When I was at Kleiner Perkins, an old lore investor story I’d hear was how it’s all about betting on the right horse, the right jockey, and the right track. If you get all three, then you win.
- The track is the category and timing
- The horse is the business
- The jockey is the team
There’s a funny article from 1999 Fast Company about a fictional, “CDU,” or “Consultant Debunking Unit.” And a follow-on funny of the “Fast Company Venture Capitalist Debunking Unit (VCDU).” They go into detail about the debate of whether it’s the jockey or the horse — because the prevailing spoken wisdom of the VC is that it’s about the jockey (i.e. team). But when they interviewed a Kentucky Derby winning jockey, their response was:
The VCDU caught up with Day at Florida’s Gulfstream Park. “That saying is absolutely false,” Day says. “The horse is the primary, the most necessary ingredient. The horse’s talent is what really counts. No jockey can make a horse run any faster than it’s capable of running.” So, the VCDU asked Day, if he were betting instead of riding, which would he wager on, the jockey or the horse? “The horse, no question.”
—FC
Building on that response, another professional horse racing person was interviewed who responded:
I never look at the jockeys first. I always look at the horses first. In some cases, a good jockey can help, but I have yet to see a jockey who can throw a horse up over his shoulder and carry it across the finish line.
—John Asher
Apparently it’s more common for a novice to bet on the jockey. But it’s all about the horse. To make that point humorously clear, the VCDU interviewed a manager at the underwear:
In the underwear business, as in the racing business, you have to be an expert on inside information. At the racetrack, I would always bet on the horse. The only time I bet on the Jockey is when I buy underwear.
—John Cronce
There’s a useful paper “Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies” to read on this subject from 2009.
The results suggest that, at the margin, in-vestors in start-ups should place more weight on the business (“the horse”) than onthe management team (“the jockey”).
—STEVEN N. KAPLAN, BERK A. SENSOY, and PER STRÖMBERG
Their paper goes on to describe how in their research they saw how companies that started out in a specific business category made it all the way through IPO and to success within the same business category. In other words, there’s been no change in business line from start to finish — i.e. the horse didn’t become an ostrich.
As for factors that led to their success in differentiation:
- a unique product and/or technology (by far the largest factor)
- comprehensiveness of their products over time as a minority factor
- customer service increases over time as a common factor
- alliances and partnerships over time are a modest factor
Growth is impacted by:
- producing new and upgraded products
- market penetration and market leadership
- successful geographic expansion
The paper in general posits that human capital doesn’t matter as much as other capital resources and the core line of business. It’s the CFO’s dream, really. The data *proves* this point well. BUT the paper makes the point that the human capital (i.e. the founders and founding team) for an early stage company are high value — perhaps, though, because there are no other competing non-human assets to speak of.
These findings also are relevant for the critical resource theories. The early emergence and stability of nonhuman assets are consistent with those assets being critical resources. The instability of the human assets suggests that to theextent that the initial critical resource is a specific person, the “web of specific investments built around the founder(s)” itself becomes the critical resource relatively early in a firm’s life.
—STEVEN N. KAPLAN, BERK A. SENSOY, and PER STRÖMBERG
The cross-sectional analysis provides further support to these interpretations of the Hart–Moore–Holmström and critical resource theories. Firms with more alienable assets at the time of the business plan have substantially more human capital turnover over time, suggesting that specific human capital is more critical before alienable assets have formed.
Finally, our results on the stability of firm business lines are supportive of Hannan and Freeman (1984), who argue that creation and replacement (or natural selection) are more prevalent than adaptation.
Takeaways? I guess it’s important to remember that people matter, and it’s all too easy to reason that they don’t when you work with large numbers preceded by dollar, euro, gpb, or yen signs. It’s up to believers in people to make the case that it’s the combination of the horse, the jockey, and the track (i.e. timing) as the true formula for success at any given point in a company’s evolution. Love the challenge! —JM
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