Pedigree Capital
Pedigree Capital is the value placed on a person or team whose prior experience and education are seen as kinetic potential for starting a company, but this perception can also create structural barriers for communities who have been historically excluded from these networks. – Jen van der Meer, 2021.
Pedigree Capital vs. financial capital
Pedigree capital is not financial capital. It is social capital. Pedigree Capital is a concept that describes the value investors and technology media place on certain schools and technology companies as proof that a person or team can deliver high-growth future returns. A person with a graduate degree from Stanford or MIT may be able to raise $6-7 MM without any evidence of revenues or business model for their technology idea, while a person with a community college degree who has $6 MM in revenues may struggle to get any meetings with angel investors.
Exclusive Selection
Pedigree Capital founders have already passed highly exclusive processes when they were admitted to the university, hired by the early-stage tech company, or selected by a competitive incubator.
Networks of Value
Pedigree Capital is not embedded in the degree itself. Investors believe a person who has received a computer science degree at a leading university, or who has worked in a fast-growing successful tech startup, has the social network to hire, fundraise, and attract customers of a higher caliber. Also included in the mix are Incubators and accelerators with track records of companies that later received high valuations like Y Combinator.
If you are outside of these systems, then you have to develop networks on your own, which can be time-consuming and challenging. You can quickly view a startup’s Pedigree Capital value by looking at the logos presented on their team page, or their Twitter bios, which may take the form of “Stanford, ex-Google, Uber-early-days” to signal the value of these networks.
A person’s pedigree alone does not instantly result in a high valuation for their startup idea. They also need to have a convincing narrative and team members with technical capability. But a person who learns and works within these tech-centric systems is trained on how to tell their story convincingly to investors, and how to evaluate and develop market-edge technical solutions.
Pedigree Capital vs. Bootstrapping
Founders are often advised to start with their own resources and with what they have. Founders without resources may be encouraged to bootstrap – a term that is certainly fraught with images of Horatio-Alger-era “pull yourself up by your bootstraps” mythology which has come to mean generating revenues directly from customers before you raise money from investors. This is often the only path to starting a company as most types of capital require evidence of revenues or profit to be considered for bank and personal loans, revenue-based financing, or newer types of crowdfunded equity.
Instead, the lucky Pedigree Capital founder does not need to prove evidence of customer demand. They are often trusted with capital that funds their exploration of the technology idea and discovery of customers and product-market fit. A person with Pedigree Capital may be able to raise substantial funds, all while maintaining ownership of their company if they start with highly credentialed degrees or prior tech firm experience.
Example Organizers of SIBs
ex-Apple | ex-Google | ex-Uber | Berkeley | MIT | Stanford | YCombinator
Is Pedigree Capital the right capital for your business at this stage?
RECIPIENT PERSPECTIVE
Benefits
- Having the right pedigree gets you favorable valuations and better terms
- Signal to investor markets that you can recruit from pedigreed networks
- Can raise capital ahead of proving customers will pay revenue
Challenges
- Many from pedigreed networks follow a default path without questioning how they want to build a company and may regret the decisions made
- Starting a company is still an extremely high-risk activity, and pedigreed founders do not show higher rates of success
- People may be pedigreed in name alone, and their credentials may not necessarily translate into actual skills
Key Performance Indicators
- Grad Year: Pedigree Capital has a shelf life within a range of time after graduating while their networks are still active and relationships still strong
- Vintage Year: Those that were there in "early days" of famous tech companies have greater value than those that joined later
CAPITAL GIVER PERSPECTIVE
Benefits
- Easy to justify why you invested if anyone is evaluating your decision
- Investing in Pedigree Capital gets you more access to more Pedigree Capital as you build your own networks as an investor
- Leverage tight networks to vet the reputation of the pedigreed founders
Challenges
- Lack of diversity when investment highly values certain programs and tech firms
- Group think: when founders just rinse/repeat prior cultures and fail to develop unique company culture
- Imitations: Pedigree Capital founders often copy each other's concepts which limits the variety and creativity of innovation
Key Performance Indicators
- Comparative valuation of companies from founders of Berkeley, Stanford, and MIT.
- Ditto - from founders who were early days at tech companies.
When it Works Well
Speed of Transaction
A Pedigree Capital founding team can quickly execute a seed round of funding in a matter of days or weeks if they are tapping angel investor networks directly from their universities or former companies.
