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Berkonomics

2. Management quality trumps a quality plan.

Great management teams mean more to investors than even greater business plans. 

If flexibility and coachability are first in the list of traits investors value in an entrepreneur, then the quality of the proposed or actual management team come in a close second, even before the attractiveness of the business plan itself.  The quest for a great management team is not a fluke, but rather a result of backward looks at the failure rate from past investments by angel investors and venture capitalists.

It is true that at least half of the businesses backed by professional early stage investors will die within three years or less. That reality is a tough one for the professional investor, almost as tough as for those entrepreneurs who lose their businesses.  The latter can start new businesses, flush with the experiences gained from the previous effort and much the better for it.  The investor’s cash is lost forever, and the experience gained usually is just another increment in a list of similar experiences from the past.

[Email readers continue here…]  It is the management team, most often led by a passionate entrepreneur with experience in the industry, which makes the biggest difference between success and failure, even for businesses built upon less than sterling basic ideas.  Among professional investors, almost all would rather back a great team with an average idea before a great idea and inexperienced team.  It comes back to coachability and flexibility, our first insight.  Great teams are flexible and have the advantage of experience in seeing the pitfalls before them from their past.  They are coachable in that they have taken advantage of the vast experience of others in overcoming obstacles and finding ways to speed a product to market faster or create a service whose quality exceeds that of the competition.

None of this is to say that an inexperienced entrepreneur cannot lead a great new business.  But it would be foolish to try without surrounding himself with as many experienced co-leaders as possible from the outset.   As a start, such an entrepreneur will soon “know what he (she) doesn’t know”, an important qualifier for success in any business endeavor, when combined with the willingness to fill gaps in knowledge with help from those who have the experience to do so.

                Ask any professional investor, and you should hear that they value the quality of the team above the attractiveness of the early drafts of the business plan.  Even without taking in money from professional investors, that advice would serve you well in protecting your own monetary investment.

  • OK to quote with attribution. And I’d appreciate any link to the site from other blogs and references.
    -Dave

  • Hello from Russia!
    Can I quote a post “No teme” in your blog with the link to you?

  • I agree that management does trump the plan and that adaptability is key to success. In my experience as an entrepreneur, it always comes down to how the team confronts and resolves problems and having an experienced team around you not only allows you to avoid problems to begin with; but helps to resolve critical issues quickly so you can stay focused on building the business.

  • Oscar Robertson, the greatest basketball player of all time, says, “Coaches can draw up all the Xs and Os they want, but in reality 90% of the plays break down. So then it comes down to who can execute, one-on-one or two-on-two. That’s where the fundamentals come into play.” To me, flexibility and the ability to improvise are among the most important characteristics a manager can have –and smart investors also recognize that plans rarely work out as originally designed.

  • I would add that one commonality of great management teams is their assumption that their business plan won’t work as planned. They know major course corrections will be needed upon engagement with the marketplace. Too many investors look for teams which can “execute the business plan” but they should seek teams which can design and execute Plan B because Plan A rarely works as presented.

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