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Key Takeaways

• Entrepreneurial experience can give future investors practical insight into the challenges founders face when building and scaling companies.
• Successful former founders may bring transferable skills, networks, and operating knowledge that can help them evaluate and support portfolio companies.
• Experience with uncertainty can help former entrepreneurs assess founders based on their adaptability, resilience, execution, and ability to respond to setbacks.
• Former entrepreneurs can provide value beyond capital by connecting portfolio companies with talent, customers, experts, and other useful resources.
• Successful founder-investors must balance their experience with humility and recognize that past strategies may not apply to every market or company.

Building a company teaches lessons that are difficult to absorb from the outside. Founders have to decide which ideas deserve resources, hire people before every role is clearly defined, persuade customers to try something unfamiliar, and make decisions when the available information is incomplete. Even successful businesses produce plenty of mistakes along the way.

Those experiences help explain why the transition from entrepreneur to investor is so common. After spending years trying to build companies themselves, some founders eventually begin putting their capital and experience behind other entrepreneurs. The work changes, but many of the questions remain surprisingly familiar.

Technology entrepreneur Sky Dayton offers one example of that progression. Best known for founding EarthLink, Dayton later became an investor and venture partner. His path resembles that of other technology founders who eventually moved into investing after accumulating years of experience building and operating companies.

Research suggests this crossover is more than anecdotal. A National Bureau of Economic Research study examining venture capital data from 1990 through 2019 found that nearly 7 percent of venture capitalists had previously founded a venture-backed startup. The researchers also found important differences in investment performance depending on the founders’ earlier entrepreneurial outcomes.

The appeal of the transition becomes easier to understand when considering what entrepreneurs learn while sitting on the other side of the table.

Experience Changes What You Notice

An investment opportunity can look compelling in a presentation. The market is large, revenue projections rise neatly, and the strategy appears straightforward. Anyone who has operated a growing company knows how much complexity can sit behind those slides.

Hiring a strong team may take longer than expected. A product customers claim to want may prove difficult to sell. A seemingly small operational problem can consume weeks of management attention. Competitors can change direction, suppliers can fall short, and promising partnerships sometimes disappear.

Former founders have encountered some version of these problems themselves. That doesn’t give them an automatic ability to predict which companies will succeed, but it can change the questions they ask.

Rather than concentrating exclusively on the size of a potential market, an operator may pay closer attention to how founders describe their customers or how realistically they discuss the obstacles ahead. Experience can make the mundane details of running a company seem more important, because those details are often where ambitious plans encounter reality.

Success Can Create Transferable Skills

Prior entrepreneurial experience doesn’t guarantee investment success. Research does, however, suggest that certain skills can carry over.

In their NBER study, Harvard Business School professor Paul Gompers and researcher Vladimir Mukharlyamov compared professional venture capitalists with former startup founders who became VCs. Successful founder-VCs had investment success rates roughly 6.5 percentage points higher than professional VCs who had not been founders. Former founders whose own startups had been unsuccessful, by contrast, had investment success rates about four percentage points lower.

The distinction is interesting because it complicates the simple idea that operating experience alone makes someone a better investor. Experience matters, but what someone learned from that experience appears to matter as well.

The researchers found evidence consistent with another advantage: successful founder-investors may contribute value after writing the check. They can draw on experience with customers, employees, fundraising, strategy, and organizational growth when helping portfolio companies work through similar problems.

That changes the investor’s role from simply selecting promising businesses to helping those businesses improve their odds after the investment has been made.

Founders Understand What Uncertainty Feels Like

Entrepreneurship involves making consequential decisions before all the evidence is available. Investors face a similar problem.

An early-stage company may have limited revenue, an unfinished product, or a market whose eventual size is difficult to estimate. Conventional financial analysis can provide useful information, but it can’t eliminate uncertainty when much of the company’s future still depends on execution.

Someone who has built a business may be more comfortable evaluating that ambiguity. Founders know that early plans change and that a company can encounter serious problems without necessarily being fundamentally broken. They have also seen seemingly minor problems become major ones when ignored.

This perspective can be particularly useful when assessing the people behind a company. A founder’s ability to respond to setbacks, reconsider assumptions, attract talented employees, and keep moving with limited resources can be difficult to capture on a spreadsheet.