Good Reputation
Listing the university or company logo does not equal resulting Pedigree Capital. If you are accessing angel or VC investors who are also tied into those social networks, they may call around to check up and you to learn about your reputation. If you have a terrible reputation your credentials cannot protect you and you may not receive any funding from people in that network.
Business Model Options
Pedigree Capital founders are not narrowly constrained to business models that generate revenue in the short term, like software-as-a-service or consulting. They can spend their funded exploration time to experiment with new models that may not generate substantial revenue upfront, or they may choose to subsidize a starter business model or free user experience in order to invest in a data analysis pipeline that would unlock business models in the future.
Exploration Time
Pedigree Capital founders are given exploration time. They can often raise capital for the very purpose of exploring the customer, the product, the proposition, the market, and the business model. These founders do not have to spend their days squeezing customers for short-term revenue. They can build products, pilots, and data pipelines first, and then adjust as they bring their technology to market.
Challenges with Pedigree Capital
Mimetic Competition
Failure of imagination. Pedigree Capital cultures are mimetic, in the words of René Girard, a Stanford Professor of French. People are social and their behavior is based on imitation, and envy and resentment are the consequence. Pedigree Capital is a type of culture, and founders are often encouraged to start different variations on the same thing. The result is a highly competitive startup ecosystem with many of the same ideas.
Overpriced Valuations
In bullish markets, Pedigree Capital founders are often sought after by many investors and even later stage investors may extend capital to the earliest stage. This results in valuations at the high end of an already inflated market.
Premature Scaling
If the Pedigree Capital founders are encouraged to take substantial rounds of capital before finding product-market-fit, this can result in wasted time, energy, and resources as money is spent to scale a company before figuring out their product and customer.
Systemic Racism
In the US, only one percent of funding goes to Black founders. It appears that early-stage equity investing suffers from systemic racism: the system of structures, procedures, and processes that disadvantage Black Americans. Pedigree Capital can help explain why Black VCs themselves have trouble increasing the ranks of black founders, with reduced access to capital, fewer black people working in early-stage tech or attending pedigreed schools. For the tech industry to confront systemic racism, it will have to challenge the unspoken reality of Pedigree Capital.
Trends in Pedigree Capital
Borderless Capital
Prior to COVID19 top-tier venture firms and angel networks privileged founders who would start or move their companies to the Bay Area. Now that we have developed confidence in our ability to work collaboratively remotely, the actual location of the founding team is less of a pre-requisite. However, this may mean that Pedigree Capital has even greater signal value now that anyone around the world can become eligible for funding.
Emerging Regional Hubs
When a region reaches a certain number of large-scale tech companies with great than $1 BN valuations (also known as unicorns), the region attains a type of Pedigree Capital status. Currently, Sweden is a Nordic country with the greatest density of unicorns, which means that any new company arising from Sweden may receive a higher valuation than neighboring Norway or Findland based on the strength of the networks that have been built among the different large scale tech firms.
Data-Driven Deal Flow
A few venture firms are aiming to reduce the bias in their venture deal flow processes using AI methods or other data-driven methods to evaluate direct app or website usage statistics or subscription revenue to find “diamonds in the rough.” These methods are designed to seek out companies who may not have signaled any Pedigree Capital but who managed to build useful technology anyway.
Before You Consider Pedigree Capital
- Decide if you want to play the game and improve your odds by working for a name-brand tech company or getting that degree from Stanford.
- Alternatively, you may want to consider a co-founder who brings Pedigree Capital.
- Better yet, you could start your company through customer-financed revenue and hire skilled people to work with and for you.
Exploring Pedigree Capital
- Ask what the average valuation of a newly formed tech company from your alma mater is. This is the basis of your Pedigree Capital valuation.
- Many successful founders did not go to Stanford, they just went to their local state schools. Proceed anyway with your plans to start a company.
- Whenever and wherever you can, develop relationships with communities of people who have been historically excluded from Pedigree Capital companies and institutions. Co-found and cognitively and culturally diverse teams of people.
Discover Alternative Capital
There is real financial capital available to you even if you do not fit the common pedigree mold. Compare to Grants and Other Types of Capital. These capital types each represent one way to grow your company, and you can choose other capital types as an alternative or pair and combine at different stages of your business. Consider these alternative capital sources or explore our Capital Library.
