By Jeff Carter,
That’s the age old question for angel investors, and venture capital investors. Teams? Or Ideas?
University of Chicago Booth professor Steve Kaplan did some research. They found that if you are a VC, you should bet on horses and not jockeys.
We study how firm characteristics evolve from early business plan to IPO to public company for 50 venture capital (VC) financed companies. We find that firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to the formation of alienable assets. We obtain similar results from an out-of-sample analysis of all 2004 IPOs indicating that our main results are not specific to VC-backed firms or to the time period. The results suggest that, at the margin, investors in start-ups should place more weight on investing in a strong business (“the horse”) than on a strong management team (“the jockey”).
VC’s have the leverage, money, time and network to bet on ideas. If they don’t, then they shouldn’t be in the business.
It’s different with angels. Phil Chang wrote an interesting piece about meeting high quality people. His thoughts echo what I have learned from Chicago Booth professor Ron Burt and collaboration. People that don’t reach out to other people don’t expose themselves to the risk that something cool could happen. Phil writes,
In a free market with any degree of bon chance, no one receives without giving, so having a chance at being greater than ourselves means taking risks on other people.
Phil’s statement echoes the entrepreneurial ethic of “give before you get” as well. As an angel, you have to bet on great ideas of course. But, the real diligence that you have to do is on the team. If the team can’t execute, the idea doesn’t have a chance. Angels have to bet on high quality people.
Often the initial idea doesn’t work out. But great teams can pivot ideas to turn them into great companies. There is example after example of startups that adjust from their initial idea to something else and they become superstars.
The best results happen when great people and big ideas smash together. It’s a beautiful evolution to watch.
Tags: angel investing, angel investing you bet on high quality management team, angel investors, entrepreneurship, invest in a strong business rather than a management team for venture capital, investing in ideas, investing in start-ups, private equity, tips on investing in early stage start-ups, Venture Capital, venture capital investors