What's the most important data point when assessing an investment opportunity: team, market or product?
Depending on the person you ask, you'll get a myriad of answers. Let's explore the arguments made by some well-known founders and investors.
While working as an entrepreneur in residence at an early-stage venture capital firm and startup studio, I was taught that the most important data points when assessing an investment opportunity were: team, market or product?
Team: Do the founders have founder market fit - this is do they have past experience in the sector or do they possess an unfair advantage such as some unique insights?
Market: Are they targeting a market which is greater than $1 billion? If things work out well can this startup return the whole fund?
Product: Does the startup have a viable commercial product or even just an MVP? Is this a tech-enabled product or is it a tech-centric product with core IP?
Don Valentine founder of Sequoia Capital believed that a big and growing market is the most important:
“Give me a B idea with a huge market and I'll find the best people. But give me the market first.”
Warren Buffet also emphasizes the importance of the market:
“Managers are never going to make progress while running in quicksand… The market, like the Lord, helps those who help themselves.”
As we can see Valentine the founder of the most successful venture capital firm in the world and Buffet one of the most successful investors of all time, are bullish on the market and bearish on the team and product.
Jarrid Tingle a managing partner at the VC firm Harlem Capital recently stated:
“For start-up success, founder strength and execution ability is very important. But from our first 43 fund investments, the biggest predictor of revenue growth and downstream VC capital has been the company’s market.”
But how does one find these fruitful markets?
Todd Dagres, founder of Spark Capital declares:
“A good practitioner needs to be a student of the market: one who can perceive where the market is going, the trends. Therein may lie an opportunity - you have to sniff it out. There's no single source for that information. As a venture capitalist, a lot of smart people come to you, and it's generally drinking in, reading, and talking to smart people. If you see something’s happening and you can sense a trend, your next step is to find a company that is an emerging leader in an emerging sector. You have to catch the opportunity before it's obvious.”
We can agree that the market is important and being a student of the market will sooner or later pay its dividends.
Steve Jobs founder of Apple however had a contrarian opinion.
He was a firm believer in the theory: Build it and they'll come.
Steve’s primary focus was on the product - it was important to get the product right. He believed that a good product would create its own pool of services as we saw with the App Store or even its own market as we saw with the launch of the iPhone and the creation of the smartphone market.
Over the past few months, I've been fortunate to attend deal flow meetings with top tier venture capital firms. These meetings have been interesting and compressed mini MBAs. You get to learn and understand how some of the best VCs assess and evaluate investment opportunities. Some of these startups are at the pre-seed stage while others are soon to be unicorns, and one of the startups was valued at $4B.
Whether they were raising their first funding round or growth funding, one common denominator in all of the discussions was the team.
As you can guess if they've been selected for investment consideration, this means they're a startup that can possibly return the whole fund. This is they're targeting a big market - they're on the wave.
Also, more than likely they've got a good product or are already generating revenue in the millions of dollars from the product.
Therefore the only differentiator was the founding team - are these the right surfers to ride the wave until the end?
In my opinion, the founding team and the people are the most important part of any organisation. A talented team that knows how to build great products, a team that knows how to tell their story in an engaging manner, a team that knows how to hire and sell, is a team that can beat the market or even create its own market.
Give a talented team the necessary resources and they'll build something people want, solve problems and create long term value.
However, why do we have to pick and choose between team, market and product?
Shouldn’t the founding team be an excellent team? Shouldn’t they target a massive market and have a good working product?
Yes, absolutely. But in life can you have the cake and eat it?
Dauda Barry