Advanced Degrees Correlate with More Funding and Better Returns for Startups

Research by Collin West and Gopinath SundaramurthyIn our previous report, we discussed the impact of graduate education on executives at startups. The results showed that 55% of all startup executives hold advanced degrees, and 70% of startups have at least one C-level executive with an advanced degree.Next, we turned our attention to examining the differences in funding and returns for startups based on the education level of their executives.As with the previous paper, the Kauffman Fellows Research Center analyzed the data for 90,000 U.S. venture-backed startups, including 419,000 startup roles going back to 2001.Key Takeaways

• Startups with at least one C-level executive holding an advanced degree had median funding rounds that were much larger than those of their counterparts.
• Such startups also had median returns that were double those of firms with no C-level executives holding advanced degrees. 

Executives with Advanced Degrees Raise More FundingThe data show that the education level of C-level executives correlates with a company’s ability to raise money, grow, and reach a successful outcome. Figure 1 below shows the median amount raised in rounds of $2M or greater. Note that we reference the median, not the average, to remove the effect of outliers.

Figure 1. Impact of startups with at least one C-level executive holding an advanced degree on amount raised, by round type. Figure 2. Difference in amount raised by startups with at least one C-level executive holding an advanced degree versus startups with no C-level executives holding advanced degrees.Startups with at least one C-level executive holding an advanced degree were able to raise $5.6M in their Series A financing compared to $5.0M for firms without any C-level execs holding advanced degrees (Figure 1). In later stages, the difference becomes more pronounced.Figure 2 shows that by Series D, startup teams with at least one C-level graduate education have historically raised 33% more funding: The median amount raised for startups with at least one C-level executive holding an advanced degree was $20M compared to $15M for startups without any advanced degree-holders at the executive level.This trend holds true across all industries, but its effects are concentrated. Across all 4 rounds of fundraising, C-level graduate education in the consumer services and computer science industries resulted in 55% and 80% more money being raised, respectively, by firms with at least one C-level graduate education.Executives with Graduate Degrees Have Better Exits and Higher ReturnsLastly, we took an in-depth look at the exits and realized multiples (RMs) of these startups.When companies fail, they obviously provide a poor return. When a startup succeeds, it typically exits via acquisition (often at a positive return, but this can vary) or IPO (initial public offering; almost always at a positive return, particularly for early-stage investors).As such, we have segmented startup exits by the education attainment of the C-level execs.To be counted in our analysis, a company had to have a completed acquisition or IPO. As such, the returns measured are higher than typical industry returns, because companies that were not successful (e.g., bankruptcy or dissolution) were excluded from this analysis.

Figure 3. Distribution of exit types for startups with at least one C-level executive holding an advanced degree (acquired, IPO, closed). Figure 4. Median RM for firms with C-level graduate versus undergraduate education. Figure 5. Difference in median RM for startups with at least one C-level executive holding an advanced degree versus startups with no C-level advanced degrees.Figure 3 shows that 75% of acquired startups and 84% of IPO startups had at least one C-level executive with an advanced degree. Firms that failed or closed had the overall lowest percentage of graduate C-suite education, at 66%.The median realized multiple (RM) for successful exits at startups with at least one C-level executive holding an advanced degree was 2.2x, compared to 1.1x for startups with no C-level advanced degrees (Figure 4).The differences are even more distinct when evaluating average RM: a 2.8x RM for startups with no C-level advanced degrees, versus a whopping 7.8x RM for startups with at least one C-level executive holding an advanced degree.“It’s especially interesting to see what happens by Series D [Figure 5], and that funding trajectory can trend with education,” commented Sameeksha Desai, Director of Knowledge Creation & Research at the Ewing Marion Kauffman Foundation. She suggested that “it’s worth asking what explains these trends, and if it’s the graduate education itself or what might come with it, like social networks—or some combination of direct and indirect factors.”Conclusion and DiscussionWhile our first article explored the difference in education level, we wanted to take that research a step further by analyzing median round size and returns on investment according to education level.Our data show that venture funds invest up to 33% more in companies with at least one C-level graduate executive (Figure 2). These companies also realize significantly higher returns on positive exits (Figure 4).Furthermore, we believe that graduate degrees, particularly from top schools, may lead to stronger professional networks. Such networks may also make it easier for startups with at least one C-level graduate executive to hire talent and access venture investors.

MethodologyAll the data used in the development of these charts and insights were obtained from Crunchbase private-market data. Analysis specifications include the following.

• Venture rounds between 01 January 2000 and 31 December 2018 were included.
• Executives with titles including “ceo,” “cto,” “cfo,” “cio,” “chief,” “coo,” “cro,” “president,” “co-owner,” and “cdo” (case insensitive) were included as “c-level”.
• The start group classification was based on the segment description listed in the dataset.
• College degrees were manually curated and classified based on the number of years and requirements for the degree. People with multiple degrees had those degrees ranked, and the top one was selected.
•  The classifications of degrees used in this study include the following:
• Undergraduate degree or less: including classifications such as high school, certificate, diploma, bachelor’s 
• Graduate degree or higher: containing degrees such as MBA, master’s, doctorate/doctoral, physician, law degree, and other graduate degrees.
• Education subjects, like degrees, were also manually curated and classified into large buckets like “engineering,” “business," “science,” or “other,” based on the subject type listed under each person’s education. Subjects for the top degrees for each person were used. A few examples are listed below:
• Engineering: computer engineering, chemical engineering, information technology, mechanical engineering
• Business: business, business administration, marketing, business management, international business, finance 
• Science: genetics, physics, mathematics, psychology, biochemistry, medicine, molecular biology, pharmacy, neuroscience
• Firms with at least one C-level executive holding a graduate degree are referred to as Graduate C-Suite Firms;
• Firms with all C-level executives holding a bachelor’s degree or lower are called Undergraduate C-Suite Firms.
• Returns on investment (Realized Multiple or RM): Analysis examined companies that publicly reported (a) the post-money of their most recent raise and (b) the amount of their exit, such that it was possible to calculate the RM. Data that could be confirmed was used; numbers were not editorialized.
• Realized Multiples were calculated for startups that had “generally positive exits.” These firms were identified by merger and acquisition rounds or IPO. Firms with other operating statuses were excluded from the RM analysis. For selected firms, the RM was calculated using the money raised and the post-evaluation, including the dilution that occurs in each round.
• Disclaimer for data: Crunchbase’s dataset is constantly expanding, but there are gaps. A company may not have all the founders and “chiefs” listed on its Crunchbase profile or have the complete details regarding an executive’s education listed in detail.