Can the team deliver? The three team domains.
August 2007 (The New Business Road Test)
When pressed to name the single most important factor in their investment decisions, many of the venture capitalists we interviewed said, simply, ‘Management, management and management.’ But we learned that assessing ‘management’ involves more than judging character and reading CVs. Our research identified three domains relating to the entrepreneur or entrepreneurial team itself, and we include any investors therein. Examining these domains is necessary in order to complete the opportunity assessment task.
• Does the opportunity fit the team’s business mission, personal aspirations and risk propensity?
• Does the team have what it takes, in a human sense – in experience and industry know-how – to deliver superior performance for this particular opportunity, given its critical success factors, i.e. those factors that tend to distinguish between the better performing and poorer performing firms in the industry one proposes to enter?
• Is the team well connected up, down and across the value chain so it will be quick to notice any opportunity or need to change its approach if conditions warrant?
Let’s take a look at each of these final three domains.
The team’s business mission, personal aspirations and risk propensityFor a variety of reasons, individual entrepreneurs and investors come to the opportunity assessment task with certain preconceived preferences, often defined in terms of:
- markets they wish to serve (Nike’s founder, Phil Knight, an athlete himself, wanted to market to athletes);
- industries in which they are willing to compete (for Knight, athletic footwear); - their own aspirations (how big a venture? how soon, if at all, do we wish to exit? are we committed to this opportunity or are we buying an option to see whether it pans out?);
- risks they are willing to undertake (with how much money? How certain must we be of a successful venture? must we have control, or are we willing to share it?).
Opportunities that do not match these preferences will be seen as unattractive, even though other observers having different sets of preferences and dreams might view them more favourably.
The team’s ability to execute on the critical success factorsThe backgrounds and prior experiences brought to the venture by particular entrepreneurs and investors make them better prepared to execute on some sets of critical success factors than on others. Understanding the critical success factors relevant to a particular opportunity and the industry within which it will compete and matching them against the team’s ability to perform on them is among the most compelling questions most investors ask in assessing opportunities. Entrepreneurs should do the same.
Entrepreneurs who fail to assess accurately whether they and their team have what it takes to execute on the critical success factors they will face take a huge personal risk – beyond the business risk they already take – if they seek external capital. It is all too common for venture capital investors who like an opportunity to tire of the team they first back and bring in a new one at the first sign of trouble. Losing their companies is not something most entrepreneurs are keen to do.
The team’s connectedness up, down and across the value chainA favourite saying among venture capital investors is: ‘I’ve made more money on plan B than I ever made on plan A.’ In other words, the ability to combine tenacity with a willingness to change course – typically due to changes in the marketplace, fortuitous or otherwise – can make all the difference. Thus, good luck can help a new venture, but those best prepared to take advantage of good luck are those whose leading-edge information connections enable them to respond to market changes quickly and adroitly. Entrepreneurial teams should ask how connected they are, both up and down the value chain – with suppliers and customers – and across their industry to address this concern. How can they get connected if they are not? One partial answer: network, network, network.
By assessing themselves in the three team domains as part of their broader opportunity assessment efforts, entrepreneurs and entrepreneurial teams gain in three ways:
• If the team needs to be strengthened to better suit an otherwise promising opportunity, the best time to do so is before writing a business plan. Doing this early enables the business planning effort to benefit from the talents, insights and perspectives of the team’s new members.
• Viewing investors as part of the team also builds trust and can reduce the risk investors perceive in the venture, since many investors like to help build the team. Entrepreneurs who are willing to admit they don’t have all the skills required often rate highly with the investor community.
• If external funding is to be sought, then pitching an inadequate team is likely not only to be unsuccessful but also undermines the credibility and reputation of the team members, thereby hampering their ability to raise capital in the future. Get the team right first, then pitch. You’ll need to make a convincing case that the team will be able to deliver the results it seeks and that it promises to investors and other stakeholders.
These benefits are important, even for entrepreneurs in emerging industries who may not appreciate the need for well-developed connections.