Half of all venture capital investments could be identified, before the cheque is written, as worse than putting the same money into the public market. That is not a polemical claim. It is the published finding of a 2022 University of Chicago study that ran a machine-learning model across 16,000 startups and over $9 billion of committed capital. The cost of the predictably bad half, in the dataset alone, was more than $900 million. The cost across the wider industry, year on year, is structurally higher.
The reason this happens is not what most allocators assume. It is not that the future is unknowable, or that venture is a power-law game where most bets are supposed to fail. The reason is more specific. The single decision factor most venture capitalists rely on most heavily, the read on the founder, is also the factor most likely to produce the bad investments. The pattern-matching that drives the worst decisions is the same pattern-matching the industry has come to celebrate as judgement.
The Venture Compass exists because there is a more rigorous way to make this decision. Eight forces, evaluated together, with the founder as one of them rather than the proxy for all of them. This article is about why the standard model produces the failures it does, what the academic research now confirms, and what the Compass does differently.
To explain why founder-first thinking became the industry default in the first place, we have to start with a story.
How the founder-first frame won
In 1957, eight researchers walked out of Shockley Semiconductor and into the offices of a young San Francisco banker named Arthur Rock. They wanted to start a rival firm. Rock saw something in them and helped them secure financing for what would become Fairchild Semiconductor, the company generally credited with seeding Silicon Valley. Rock became the first modern venture capitalist. His conviction, repeated across decades of practice, was that backing people was the core of the business. A great team, he liked to say, can find a good opportunity even if they have to jump from the market they currently occupy.
Rock's contemporaries saw it differently. Tom Perkins at Kleiner Perkins focused on the technology, asking whether it was proprietary and meaningfully better than alternatives. Don Valentine at Sequoia became obsessed with the market itself, reasoning that a sufficiently large market could carry a mediocre team. The three philosophies coexisted, productively, for a generation.
Rock's framing won. Not because the data supported it more than the others, but because "venture capital is a people business" makes an excellent slogan, puts the founder at the centre of the story, and gives capital allocators a clear purchase deck to sell to the next round of LPs. Today, virtually every venture firm presents itself as founder-first. The framing has been hollowed out by everything that came after it.
What the data actually shows
In 2016, four economists (Paul Gompers, William Gornall, Steven Kaplan, and Ilya Strebulaev) published what remains the most thorough analysis of venture capital decision-making ever conducted. They surveyed 885 institutional venture capitalists at 681 firms. The headline finding became industry orthodoxy: 95 percent of firms identified the management team as an important factor, and 53 percent identified it as the single most important. Business model and product, the territory Perkins worked in, were selected as most important by roughly 10 percent. Market and industry, Valentine's territory, by about 6 percent.
That looks, on its face, like vindication of the Rock view. But the same paper's authors, and the work that has built on it, point in a different direction.
Diag Davenport's 2022 study, the one referenced at the top of this article, is the most direct evidence. By comparing real investor choices against a machine-learning model trained on the same information available at the time of decision, Davenport showed that approximately half of investments were predictably bad before they were made. Then he did something more revealing. He trained two parallel models, one to predict the best outcomes and one to predict the worst. The model that predicted good investments leaned on product characteristics. The model that predicted bad investments leaned heavily on the founder's background, especially educational pedigree. When investors were making good decisions, they were looking carefully at the idea. When they were making bad decisions, they were looking carefully at the team.
A separate body of research, summarised by Andrew Zacharakis and G. Dale Meyer, suggests the deeper problem. Even sophisticated venture capitalists struggle to introspect about their own decision process. They operate on intuition, articulate that intuition as judgement about people, and lack the structured mechanism to test whether their intuition is producing returns or producing pattern-matching that compounds error. The Gompers data corroborates this directly: 9 percent of venture capitalists in the survey admit to using no financial metrics in their decision process at all. Among early-stage investors, the figure rises to 17 percent. An industry that relies this heavily on qualitative judgement might be expected to have thought carefully about its judgement criteria. The data suggests it has not.
This is the trap. Founder-first thinking, applied superficially, has produced an industry that overweights pedigree, charisma, and prior fundraising success, and underweights the substance of what the founder is actually building. The founders who fit the pattern get funded. The pattern feeds the next round, which feeds the round after that. The quality of returns has declined while capital velocity has accelerated. Daniel Kahneman called this the hazards of confidence: even sophisticated professionals can be seduced by simple, coherent ideas if they are aligned with the right incentives, even when those ideas produce obviously bad results.
The statistical evidence of our failure should have shaken our confidence in our judgments of particular candidates, but it did not. We knew as a general fact that our predictions were little better than random guesses, but we continued to feel and act as if each particular prediction was valid.
From Daniel Kahneman, Don't Blink! The Hazards of Confidence
The paradox of the great investors
If founder-first thinking is structurally flawed, the best venture firms in the world should be exhibits for the prosecution. Most of them are aggressively founder-first. Founders Fund has spent two decades backing unusual people before anyone else would. Y Combinator has run for twenty years on the premise of identifying great founders.
Yet they are not exhibits for the prosecution. They are among the best performers in the industry. Which means the founder-first framing is not the problem. The shallow application of it is.
Asked at the DealBook Conference how he evaluated founders, Peter Thiel was direct. He cannot, he said, separate the ideas and the business strategy and the technology that much from the people. It is, in his words, all some sort of a complicated package deal. He cannot assess a founder without assessing the idea, and cannot assess the idea without understanding the way the founder has shaped it. The two are inseparable.
