Starting a business requires pedigree in Silicon Valley

Despite the image that is promoted in Silicon Valley, a good idea may not be all a person needs to succeed. Connections and the right diploma are often essential for entrepreneurs

By Sarah McBride  /  Reuters, SAN FRANCISCO

Mon, Sep 16, 2013 - Page 9

When asked to name the most notable rags-to-riches entrepreneur that his firm has funded, venture capitalist Ben Horowitz did not hesitate: Christian Gheorghe, a Romanian immigrant who came to the US without speaking English, and rose from limo driver to founder of a business-analytics company, Tidemark.

It is an impressive tale that encapsulates the way Silicon Valley likes to think of itself: a pure meritocracy; a place where talent rises to the top regardless of social class, educational pedigree, race, nationality or anything else.

Indeed, the notion that anyone with smarts, drive and a great idea can raise money and start a company is a central tenet of the Valley’s ethos.

Yet on close inspection, the evidence suggests that the keys to success in the start-up world are not much different than those of many other elite professions. A prestigious degree, a proven track record and personal connections to power-brokers are at least as important as a great idea. Scrappy unknowns with a suitcase and a dream are the exceptions, not the rule.

An analysis of the 88 Silicon Valley companies that received “Series A” funding from one of the five top Valley venture firms in 2011, last year, or the first half of this year shows that 70 were founded by people who hailed from what could be described as the traditional Silicon Valley cohort.

That means the founders had held a senior position at a big technology firm, worked at a well-connected smaller one, started a successful company already or attended one of just three universities — Stanford, Harvard and Massachusetts Institute of Technology (MIT).

The analysis, which looked only at northern California companies funded by Accel Partners, Andreessen Horowitz, Benchmark Capital, Greylock Partners and Sequoia Capital, generally supports academic research showing that tech entrepreneurs are substantially wealthier and better educated than the population at large.

It also echoes the perception of even successful entrepreneurs who come from outside the preferred cohort.

Michal Wroczynski, founder of Fido Labs, believes coming from Poland cost him many extra months when he was fundraising late last year and early this year.

“It would be great value to be from one of the big universities with a big strong network,” he said.

There are, of course, plenty of stories of outsiders who climb to the top in Silicon Valley. Oracle Corp cofounder Larry Ellison grew up in middle-class surroundings in Chicago, and started Oracle with US$2,000, mostly his savings. Apple cofounder Steve Jobs grew up in Silicon Valley, but came from a working-class background.

In recent years, a new wave of start-up incubators — led by Y Combinator — have given entrepreneurs from varied backgrounds a helping hand, including advice, introductions and seed money. The incubators seem to find a broad range of founders.

“We connect a lot of previously unconnected startups,” Y Combinator cofounder Paul Graham said. “But a lot of the startups we fund are from Silicon Valley and are already well connected.”

Of course, well-connected people often merit every penny of their funding — after all, even connected people typically also need smarts and drive to get a prestigious degree or land a good job at a respected company.

However, venture capitalists emphatically reject the notion that connections count in the start-up economy, and dispute the study’s methodology in categorizing their investments.

“I don’t really think that a kid coming out of Harvard or MIT is actually well connected,” Horowitz said by e-mail, citing examples such as Facebook founder Mark Zuckerberg.

Though he attended Harvard, Zuckerberg was unconnected until entrepreneur Sean Parker sought him out and made Silicon Valley introductions for him, Horowitz said.

Attending a top school, or performing well at a hyper-competitive company such as Google, can serve as a marker that the person can compete globally, but it is not necessary to succeed, Horowitz said. Venture investors are backing people as much as ideas, he added, and thus have no choice but to insist that the entrepreneur have a certain level of qualification or reputation.

“When Andreessen came out of the University of Illinois, he didn’t know anybody, but people knew his work,” Horowitz said, referring to partner Marc Andreessen, who cofounded Internet pioneer Netscape Communications.

“Silicon Valley has this way of finding greatness and supporting it,” Greylock’s Joseph Ansanelli said. “It values meritocracy more than any place else.”

Still, unknowns from modest backgrounds, like Andreessen and Jobs, are relatively rare among today’s Valley start-ups. Much more typical are entrepreneurs such as Instagram cofounder Kevin Systrom, who followed a well-trod path from Stanford to Google to start-up glory.

Ross Levine, a professor at the Haas School of Business at the University of California, Berkeley, said people who found startups are more likely than salaried workers to come from high-earning, well-educated families.

As children, entrepreneurs lived in households where the average income in 1979 was US$88,711, compared with US$67,548 for the population as a whole, according to Levine’s study of the National Longitudinal Survey of Youth.

“Who’s going to be an entrepreneur?” he asked. “It’s going to be a rich person, to a much higher degree.”

Venture capitalists often say they look for companies via people they know; Sequoia partner Mike Moritz described that process in July when talking about the firm’s investment in grocery-delivery company Instacart.

“Like a lot of the investments that have come our way, a friend of a friend talked to us about it, and told us about it, and encouraged the founder and the CEO to come and chat with us,” he said. “One thing led to another.”

Those who successfully break into Silicon Valley say networking their way to that one introduction is critical.

Suhail Doshi, cofounder of analytics company Mixpanel, shows how it can be done. While a student at Arizona State University, he engaged an engineer at the start-up company Slide in a series of conversations on Internet Relay Chat, a message service favored by serious techies.

He parlayed that into an internship at Slide, which is run by angel investor and PayPal cofounder Max Levchin. After a stint at Y Combinator, he was able to raise more than US$10 million from top-tier venture capitalists. The relationship with Levchin, who also invested, was crucial.

“He’s a super awesome mentor to me,” Doshi said. “He’s been instrumental in every fundraising round.”

Levchin himself broke into Silicon Valley as a recent graduate of the University of Illinois in large part due to an encounter with entrepreneur and investor Peter Thiel. They went on to found PayPal.

“The founders, they just figure it out,” Ansanelli said about unconnected entrepreneurs. “They hustle, they network.”

Yet not everyone has to hustle in quite the same way. Brit Morin raised US$1.25 million for her craft-oriented Web site, Brit & Co, months after its 2011 launch, and another US$6.3 million earlier this year.

Investors included Founders Fund, which was cofounded by Thiel, an early backer of Facebook, where Morin’s husband Dave was an early employee. He later launched the social-networking site Path.

When asked whether her connections got her the cash, Morin said: “I don’t think any VC [venture capitalist] is going to invest in a company that doesn’t have a clear business strategy.”

The case of Gheorghe is also instructive. He immigrated to the US in 1989. By the time Horowitz met him, he had built a database-marketing firm and a predictive-analytics firm, both later acquired; worked as chief technology officer at software company SAP; and served as an entrepreneur in residence at white-shoe venture firm Greylock.

In other words, he was very much a known quantity.

The son of a Bucharest lathe operator, Gheorghe believes his first big break came from far outside Silicon Valley. While working as a limousine driver in New York in 1991, he told a client, Andrew Saxe, that he liked to code.

Saxe, who ran a marketing company, invited Gheorghe to come for a formal interview and hired him. Eventually, the two built software-marketing business Saxe Inc. Saxe died in 1999.

“The first venture investment was Andrew investing in me,” he said, adding he is not sure that would have happened so quickly in the Bay Area.

“I feel this expectation, that you have a certain background,” he said about Silicon Valley.

It is an expectation he did not feel in New York.