Of Horses and Jockeys

Should venture capitalists invest in ideas or people? Business plans or management?

It may sound like the VC version of chicken versus egg, but some empirical research says to place your bet with the horse (company) rather than with the jockeys (management). That would mean Don Valentine is right and Arthur Rock is wrong, although few of us would mind being wrong like Arthur Rock. But I digress…

You can read the study here. It was written by Steve Kaplan at the University of Chicago, Berk Sensoy at USC and Per Stromberg at SIFR.

The researchers found that over 90% of successful VC-backed companies have the same business model at the time of IPO as they had at the time of initial VC funding. Conversely, only 72% have the same CEO – and that number drops to 44% by the third annual report. And here’s a kicker: The researchers also examined a sample that included both VC-backed and non-VC backed IPOs for 2004, and found no demonstrable difference in the human variable’s importance. So much for VC value-add…

I do have some minor quibbles with the research — particularly with the notion that IPO=success. But the researchers make a compelling case that it was the best available sample. I also might have been a bit stricter in my interpretation of biz model consistency. Again, minor quibbles.

More about this study Monday, after I’ve had some time to stew on it (and reflect on a conversation I just had with Kaplan)… Let me know your thoughts.