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Aileen Lee’s popular article on “unicorns”—startups with billion-dollar or more valuations—uncovered a number of potential signals for identifying successful founders. Based on her findings, founder age, experience, and prior working relationships all could be indicators of future success. One of the strongest and most concrete potential signals is where founders were educated, and particularly, whether or not they went to Stanford—a third of the 39 unicorns were founded by Stanford graduates.
This observation raises an interesting question: Are Stanford graduates better investments than other founders? While Lee’s article provides a strong piece of evidence that they are, three questions need to be answered before drawing that conclusion:
The answers to these questions indicate that Stanford founders do typically perform better, but they also cost more. For large investors who can afford higher prices and some misses in order to find a few unicorns, investing in Stanford graduates may be a good idea. For smaller investors who can't rely on returns from a few outliers, the price may not be worth it.
- Are Stanford founders responsible for more unicorns because they’re better founders, or because they start more companies?
- Unicorns are extremely rare. Is Stanford’s strong performance in this exclusive club just noise, or do most Stanford startups fare better than other companies?
- If Stanford companies are more likely to succeed, do Stanford founders command higher prices from investors—and if they do, does that price outweigh the higher expected return?
1. Do Stanford Grads Start More Companies?
According to data provided by CrunchBase, by (very) rough estimates, Stanford appears to graduate a disproportionately large number of startup founders. The gap between Stanford and other schools, however, isn’t large enough to explain the gap in unicorns, suggesting that companies with Stanford founders may indeed be more likely to found a unicorn.
The graph below shows the approximate number of CrunchBase founders from each school mentioned by Lee (Stanford, Harvard, Berkeley, MIT, Cornell, Northwestern, and Illinois) and three other top schools (Princeton, Yale, and Duke).
Importantly, this shows the number of founders, not the number of companies founded. However, if we assume that founding teams from different schools are roughly the same size (which seems plausible) and that founders start the same number of companies (perhaps less plausible), then this provides a decent approximation of the relative number of companies with founders from each school.
2. Are companies started by Stanford grads more successful?
Though defining a startup as a success or failure is difficult, a couple metrics are generally applicable. First, raising additional funding rounds indicates that a company has found a market and is growing. Notably, there are exceptions to this. GitHub, for example, was already a very successful business prior to raising its only funding round from Andreessen Horowitz. Cases like this are rare, however.
By this metric, Stanford grads tend to more successful than other founders.
Company exits provide a second indicator of startup success. By this metric, Stanford graduates also tend to perform well. Compared to companies started by other founders, Stanford companies are acquired twice as often, IPO five times as often, and are flagged as “closed” half as often (though it should be noted that there are likely a large number of companies that are no longer in operation but are not marked “closed” in the CrunchBase database).
Furthermore, Stanford acquisitions are typically larger. Of companies that were founded after 2003 and have been acquired for known amounts, those with Stanford founders sold for an average of $285 million and a median of $104 million. For other companies, the average sale price was $175 million and the median was $76 million.
Importantly, while this data does suggest that Stanford companies fare better, it doesn’t necessarily imply that Stanford graduates are better founders. If Stanford founders are perceived as superior—which is likely a common perception, given the data above and articles like Lee’s—then they may be less scrutinized by investors or be seen as better acqui-hire targets. In other words, if two founders presented the exact same company with the exact same metrics, investors or buyers may favor the Stanford founder. Biases of this nature has been noted in other areas of the tech community (gender bias in hiring, for example), and seem quite possible here....MORE, including the key question "Are they worth the money".