Sam Altman, addressing a Khosla Ventures summit in 2016, said the same thing in different words. The traits he looks for, in order, are determination, clarity of vision, communication skills, and "the non-obvious brilliance of the idea." Notice the framing. Not the brilliance of the founder. The brilliance of the idea, which the founder has chosen and shaped.
The most rigorous version of this argument has been made by academia. In a 2022 paper published in the Journal of Business Venturing Design, Mattia Bianchi and Roberto Verganti at the Stockholm School of Economics and the Politecnico di Milano argue that entrepreneurship has been systematically misunderstood as an exercise in problem solving when it is in fact, primarily, an exercise in problem finding. The founder's most important creative act is the identification and framing of a problem worth solving. Everything else, the pitch deck, the go-to-market plan, the product road map, follows from the quality of that initial framing.
If Bianchi and Verganti are right, the jockey-versus-horse debate is a false dichotomy. The founder cannot be assessed without the problem they have chosen. The problem cannot be assessed without the way the founder has framed it. The two illuminate each other. Any investor who claims to assess them separately is doing neither well.
Nabeel Hyatt at Spark Capital captures this in operational language. The way Spark separates real executors from people who simply pitch well, he has said, is to look at what comes out of the founder's hands. The product is the manifestation of the founder's ambition, and a deep reflection of their judgement, their priorities, and the problem they have chosen to solve. An investor who says "I invest in people" and has not looked carefully at the product is either investing in shallow patterns or in charm and charisma. Those are precisely the habits which reliably produce predictably bad investments.
Finding meaningful problems to address is a critical driver of innovation and entrepreneurship in today's turbulent environment, possibly even more so than problem solving.
From Bianchi and Verganti, Entrepreneurs as Designers of Problems Worth Solving, 2022
What this means for the Compass
The Venture Compass was developed before this body of academic research crystallised, but it was built around the same recognition. The reason ventures succeed or fail is rarely a single factor. It is the coherence between the eight forces that shape the venture's trajectory: Market Validation, Market Forces, Growth Model, Capital Strategy, Structure, Culture, People, and Integration. Each of those forces is real. None of them, alone, predicts the outcome.
Eight forces, evaluated together, are the operational answer to what Bianchi and Verganti describe theoretically and what Thiel and Altman articulate intuitively. The founder is one force in a system of eight. The product, the problem framing, the market dynamics, the capital architecture, the structural design, the operating culture, the integration into the world the company exists inside, all of them sit alongside the founder, and the venture's trajectory is determined by the interaction between them.
The X Factor at the centre of the Compass is the structural consequence of the eight forces working together. As we have written elsewhere, the X Factor is not mysterious. It is the natural outcome of alignment. When the forces are coherent, the X Factor is present and the company carries the quality investors call inevitable. When they are not, the X Factor is absent, and even strong individual forces produce fragility.
This is the discipline that protects against pattern-matching. A founder with the right pedigree but with a Capital Strategy mismatched to the company's commercial reality will burn through capital that is structurally wrong for the business. A founder operating in a market with strong tailwinds (Market Forces) but without the structural integrity (Structure, Culture) to absorb scale will scale into collapse. A founder with extraordinary product instincts (Market Validation) but without the operating bench (People) to extend the vision will plateau at the point where the founder's individual capacity becomes the constraint.
The Compass holds eight forces in view at the same time, deliberately, because that is the only honest way to answer the question Davenport's data raises: which investments are predictably bad, and how do we stop making them?
A clear Gap makes investment decisions coherent. A distorted Gap misprices the journey.
From The Venture Compass, Falzon and Christopherson, 2025
A closing note
The Rock view is not wrong. Backing people remains the core of the work. But there are two things an investor can mean when they say they invest in people. The first is the belief that pedigree, biography, charisma, and prior fundraising signal carry more meaning than the substance of what the founder is building. The data is now clear that this view produces predictably bad investments. The second, harder version is the belief that the founder cannot be evaluated separately from the problem they have chosen, the idea they have framed, the structure they are building inside, the capital they have selected, the culture they are forming, and the system they are integrating into.
That is the Compass. Eight forces, the X Factor, and the Gap between current reality and potential reality, evaluated together. It is the discipline that translates the founder-first instinct into something rigorous enough to allocate capital against, and patient enough to compound across the multi-decade arc that real-economy companies actually require.
Founder-first is the slogan. Coherence-first is the practice. The difference between the two is, on the available evidence, the difference between the half of venture investments that compound and the half that should never have been made. The Compass exists to keep capital on the right side of that line.
Read more about the assessment methodology behind this analysis in The Venture Compass, available in our Books library. Wholesale-qualified investors interested in the Information Memorandum for MAD Fund 1 are welcome to enter the Investor Room.
Information for wholesale clients only. This paper is general commentary and does not constitute financial, tax, legal, investment, or other professional advice. It does not take into account the objectives, financial situation, or needs of any person. It does not constitute an offer of securities or an invitation to subscribe. Any investment opportunity referenced is offered privately and only to wholesale clients as defined under sections 761G and 708(8) of the Corporations Act 2001 (Cth), under separate offer documentation. Past performance is not a reliable indicator of future performance and capital is at risk. Tax positions referenced are based on the manager's understanding of the ESVCLP regime at the date of publication; legislation may change. Prospective investors should obtain their own independent financial, legal and tax advice before making any investment decision. Nothing on this page should be relied on as a substitute for the Information Memorandum and Partnership Deed, available on request to wholesale clients via the Investor Room.