Bet on the jockey, not the horse
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Steve Jobs once said, “To me, ideas are worth nothing unless executed. They are just a multiplier. Execution is worth millions.”
Jobs’ comment has been recounted by many over the years, to emphasize the fact that ideas are cheap, and what really matters is execution. More significantly, it underscores the fact that entrepreneurial ideas are abundant and commonplace, but entrepreneurs who can execute the ideas in the face of difficult odds are few and uncommon. As such, the smart money should be on the entrepreneur, rather than the idea.
Bet on the jockey, not the horse.
Decades ago, Harvard University’s William Sahlman wrote about this issue, emphasizing that the entrepreneur and the start-up team is more relevant than the business idea. “When I receive a business plan, I always read the résumé section first,” he said. According to him, without the right team, none of the other elements of the start-up matter. Famed venture capitalist Arthur Rock, whose investments include Apple and Intel, had similar sentiments: “I invest in people, not ideas”. He further explained: “If you can find good people, if they are wrong about the product, they’ll make a switch, so what good is it to understand the product that they are making in the first place?”
These remarks make a strong case for a focus on the entrepreneur and the team, when evaluating a start-up. However, is there empirical evidence for this? A recent research study on angel investors, conducted by Stanford University’s Shai Bernstein, University of Southern California’s Arthur Korteweg, and Kevin Laws, chief operations officer of AngelList, provides the first relevant evidence on this topic. This study is particularly valuable because it focuses on angel investors, and they fund many more start-ups than venture capitalists. In fact, in the US, they fund more than 15 times as many start-ups as venture capitalists. The study focuses on identifying the specific start-up characteristics that are important to investors in early-stage firms. The results reveal that the average investor responds more strongly to information about the founding team than marketplace evidence such as customer demand. Equally important, the researchers show that investing based on team information is a rational strategy for early-stage investors.
The obvious next question is, if you are going to bet on the entrepreneur and the team, how do you pick the right entrepreneur? What characteristics of an entrepreneur indicate future success for the start-up?
The University of Virginia’s Saras Sarasvathy’s research provides interesting insights that address this question. For starters, the approach that characterizes successful early-stage entrepreneurs is very different from those of successful managers. In fact, the successful entrepreneurs’ approach early in their ventures is often contradictory to that of a successful manager.
According to Sarasvathy, in established businesses, the typical manager is asked to focus on clearly defined goals, and is expected to identify and select the best means to achieve the goals. Thus, for a predetermined goal, the manager attempts to find the optimal alternative to achieve it—be it based on efficiency, speed, cost, or other criteria. In sharp contrast, the successful entrepreneur begins with a given set of means, and the goal emerges over time, based on interactions with the marketplace, potential customers and experts, as well as on the team’s imagination and creativity. The ultimate entrepreneurial goal that emerges is also influenced by the aspirations of the entrepreneur (a grand vision, or a less ambitious one?), and how the entrepreneur responds to the steps and missteps, and twists and turns, that are part of the journey.
The managerial approach is termed “causal thinking”, and the entrepreneurial approach, “effectual thinking”. The premise of causal thinking is that if we can predict the future, we can control it. This has led to enormous amounts of time and money spent on research and books on predictive models, and courses on predictive modelling for MBA and executive programmes. In contrast, the premise of effectual thinking is that if we can make our future, by creating our own markets, we control it, and thus, there is no need to predict it.
The early-stage entrepreneurs you should bet on are those who are effectual thinkers—those who see and create a new future, rather than causal thinkers who see the future as a continuation of the past. Such entrepreneurs recognize that their start-up is the beginning of the journey that will require inputs from various stakeholders, as well as their own innovative and imaginative inputs, to ultimately provide clarity to the goal that the venture will work towards.
Best-selling author and professor John Mullins reiterates this point: “For entrepreneurs it is not about (stubbornly) thinking that one has a brilliant idea and trying to figure out how this particular idea can be successful, but about acknowledging uncertainty and embracing the need to adapt the initial idea until it works out. Entrepreneurs should emphasize ‘business discovering’ and de-emphasize ‘business planning’.”
As the early start-up grows and matures, the best entrepreneurs will recognize the need to transition from an effectual bent of thinking to the causal approach of managerial thinking. Thus, the ideal entrepreneur to bet on is the jockey who can wear both hats, and has the insight to know when to remove one, and don the other.
Arun Pereira is a faculty member at the Indian School of Business, and executive director of ISB’s Centre for Learning and Management Practice.
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