"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."
As an interesting aside, one of the qualitative comments generated by the survey suggested that you must line up the type of business acumen the CEO has, with the stage of the business.
For instance, a CEO with years of public-company experience might not have the ability to lead a startup venture. If we look to AbleAuto.com, the business acumen leader requires startup experience, but not necessarily startup experience in the car business or even in on-line selling. Larry Marcus, from the California based fund, Walden VC, corroborates this finding by stating, that "Companies at different stages require different skill-sets. Management needs to evolve. Early on, it takes more domain knowledge and product focus. Later, it shifts, [and the question then becomes]"can you bring it to market, and do you have the business acumen to scale up and respond to customers' needs and growth?"
Element 2: Operational Experience
According to Rick Segal, Partner with JL Albright Ventures, "ops," is the key to a strong fundable team. He comments that, "The most important part of management is operational experience. The ability to understand the issues, feel the pain and know in your gut what to do, often times will carry the day."
People with ops experience are focused on infrastructure, logistics, and most importantly, product development. These founders often carry the title, COO, CTO, or VP of R&D and occupy the Operations Experience corner of the Talent Triangle. Their job is to make decisions that relate to the venture's implementation and execution of its business plan. They not only build what the startup will sell, but they are also responsible for making sure it is shipped and supported. These people need hands-on experience in technical product development, setting up delivery chains, inventory management, and selecting and managing outsourced partners. I think that Roger Wilson, of Toronto's BDC Venture Capital software group, put it best when he articulated that, "Once the initial code to the Company's positioning, messaging and pitch to the outside world has been "cracked," increased attention must be turned more inwardly to operational processes to allow the Company to scale in areas including: customer support, implementation, sales, ongoing product development/innovation, etc. This ensures that, while the Company continues to delight more and more customers, over time, it does so increasingly through an efficient and highly profitable business model."
In AbleAuto.com, the operational experience corner is not only charged with designing the website from which the customers order their cars, but they are also responsible for choosing the ISP host, co-ordinating the delivery of vehicles sold on the site, and managing security in the data chain.
Element 3: Domain Knowledge
The individual who brings Domain Knowledge to the team must understand the industry's key value motivators, be aware of the domain's impediments to ensure that the supply chain is not interrupted and possess the necessary relationships in the market to make sales. Domain Knowledge experts, often have business cards that read, VP Sales, VP Business Development or Director of Corporate Development. The Domain Knowledge expert, must have years of hands-on experience in the target industry, even if it is from a "big company" perspective. It is this person's job, to ensure that the startup's product and value proposition meet and possibly exceed the needs of end-users.
In-depth knowledge of the car market, as well as an understanding of the relationships between automobile manufacturers, their dealer network, and the car-buying public, are necessary requirements for the Domain Knowledge leader of AbleAuto.com. Domain experts are responsible for making the first and by far the most important sales - the reference accounts (a/k/a beachhead accounts). Marc Faucher, from BCE Capital, describes it this way: "Deep domain knowledge, specifically a strong network of contacts into potential target customers, is arguably THE most important component of a well-rounded management team. Securing that beachhead account is pivotal for any early stage company. One's ability to accelerate that process by leaning on existing relationships, in my opinion, is invaluable."
What happens if one of the elements is missing?
While the survey shows that all three elements of the Talent Triangle, must be present for a balanced management team and for the highest probability of success, it is worth noting that in most cases you do not need 3 people (i.e. one person in each corner). The founders of Microsoft, Dell and Google occupied multiple corners simultaneously. Therefore, although our survey found that the Talent Triangle was typically covered by 4-5 members of the management team, it is less about the quantity and all about the quality. Notwithstanding, without all three corners, the triangle ceases to exist and the venture lacks the prerequisites for rapid growth.
The absence of any one of the three major components of the Talent Triangle might create a monumental void that, while not necessarily causing the failure of the startup, will definitely hinder the company's ability to raise venture capital and limit the number of interested investors. To expand on this, we shall consider the following scenarios:
- A business that has Business Acumen and Operational Experience, but lacks Domain Knowledge, might create a well-run venture with an excellent website and delivery model, but will achieve minimal sales or develop a less-than-attractive product based on low client interactivity.
- A startup with strong Business Acumen and extensive Domain Knowledge, but insufficient Operational Experience, might offer investors a venture with a good product and lean infrastructure, but lacks the efficacy to execute and fulfill sales.
- A company with Operational Experience and Domain knowledge that lacks the necessary Business Acumen might end up with a great product and efficient delivery methods, but it will also have a bloated infrastructure, high staff turnover and larger burn rates than necessary.
So what is the bottom line you ask? While Angels, seed investors and friends and family might be willing to support a management team without the necessary three elements, it is less than likely that traditional venture capitalists will. With this said, all investors look to mitigate risk in three key areas: magic (will the product work?), market (will anyone buy it?) and management (can they create a viable company?).
Decision-making in the Talent Triangle
Simply having all three elements in the team is not enough. To maximize the probability of success, a venture must coat the Talent Triangle with a proper balanced effective decision-making process. The BODCAT Decision-Making Model does this by encompassing three elements:
(1) Consultation: Decisions are made in consultation amongst all three elements and wherever possible, consensus is sought. This increases the probability that decisions will be sound, not only from a business perspective, but also from an industry standpoint. Similarly, it ensures that decisions are efficiently executed.
(2) Authority: Each member of the Talent Triangle should not only have the responsibility for making decisions that fall within his or her own area of expertise, but should also reserve the authority to make the final call if consensus cannot be reached. Responsibility without authority will lead to frustration and substandard decisions.
(3) Trust: Management teams must at all times strive for internal agreement. Each member of the management team, must therefore, implicitly trust all partners, so that whenever consensus cannot be reached and a final decision is made, the other members of the team offer their energy and support for the decision. External parties such as VCs, clients, and suppliers must always believe that a venture's management team is in 100% agreement. Divide and conquer is an old investor trick. To prevent this, make sure that every member of the team is always singing from the same song sheet, even if they were originally not in agreement with the tune.
The best illustration for the need to deploy the BODCAT management model comes from the 2001 MTV documentary, Startup.com. This unique look at the rise and fall of a startup in the late 90's showed the damage that can arise when management does not employ consultation, authority and trust. What starts off as a potential homerun, strikes out as the founders' relationship implodes.
The Bottom Line
There is no quick answer as to why some startups fail, while others succeed. Industry conditions, price fluctuations, consumer tastes and a host of other external factors all affect a venture's bottom line and are generally outside management's sphere of influence. You can however, improve your odds by ensuring that all three elements of the Talent Triangle are in place and by putting The BODCAT Decision-Making Model to good use. This will provide your management team with a solid foothold and increase your venture's overall chance of success, not only at raising venture capital, but at creating a truly viable high-growth startup.
Sean Wise, BA, LLB, MBA is the Managing Director of Wise Mentor Capital (www.WiseMentorCapital.com), a national venture capital consultancy focusing on bridging the gap between entrepreneurs and capital. Sean is a former Director with Ernst & Young's Venture Capital Advisory Group for Canada, and currently sits on the Boards of the Canadian Venture Forum, the Banff Venture Forum, and the Toronto Venture Group. He speaks at more than 20 Entrepreneurial Bootcamps and events across North America annually. His monthly column on www.theglobeandmail.com/smallbusiness covers a wide range of topics on entrepreneurship and venture capital. Email questions or topics you wish to have covered to WiseWords@WiseMentorCapital.com