Prediction: The Decreasing Importance of Management Experience

I am sure that this will be a controversial post. VCs and private equity investors have long held that some variation of the following framework is the best to validate a potential investment:

• Strength of the management team
• Strength of the market dynamics (size, share, competition, etc.)
• Strength of the product / service
• Strength of the business model, financial results, balance sheet
• Favorability of the deal terms

There is also widespread agreement (in my opinion) that of these criteria two are dramatically more important than the others (probably much more important than the others combined). These are management and market. This leads to one of the oldest questions in the industry: which is more imporant management or market. Put another way: should you bet on the jockey or the horse?

I think that the industry probably falls into two groups here: 75-80% of investors believe that management is the most important and 20-25% believe market is more important. I don't know if it is true but Sequoia capital has the reputation of falling into the latter category. It is a minority category but an important minority.

Generally speaking when VCs talk about the strength of the management team, they mean that the management team has certain credentials--directly relevant industry experience, previous startup experience. The CEO, who is equal in importance to probably the rest of the entire team combined, should probably be a serial, and serially successful, venture or private-equity backed entrepreneur.

I know that this is controversial but I think that for a broad range of startups the importance of management team experience is really starting to fade. I cite as examples basically every major Internet success story over the past 5 years from MySpace, to Mark Zuckerberg at Facebook, to Skype, to the Google guys, to Chad Hurley at YouTube, etc. It seems like the decreasing barriers to entrepreneurship, which, on the web, are falling faster that consumer confidence is right now, is creating a challenge to a centrally held tenet of the VC model for the past 50 years. But maybe youth or at least youthfulness in spirit has always a key factor in successful startups. Look at Bill Gates or Steve Jobs for example. Neither of these geniuses were serial entrepreneurs before starting their first major success. I don't know where I come down on this one just yet but I think it is an important and intriguing topic for debate.