Focus on Founders: Paul Arnold of Switch Ventures on why he invests in alumni

Paul Arnold’s VC firm, Switch Ventures, invests in promising startups – many of them founded by McKinsey alums. There’s a reason he backs so many alumni: he says they’re particularly good at “charting a clear path,” making their entrepreneurial pursuits much more likely to be successful. (And yes, he’s ready to write more checks.)

This is the twenty-first in our ‘Focus on Founders’ series of articles about alumni entrepreneurs.

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Paul Arnold (SVO, SFO 08-12), founder of the newly launched Switch Ventures, likes investing in startups founded by McKinsey alumni.

Among the alumni-founded companies he’s backed so far are online insurance broker PolicyGenius, co-founded by Jennifer Fitzgerald (NYO 08-13) and François de Lame (JOH, NYO 04-04, 06-08, 12-14); online hiring tool Interviewed, co-founded by Darren Nix (CHI 04-06); on-demand design platform SketchDeck, co-founded by Chris Finneral (LON 11-13); online will creator Willing, co-founded by Eliam Medina (MIA 07-12); and online employment platform Koru, co-founded by Josh Jarrett (BOS, DCO, NYO 97-99, 03-06).

Paul is fairly new to the venture capital industry, although he has done his share of entrepreneurial work. He joined cloud service marketplace AppDirect in its early days and was an executive through the company’s growth and scaling, seeing it through several rounds of funding.

Then, in 2013, he launched a proof-of-concept fund, Arnold Capital, to determine whether or not he wanted to raise a venture fund and what his approach would be. He made over twenty investments in about a dozen startups. The companies performed well, and the experience gave him the conviction to build his fund.

Last month, he launched Switch Ventures.

“I invest in talented people who break tradition,” he says on his website, and explains the name of his company like this: “I am interested in talented founders who break out to create something new. Founders who make that switch.”

In a recent conversation with us, he expanded on this thought. “I love founders who have the talent to pursue a prestigious path in the traditional structures [of major corporations], yet they do something crazy—they launch a startup. They have an itch; a need to build something of their own.”

“I’m betting large on alumni”

Paul says there is something about McKinsey alumni in the startup ecosystem that creates an almost magical reaction. To add even more to the success formula, his own experience at the Firm gives him an extra insight into entrepreneurs’ potential (“There’s a bit of a presumption in Silicon Valley that the ideal founder is a 20-year-old college dropout,” he chuckles).

“I have a strong interest in McKinsey alumni founders. As a whole, they do fantastically, and I’m betting fairly large on them,” he says. “I came to this conclusion through some pretty thorough analysis. We built a large database of founder profiles to understand who outperforms venture. We gleaned a lot of insights that define who I invest in. And guess what? McKinsey alums are crushing it. They are having exit rates over double the venture industry and are around four times as likely to build a startup into a billion-dollar company.”

He continues, “Startups are hard; lots of them fail. But if you look at the whole group of alumni entrepreneurs, they’re doing great.”

Why is this, does he think? “You are drawing from a talented and motivated group of people who have experience solving big, ambitious problems, which is what building a successful startup really is. Also, McKinsey gives you an understanding of what successful teams and scale look like, and a sense of where the inefficiencies and problems are. These are things that good entrepreneurs think about.”

Project management skills gained at McKinsey also play into alums’ remarkable overall success in startups, he says, citing their ability “to get large, complex things done and over the line.” He adds, “It’s a surprisingly uncommon skill among other founders. Lots of entrepreneurs lose their way, but I think McKinsey alum entrepreneurs are good at charting a clear path. They can say, ‘These are the steps from here to the end, and here’s how we break it down into parts, month by month, to keep the train on the tracks.’”

Working together: a “team-oriented thesis”

Paul, an original investor in PolicyGenius – the online insurance broker co-founded and led by Jennifer Fitzgerald – was impressed with her concept right out of the gate. The company helps U.S. consumers determine what sort of insurance they require and offers them relevant products, earning a commission on policies sold. “It was born out of insight she had as an AP in the Firm’s insurance practice, doing marketing work and seeing that there was a huge gap between the way that customers think about insurance and what they need, and what’s available,” he says.

As other fund series have come up, Paul has reinvested. PolicyGenius just completed Series B funding to the tune of USD 15 million, and has been praised in articles in Forbes and the Wall Street Journal for its aim of addressing underinsurance issues in the U.S.

“We have a good and easy rapport,” Jennifer says, adding that their shared background at McKinsey means they approach problem solving in the same way. “He’s able to ask the right questions and quickly get to the root of what we should be talking about, and is good at pattern recognition,” she adds. “He combines operational experience, investment experience, and McKinsey problem solving.”

Darren Nix, co-founder of Interviewed, caught Paul’s attention for a number of reasons, besides the fact of being a McKinsey alum: he was a Y Combinator alum and a repeat entrepreneur, and his startup’s concept – an online job simulator tool – addresses the pain of not being able to hire well and effectively.

Interviewed allows employers to see how applicants react during an advanced simulation of a realistic on-the-job situation – for example, making a cold sales call or replying to a customer service request.

“When I looked at their product, I was impressed,” Paul says. “It made intuitive sense to me. I would have paid a lot for this as a hiring manager. I have total faith that this is a better approach to hiring.”

It seems that others agree; Paul says the company is growing “quickly and aggressively, because it’s a good product.”

Like Jennifer, Darren says that working with Paul has been particularly beneficial. “What was cool about talking with Paul is that he had a very strong opinion about characteristics that he’s looking for in a founder,” he says. “He has a team-oriented thesis; his idea is that you need to start with people who have the right problem-solving skills and motivation. Then, if the initial approach to the concept isn’t right, they’ll figure it out. This is the difference with Paul as opposed to other investors; he’s less focused on the idea and more on the team.”

He adds that the mutual trust a shared McKinsey background brings also means a quicker decision about funding—something that is particularly important in the Bay Area. “One of the things that might surprise people about investing at the seed stage is how quickly it happens, especially in San Francisco,” he says, explaining that investors who take a long time to make a decision can lose out on the best opportunities. “Paul came in with a strong thesis, and had questions he needed answers to. Those who can avoid ‘analysis paralysis’ and form a conclusion quickly—those are the people who tend to win.”

Paul also had several alumni involved in the first fund as investors and advisors. “The alumni investors are invaluable to me building my fund and to the founders building their companies,” he says. “The strength of the network working together on this is a real asset.”

“Paul’s Switch Ventures is a very interesting model to continue supporting terrific McKinsey alums,” says Lenny Mendonca, Director Emeritus and investor in the fund. “As his data show, many of them make great entrepreneurs. The best ones are also great investments.”

Calling alumni entrepreneurs

Do you have a startup you’d like to pitch? Paul says he’s ready to hear from any alumni with startups that meet Switch Ventures’ qualifications.

“I’m terribly excited,” Paul says. “We are going to grow our investments . . . writing meaningful checks in a lot of alumni companies in the coming years. It's awesome."

Jennifer sees continued success in Paul’s future. “He is well respected among the entrepreneurs he is working with and his stature in this space continues to grow,” she says. “He’s on a really great path.”

And so are the alums he backs.