"We like to bet on the jockey not the horse"
"I'll always back an A team with a B opportunity over a B team with an A opportunity",
"In Real Estate it is LOCATION, LOCATION, LOCATION. In investing it is MANAGEMENT, MANAGEMENT, MANAGEMENT"
These are only a few of the axioms common to the venture and angel investment landscape that stress the important role management plays in the investment decision process. This management bias was confirmed a few years ago in a survey produced by, the National Venture Capital Association ("NVCA"). The members of the NVCA considered management as the most heavily weighted factor when deciding to invest in a particular venture (i.e. management received over 35 per cent of the weight, compared with 25 per cent, 20 per cent and 15 per cent for the market opportunity/sector, business model and the actual technology/product respectively). This, of course, helps in answering the question, "What factor do investors put the most weight on when reviewing an opportunity?" What it does not answer, however, is, "What do investors look for when evaluating management?" After straw-polling some colleagues on this question, most of my VC peers share the NVCA's findings, but felt that the 35 per cent figure may even be too low (one colleague stated he based as much as 60 per cent of the investment decision on the quality of management). The answer most frequently offered was "we look for a well-rounded team that can increase the probability of the venture's success." In response to this answer, I ask, what defines a "well rounded team that can increase the probability of a venture's success?" In order to satisfy my query, I delved into the archives.
A few years ago, when I was working for Ernst & Young's Venture Capital Group, I decided to investigate what a well-rounded management team consisted of, by issuing a survey to 500 of the most successful high-growth companies (based on multiple year published lists of the Profit 100, Deloitte's Fast 50 and Ernst & Young's Entrepreneur of the Year program winners). The goal of the survey was to determine if there were common management elements among the high-growth companies. The results showed that more than 80 per cent of the successful high-growth companies had common management elements.
Based on this survey, the attributes of a successful management team included three key elements: business acumen, operational experience and domain knowledge. These elements form the corners of what we coined, the "Talent Triangle." In addition, the survey revealed that having the right cogs in place was vital, but even more important was how those cogs interacted with each other.
A management team with all three elements, should structure its business to ensure that each segment of the triangle, has not only the responsibility for its own portfolio, but also the authority to make decisions on issues under its specific jurisdiction. We called this strategy, "The BODCAT Decision-Making Model".
The BODCAT Management Model refers to the three key elements of the Talent Triangle, which again include, business acumen, operational experience and domain knowledge. Consultation, authority and trust, facilitate the decision making process. To help illustrate this, I will use a hypothetical startup that sells automobiles on-line to the general public, AbleAuto.com.
Element 1: Business Acumen
A person with Business Acumen is most often seen carrying the title CEO, President or CFO, because he or she has the skill, knowledge and experience to make key business decisions. These people are focused on HR management, investor relations and overall corporate development, which are all consistent with their expertise in venture evolution. The person in the Business Acumen corner of the Talent Triangle is often responsible for ensuring that the venture focuses only on core competencies that add direct value to their startup. They might have 20 years of professional services experience or experience in running a business and although they might lack domain expertise, they must have the ability to make top-level decisions that encourage the company's growth. Similarly, a person with business acumen, must be a strong communicator and able to assume a leadership role. Sam Znaimer, Senior VP from Ventures West put it this way:
"Domain knowledge, vision, and passion are critical to a startup, but nothing is ever sold without a sales guy cementing a relationship or pushing for a close. Whether it's selling product to end users, distribution relationships to channel partners, or stock to venture capitalists, the core of the team must include a communicator who can command unreasonable loyalty and close the deal."
