This discussion is in relation to innovation, and the importance of investing in people in the early-stage venture capital process:
When looking for VC funding, it is important to realize the importance of the team. We always hear this. But, why do VCs put such a large emphasis on the team? I have a theory on this one: its because essentially, the VC don’t know which ideas are going to be successful. They don’t believe heavily in one technology or another (if they did, they would likely be entrepreneurs themselves). Because they hear ideas all day long, they need a way to separate out the good from the bad and the ugly.
There is an essential momentum that VCs need to overcome, and need to avoid being trapped into “group-think” (herd-mentality) as everyone chases the latest trends. If you think back to when Google was first pitching their ideas to VCs, it was common to hear criticism that “they didn’t have a sustainable business model”. And later, as we saw money chasing money into ever more social networks, I began to wonder how many of them were just being funded by “me-too” VC funds that chased the latest fad.
The conclusion? the most successful early-stage investments will be ones that ignore common knowledge, and buck the trends, and invest in truly original and innovative solutions. But, without the comfort of intellectual acceptance from your peers, how do VCs wade into the unknown, and successfully make a career of betting on counter-intuitive ideas? They key, I believe, is to invest in exceptional people with heightened technological knowledge, insight, and vision. By seeking out and investing in leading engineers at Yahoo!, for example (many of whom may be looking for new careers now), the early stage investor will be better positioned than chasing new ideas from unknown sources.
So, that brings me back to the original question: “why are entrepreneurial teams so important?”. In response it seems clear that early-stage investors will be better served by investing in people than in ideas.
Why? Because at the early stage, almost all ideas sound great, possible, and world-changing. But how many of them actually will? Who knows, but I’ll bet you that the VC’s investing in MIT grads or ex-Google guys will have better success ratios. Its just a better bet that their ideas are really insightful (and not trend-chasing), and that they will have the skill set (not just they hype) to pull of the transformation.
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