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Once again: Is it the jockey or the horse?

Early stage investors have been arguing over this for years.  Do they bet on the entrepreneur (jockey) or the business idea and plan (the horse)?   This is serious stuff.  If you are looking for money, this question will certainly come up in one form or another when you approach professional or organized angel or VC investors.

A more complex answer

My answer always varies as I examine each deal, sometimes deferring and passing on an investment because of an uneasy feeling about the entrepreneur, even if the business plan seems able to capture the market.  Speaking for others, I see VC investors jumping into deals knowing that soon they will push to replace the entrepreneur with a professional, experienced manager that the VC has vetted and trusts.

Sometimes there’s a real surprise after the fact

I have bet on the entrepreneurial jockey numerous times and been blind-sided by after-investment behavior that completely reversed my opinion about an entrepreneur’s ability to manage growth to breakeven.  Other times, the entrepreneur went on to assemble a great team and execute the plan as it inevitably changed again and again.

[Email readers, continue here…]  Although this debate will continue for ages, I tend to fall on the side of betting on the jockey, simply because it has been a rare business plan that did not change again and again seeking a successful model in the marketplace.  And great management can morph a company to adopt without destroying the culture of the company in the process.

What if you see a great idea but no team to execute?

What if you were the investor and someone walked into your office handing you a business plan executive summary that floored you with its brilliance?  And what if that person admitted immediately that he or she had no team and was not the person to take this plan to market?  Would you, as an investor, plow money into the plan and help to incubate the idea into a real enterprise?  I would not, nor would most all of those I co-invest with.  There are millions of great plans that failed over the years for want of a great management team.  And I am sure there are many, many average plans that developed into great companies with the help of a great team.

Concentrate on a world class team

So, if you are one of the entrepreneurs without experience or ability to take your great plan to market, admit this early and form a team that investors can trust to do this, personally stepping into a position that fits your core skills, be it marketing, sales, development, or other areas required by a young company.

It would be refreshing as an investor to meet an entrepreneur with a great plan and a pre-formed management team fronted by the strongest possible leader, even if the entrepreneur offers to take a back seat in order to make the vision a grand reality.

  • Arthur Lipper

    A good jockey can make a good horse perform better, but even a good jockey cannot make a bad horse a winner.
    A good entrepreneur can achieve greater success with a good idea, but even a good entrepreneur cannot make a good business from a bad idea.

    Horses and business ideas have to be good to succeed. Those in control of both can be pluses, but are not magicians.

  • The answer is yes.

    The challenge comes in who is doing the analysis.

    And more importantly how the analysis is structured.

    Nobel Prize Winner Daniel Kahneman would suggest that having an individual doing the judging – on either the jockey or the horse – is sub-optimal at best.

    Think ‘MoneyBall’. Algorithms outperform personal judgement, and simple algorithm (properly constructed) outperform complex ones.

    That takes away the ‘punch bowl’ most angel investors like to drink – thinking they can pick winners. Performance data on the venture industry supports what is common knowledge in the public markets – stock picking doesn’t outperform passive/index investing over time.

    Yet VCs are continually able to fool LPs that they can find the next Facebook (and charge 2/20 in the process), while hobbyist angel investors try to become vcs – that are pursuing a flawed model to begin with.

    Question: What is the professional licensing required to become a VC? Academic curriculum requirements? Continuing education requirements?

  • Mr. Louis Dienes

    Possibility 3: Or is it the track? Sometimes circumstances beyond the control of the jockey or the horse dictate the outcome.

  • Larry Hall

    All great points. And the “jockey” becomes even more critical if the company needs to call an audible and execute a complete pivot. At that point, the old business plan and all derivations thereof become nearly irrelevant and the jockey and his/her team remain essential.

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