Venture Capital For Dummies
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Venture capitalists often say that they “bet on the jockey and not the horse.” Translation: The management team is often more important than having a great idea, no matter how great that idea is. VCs point out that they see lots of great ideas but only a few teams that are capable of executing on those ideas.

Management teams that are attractive to VCs include people who not only have the skills to succeed in their business but are also entrepreneurs who are more interested in making money than in running a business for life.

The team may be the single most important factor a venture capital investor considers when investing in a company. You can find countless stories of companies that attain huge success after pivoting away from their original idea.

Instagram, for example, was originally a location-based social networking app called Burbn; today, it’s a photo-sharing app that connects to social media. With Instagram, the investors bet on a team that was able to change quickly to take advantage of rapidly shifting market trends.

A venture capitalist's Dream Team: Forget the titles, focus on skill set

When evaluating the management team, a venture capital investor asks these questions: “Can these people carry out the plan they’ve described?” “Do they have the skills and experience?” and “Do they have the passion, drive and character to do it?”

That’s why the perfect team to run an early-stage company is not necessarily made up of a CEO, CFO, CMO, and so on. Titles at this stage don’t mean all that much. A great team is a group of people who are experienced in the tasks and processes that the company is about to undertake.

If, for example, you are proposing to use international manufacturing or sales, your team should include someone who has experience with international manufacturing and business relations. If you plan to sell your product directly to hospitals, your team should include someone who is experienced in the inner workings of hospital purchasing. If your company relies on advanced technology, the team needs to include someone who can manipulate that technology.

Of course, team members with advanced degrees and strong pedigrees are always nice. Teams with experience taking a company all the way through a positive exit are excellent.

Teams with PhDs, Harvard MBAs, people with venture capital experience, marketing wizards who built sales up from nothing to $100 million, or a software developer from Google also really stand out. The teams with real-life experience and success will always be more attractive than teams that are packed with academic degrees and no actual experience.

If your team doesn’t have the dream pedigree in every area, you still have a chance. Venture capitalists work with young entrepreneurs who can weave a story about their experiences and demonstrate their ability to overcome the obstacles ahead of them.

In truth, much of a VC’s assessment of the team won’t come from your resume; it comes from the passion they see in your presentation, the thoroughness of your research and thinking, and the honesty with which you address the risks inherent in your project.

A picture perfect team to attract venture capital

The perfect team will be different for each company. Each company has different needs, and depending on the available people, you will have to piece together the right experience and skill sets. However, it’s even more complicated than that. Your company’s perfect team will be different today compared to your perfect team two years from now. Identify your company’s needs to determine whom you really need to get on board.

  • Owners: Every company will have one or more owners. Sometimes these people are involved in the management team; sometimes they’re not.

  • Management: The management team is often a group of two to five people who make the majority of the daily decisions in a company. They execute on decisions and steer daily operations. The management team can include cofounders and owners. It can also include hired executives who do not own part of the company.

    Generally, management is offered stock or stock options as an incentive to work in a high-risk, early-stage company and to make up for the fact that their cash compensation is probably less than they would make at a more established company.

  • Non-management employees: Non-management employees are the people hired to handle very specific tasks. They might be collecting data, creating a product, engineering a process, selling the product, or handling customer service. Non-management employees may have stock incentives, or they may be paid in cash without stock options.

    An alternative to hiring non-management employees is to use third-party consulting, research, or sales firms for your necessary task work.

  • Advisory board: Advisory boards are made up of very experienced business people and industry leaders who are interested in steering your company right. They are not involved in daily operations. They meet with management monthly or quarterly to determine whether the company is headed in the right direction or needs to change course.

    Advisors are often given small amounts of common stock so that they have incentive to come to meetings, give good advice, and make introductions in the industry. The advisory board does not have legal decision-making power.

  • Executive board: The executive board has legal decision-making power. This is always an odd numbered group, generally consisting of three to five people who control high-level decision-making. They determine the salary of the CEO who then determines the salaries of the rest of the team.

    Executive boards approve annual budgets, new strategies, and strategic partnerships. They do not control daily decisions (deciding which candidate to hire for a non-management role, for example, or deciding which shipping company to use for distribution).

  • Consultants: Consultants can be considered members of the team in some cases. Interestingly, it is the reputation of the consulting firm that will be vetted instead of the actual individual who is doing the consulting work. If you are working with Deloitte for your growth strategy planning, you would list Deloitte as a team member. The actual name of the consultant won’t be as relevant as the well-respected firm.

About This Article

This article is from the book:

About the book authors:

Nicole Gravagna, PhD, Director of Operations, and Peter K. Adams, MBA, Executive Director for the Rockies Venture Club, connect entrepreneurs with angel investors, venture capitalists, service professionals, and other business and funding resources.

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