Recent Harvard research showed that VCs tend to be more successful if they were previously a founder themselves, with this boost typically because their experience means they add more value after they invest in the firm.

This underlines the importance of human capital to the success of a startup, but a second study, from Rice University, shows how difficult it is for VCs to accurately gauge the merits of a founding team. The researchers examined the factors behind early-stage investment decisions, and ultimately the long-term success of the startups. The researchers were particularly interested in the expertise of the founders and how they chose to present themselves.

Data was collected from LinkedIn to gauge the experience and self-reported skills of the founders of over 4,000 startups. The actual expertise was then gauged by looking at the past experience of the founders, and especially any managerial experience or technical education they had. They then utilized the “Skills and Endorsements” section on LinkedIn to understand the signals founders wanted to give off to potential investors.

Last, but not least, the researchers examined the short- and long-term success of each firm via the funding raised and whether there was a successful exit or not, whether by IPO or acquisition.

Detached from reality

The analysis showed a clear detachment between the skills founders projected they had and the skills they actually had. This matters, as actual skill levels were strongly linked with successful exits, but interestingly, not with funding, which was far more closely correlated with the expertise signaling made by the founders.

This doesn’t make comforting reading for investors, who presumably believe they’re making investment decisions based on the actual skills and experience of founding teams, when the reality suggests they’re far more swayed by the self-presentation of the founders. This is especially important during early-stage investments as due diligence is often far less than in later stages.

For founders, however, it clearly shows the importance of being able to communicate your skills and experience effectively, even if those skills aren’t particularly reflective of reality. This is especially important as the study suggests that often those with the best skillset fail to communicate that fact effectively enough.