Venture capitalists invest in revolutionary ideas, huge markets and smart teams. But what’s the most important factor they take into consideration before writing that check?

At the World Financial Symposiums event in Seattle last week, we heard from four VCs who offered their take on what makes a good bet. As you’ll see, there was more agreement on the question than you might imagine. 

Here’s what they said when moderator Enrique Godreau asked whether the VCs prefers a franchise entrepreneur, a big market or a game-changing idea. 

Cam Myhrvold

Cameron Myhrvold of Ignition Partners: “I’d probably have to say market. And Warren Buffett is my favorite quote on this, which is: ‘If you have the greatest management team in the world running an airline, it’s still an airline.’ He also says he has a 1-800 number that he calls whenever he wants to invest in an airline, and they talk him out of it. The point there is, look, teams can change. Lots of things can change. But if the fundamental market that you are picking is the fundamental thing you are going after helps define the opportunity. And, if you do have the world’s most amazing management team, but you are going after a small market, it does limit what you can expect to accomplish there. I think crowded (markets) makes almost no difference. As we look at our returns, our best returns have come from our most crowded markets. I think the logic of that is that lot’s of companies in the space help to make more noise and lower the overall cost of acquiring customers, which is generally the number one challenge that startups face. So, I will pick market.”

Tom Huseby

Tom Huseby of Seapoint Ventures: “How can you pick anything else, even without quoting Warren Buffett, which was a great quote and I will try to remember that. You can’t tweak a market. You can tweak the product. You can tweak the management team…. I like Len (Jordan’s) description better when he said that it is a good idea. A good idea to me is a really interesting market proposition, with a great way to approach it. And that combination can be destroyed by an idiotic approach by the management team. I mean, really, you guys have a lot of power. You can actually turn anyone of us off in the first meeting, or any subsequent meetings.  But, to turn us on, you better have a very good idea, and that’s a very clever way to address a big and growing market need.”

Len Jordan of Madrona Venture Group: “At the risk of saying that Cam got it right, I’ll just say that Cam got it right. But I’ll add one insight. The one observation I would make is that where a team really becomes important is when a team shifts where they are headed in terms of market. It is not an accident that most companies don’t finish the way they start. Apple didn’t start as a music company. Most of the things that are making Apple valuable today have nothing with what that company started as. Of course, that was a long, long time ago — it was more than 30 years ago. But even Intel, which started in memory, no one thinks of Intel as a memory company. They haven’t been in the memory business since a very few years after they started. Google, they started out as a search engine, but their business is a really about being an ad network, a very sophisticated type of ad network that leverages their search engine.

Len Jordan

The point is that a lot of times that markets companies start with, end up changing. And it might be the same type of customer, but a different implementation or a different way to monetize. The value may come from something different than their original business model. And backing entrepreneurs who know how to figure that out, who know how to adapt to the problem set and the product and the market and what the problem is trying to resolve, finding those people is really, really hard. And it is important, though, because most of these entrepreneurs are wrong. Steve Jobs, rest in peace, was a brilliant guy. But he did found Next, which was fundamentally a mistake. Turned out there was an operating system that Apple valued there later, but the business of Next was not a business. I can go into a number of Microsoft products that didn’t succeed, and then a whole bunch of them that did. The point is, really smart people often come up with ideas that aren’t good ideas, so if you just decide you are going to put your money behind that person, no matter what, I can’t think of many venture firms where that has been a successful strategy. It is probably more lucky, than good.”

Gowri Shankar

Gowri Shankar of Naya Ventures: “I think market has to be the number one driver…. I agree with Len. The execution risk that I so know having been on the other side, I think is as important as the market. If the market is big, the team knows how to execute, not necessarily every member has to be a franchise quarterback, or a serial entrepreneur. If they believe they can execute better, that is as important in a large market…. I think market has to be the first thing, and eventually can they execute even if the market is there.”

Previous coverage from the World Financial Symposium eventThe wisdom of Tom Huseby: Advice and zingers from Seattle’s most quotable VCSeattle angels on what they look for in entrepreneurs, and why startups failIgnition’s Cam Myhrvold: The problem in Seattle isn’t money, it’s the entrepreneurial talent

Comments

  • http://twitter.com/Seattle_Startup Seattle Startup

    Well…since you have reported that angels return is better than VC return, and the angels say the team is most important and the VCs say market, guess it makes sense to go with the angels on this one.

  • Agree

    I agree with Seattle Start-up. How many of us have seen start-up or established companies bury their company’s because the founder or management team couldn’t execute on a great market opportunity.

    • http://twitter.com/Seattle_Startup Seattle Startup

      Example: MOBILE market is huge….so VCs invest there….forget about the idea or team….as long as I’m into MOBILE, I’m a good bet!

  • http://twitter.com/Vroo Vroo (Bruce Leban)

    Len Jordan says he agrees with Cam Myhrvold and then goes on to give reasons why people are more important than the idea. I think the question is meaningless. It’s like asking a football coach if he’d prefer to have a quarterback that can throw the ball or a receive that can catch it, and that he can’t have both.

    Really, you need good ideas and a market for them and a team that can execute on them.

    In the fictional reality where you only get to choose one, consider this: If the idea turns out to be bad and there’s no market, a smart team team should be able to recognize that and pivot before they’ve gone broke. On the other hand, if the idea and market are great and the team sucks, there’s no way they’re ever going to deliver anything before they’ve used up all the money.

  • guest

    I’m surprised that when investors are concerned about the lack of entrepreneurial talent in Seattle, they don’t use Geekwire as a platform to talk about bringing great teams together that aren’t looking to go the techstars route. Yes, market is most important, but still – it seems like a missed opportunity. But hey, maybe they’re just focused on later stage companies.

  • Thomas R.

    I think it’s important to highlight the differences between Angels and VCs.

    VCs are looking for $100m in 5 year companies.

    Angels can be satisfied with a $10-30m exit.

    That’s why VCs always ask: Is the market big enough?

    And Angels ask: Is the team good enough to just execute?

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