s all about team (skill set, not background), traction, market size, competition, etc. rather than who you went to school with.

Summing Up

Overall, I believe that coming from a more elite background is marginally beneficial when it comes to raising venture funds. However, the story is much more nuanced than I thought, even as I started to think about writing this blog.

If you’re ‘privileged’, the number one thing to do is show investors that you do not live a life of caviar, croquet and contentment. Draw out what drives you and why you want to change the state of play. And, while you’re at it, be humble and don’t only switch on for partner-level meetings; it’s the VC analysts and associates that can often be the real kingmakers.

For less privileged founders, work on building a network. Attend industry events and spend time mapping out your current contacts to see if there are any connections to be had, however tenuous. While it can feel awkward to ask people for introductions, most want to help.

Ultimately, whatever your background, attend events and build face to face relationships; don’t be a slave to your screen.

These tips aren’t silver bullets, but they might help to further social mobility in our industry.

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True is Europe’s only retail and consumer sector specialist, that operates across the entire investment vertical. Future-focused, we are exposed to exciting startups and established companies. We invest in disruptive technologies, products, businesses and teams.

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Taos Edmondson

Consumer sector VC and operator. Stoke City lover. The Stage founder.