None of those qualities eliminates financial risk. They simply add another dimension to how that risk can be evaluated.

Networks Travel With People

Entrepreneurs also accumulate something less tangible during their careers: relationships.

Building companies introduces founders to engineers, executives, customers, attorneys, recruiters, suppliers, bankers, other entrepreneurs, and investors. A network assembled over many years can become useful in an entirely different way once a founder starts investing.

A portfolio company might need an experienced executive, an introduction to a potential customer, or someone who has already dealt with a particular operational challenge. An investor with a deep network may be able to make that connection quickly.

This is one reason the value of an investor can’t always be measured by the capital provided. Two investors might write identical checks while offering very different resources afterward.

For entrepreneurs deciding whose capital to accept, those differences can matter. Money may be interchangeable in theory, but experience, judgment, and relationships usually aren’t.

Investing Offers a Different Kind of Scale

There is also a practical reason entrepreneurs may eventually gravitate toward investing. Building a company demands concentrated attention. Investing makes it possible to participate in the development of several businesses at once.

The shift changes the nature of the work. Instead of determining what one company should build next, an investor might spend a morning discussing hiring with one founder, an afternoon evaluating an entirely different market, and the following day considering a company at another stage of development.

For someone who remains interested in entrepreneurship but no longer wants to operate a single organization day to day, that variety can be appealing.

It also offers a way to remain close to innovation without always occupying the founder’s seat. Years of accumulated knowledge can be applied repeatedly across companies rather than primarily within one organization.

Knowing When Not to Intervene

Operating experience can create a risk of its own, however. Someone who successfully built a company may assume that methods that worked before will work again.

Markets change. Technologies change. Customers behave differently, and a strategy that made sense ten years ago may be poorly suited to a company today. Good investors therefore need more than experience; they need enough humility to recognize its limits.

That can make restraint particularly important for former operators. Their role is no longer to run the company themselves. The founder sitting across the table has information, responsibilities, and instincts the investor doesn’t possess.

The most useful operating experience may therefore provide context rather than instructions. It can help an investor recognize familiar problems, ask sharper questions, and identify risks without assuming there is only one correct response.

From Building Companies to Backing Builders

The movement from entrepreneur to investor makes intuitive sense because the two roles share a central challenge: both require forming judgments about an uncertain future.

Founders make those judgments from inside a company, committing time, capital, and effort to a particular direction. Investors make them across companies, deciding which teams and ideas warrant support and then determining when their involvement can be useful.

Prior success doesn’t guarantee that an entrepreneur will become a talented investor, just as investment expertise doesn’t require having founded a company. The evidence suggests a more nuanced conclusion. Certain kinds of entrepreneurial experience can produce knowledge and judgment that remain valuable when the role changes.

For founders who make that transition, investing can become less of a departure from entrepreneurship than a different way of participating in it. Instead of building every company themselves, they use what they learned from building one to recognize, support, and occasionally challenge the people building the next.

FAQs

Why do entrepreneurs often become investors?

Entrepreneurs may become investors after gaining years of experience building companies and developing valuable business judgment. Investing allows them to apply that experience to multiple companies while remaining involved in entrepreneurship in a different capacity.

Does being a successful entrepreneur guarantee success as an investor?

No, entrepreneurial experience alone does not guarantee investment success. Research suggests that the lessons and outcomes gained from previous entrepreneurial experience can influence how effectively someone performs as an investor.

What advantages do former entrepreneurs bring to investing?

Former entrepreneurs may understand operational challenges, hiring, fundraising, customer acquisition, strategy, and organizational growth from firsthand experience. They may also bring valuable networks that can help portfolio companies find talent, customers, partners, or expertise.

How can former founders help the companies they invest in?

Founder-investors can provide more than financial capital by offering advice, making introductions, and helping entrepreneurs navigate challenges they have encountered themselves. Their operating experience may help portfolio companies address problems and improve their chances of success.

Why is humility important for entrepreneurs who become investors?

Strategies that worked for a former founder may not work in different markets, technologies, or business environments. Successful investor-entrepreneurs therefore need to use their experience as context while allowing current founders to make decisions based on their own circumstances.