How Does a Founder's Alma Mater Impact Their Startup's Markup Rate?

The most prestigious universities in the U.S. produce many of the nation’s startup founders. This past year, Stanford, MIT, and Harvard had more founders who raised a private funding round of $1M or more than any other college in the nation, according to Crunchbase.

It’s easy to see why this would be the case—schools like Stanford and Harvard expose their students to an entrepreneurial culture and network of individuals involved in the world of startups and technology. Many students choose to apply to these schools for this very reason.

Stanford graduates (or, in some cases, dropouts) leave with plenty of access to venture capital, helping them to kickstart and scale their businesses.

But do startups founded by Stanford alumni—and alumni from other schools that produce many founders—present the best investment opportunities for VCs? If you consider the “best” investment opportunities to be the ones that produce the highest expected ROI relative to price, the answer may be no.

Evaluating Founders by the Markup Rate of Their Startups

To determine the colleges that produce founders whose startups generate the highest expected return relative to price on AngelList, we grouped founders by the college they attended and then evaluated their collective startups' markup rate over expectation—or “excess” markup rate.

What is Excess Markup Rate?

To understand excess markup rate, it first helps to explain how AngelList defines “markups.”

An investment in a startup on AngelList is considered marked up if the company does a priced equity round at a higher price per share in a future fundraise. Markups are a good indication of how a VC’s investment is performing.

As they mature, investments tend to have a higher rate of markups, and different investment rounds tend to be marked up differently (for instance, Series B investments on AngelList are marked up at a higher rate than pre-seed investments).

This means that for any portfolio of investments made at any time in the past, we can calculate the expected number of marked-up investments in that portfolio. This expectednumber of marked-up investmentscan be considered a “baseline,” derived from the more than 12k investments on the AngelList platform.

The excess markup rate of a portfolio can then be defined by the level of outperformance of that portfolio: the rate above the baseline rate of markups. It’s a useful way to measure investor expectations vs. reality in a way that’s significantly less susceptible to the skew of large outliers.

The markup rates for founder schools are stage-matched, meaning they’re compared to the average markup rate for the round they’re in (e.g., 50 Yale founders’ average seed round markup rate vs. the average seed round markup rate from thousands of AngelList deals) to get an apples-to-apples comparison.

Tracking markup rates allows us to start getting meaningful results after just one year, instead of waiting up to 10 years for an investment to exit. For this analysis, we looked at the excess markup curve for each school vs. its baseline at both 12 and 36 months. Then we averaged those numbers.

This approach gives us the following chart for investments in startups founded by Yale graduates. The purple line estimates the markup rate of Yale startups, and the orange line is our baseline for stage-matched investments across the AngelList platform. Yale startups roughly match the baseline rate of markups for the first two years of an investment, after which they begin to outperform the baseline.

The baseline markup rates for any month are slightly different for each school, since AngelList’s portfolio of investments in startups founded by each school’s alumni differ. As previously noted, a school that happens to have 25 pre-seed startups will have a different set of baseline results compared to a school with 25 Series B startups.

To reduce small sample size effects, only schools whose alumni founded at least 25 startups in our dataset were considered. Our baselines come from more than 12k investments tracked on the AngelList platform from inception to exit (or, as is the case with active investments, from inception to the present).

The Results

Given this context, we found the average excess markup rate for startups founded by University of Washington alumni at 12 and 36 months was 21.1% higher than the baseline. This was the highest positive outlier of any group observed in our dataset.

The next closest was the University of Waterloo (13%), Brown University (11.5%), and Columbia University (10.9%).

Meanwhile, the excess markup rates for startups founded by Harvard, Stanford, and MIT grads came in at +7.5%, +4.7%, and +2.9%, respectively (Stanford Graduate School of Business founders had a markup rate of +6%).

This chart summarizes the rate of excess markups for each school by averaging the observations at 12 and 36 months

While many of these schools are among the best in the world, it may be surprising to some to see schools like Stanford and MIT placed behind institutions that aren’t known as prominent founder schools (Washington ranked 19th in Crunchbase’s study).

Does this mean the “best” investment opportunities come from startups founded by University of Washington alumni? Or is something else at play?

Higher Initial Valuations May Be Stunting Markup Rates

Expectations for startups founded by Stanford, MIT, and Harvard graduates are very high. Total capital raised by startups founded by Stanford graduates between 2006-2020 was $47.8B, the most of any cohort during that period.

Our analysis found that a high-valued seed-stage startup is far more likely to come from a Stanford founder than a University of Washington founder. But aggressive seed rounds can sometimes make it more difficult for these companies to receive large markups by future investors—hence the lower average markup rates.

This isn’t to say Stanford founders produce less successful startups than founders from other schools. Startups founded by Stanford alumni make up an outsized portion of startup success rates because of their higher valuations. The lower markup rates are indicative of founders from universities like Washington and Waterloo being unable to get high initial valuations on their startups, relative to startups founded by Stanford and Harvard alumni.

Ali Tamaseb, author of the book “Super Founders,” in which he performed an in-depth analysis on the characteristics of dozens of unicorn startups, says the culture and locale of schools like Stanford and Harvard give them a fundraising advantage.

“Given students from these schools have proximity to a network of people who are investors, operators, and former founders, they would have an easier time accessing investors, getting warm introductions, getting feedback on their pitches and improving them, and hence be in higher demand in the early stages of fundraising,” said Tamaseb, who is also a partner at DCVC.

Founders with Washington and Waterloo pedigrees might not see the same level of investor demand. But that can make these startups undervalued—meaning that investors willing to back the founders from these institutions may have an opportunity to capture some excess returns.

Ed Lazowska, a professor and the Bill & Melinda Gates Chair Emeritus in the School of Computer Science & Engineering at the University of Washington, says the data points to the fact that Seattle is a great place for seed-stage investment.

“The vast majority of University of Washington graduates come from Seattle and remain in Seattle,” Lazowska said. “Modest seed-stage investments keep the team hungry and lead to big returns down the road.”

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