For Startups, Do You Bet on the Jockey or the Horse?
There have been several articles written that talk about how venture capital investors prefer to bet on the jockey (the entrepreneur), over the horse (the startup idea). As I have often said, I would much rather invest in an A+ team with a B+ idea, than a B+ team with an A+ idea. So I agree with this premise of the jockey being more important than the horse, usually. This post will tell you when one outweighs the other.
When the horse outshines the jockey.
Unless the idea is a material one in the first place (e.g., it has a chance to become a billion dollar business), why waste your time when shooting for VC types of returns. Said another way, would you rather invest in Jeff Bezos, one of my entrepreneurial heroes, building a white water rafting business in the arid Sahara Desert, or me, a proven serial entrepreneur (albeit a fraction the talent of Bezos) trying to build a next-generation artificial intelligence technology disrupting a $200BN industry? The former has very little prospect for driving material revenues, and the latter could become the next unicorn size startup, so it's a relatively easy decision.
There is an inflection point where the idea is worth betting on, more than the entrepreneur. But the reality is, a smart venture investor would try to convince me that I am not nearly as qualified as someone like Bezos to actually pull off this grandiose vision, and to have me hand him the reins to take my business to meteoric heights. Which I may or may not do, depending how confident I was in my own abilities versus the equity value upside I could realize from having someone like Bezos in charge.
Which is exactly my point of this piece. It is not the jockey OR the horse. It is the jockey AND the horse. That is how to build terrific venture returns -- with A+ teams building A+ ideas. And, whatever you can do to make that happen, is the Holy Grail of venture investing.
Some insights from horse racing.
As a little fun, and to help me further illustrate this point, I took a look at some horse racing data to see if I could glean some insights on this topic. First, I looked at the last four Triple Crown winning horses -- Secretariat (1973), Seattle Slew (1977), Affirmed (1978) and American Pharoah (2015). I compared them to a typical top 100 winning race horse in 2016. The data was pretty incredible. The Triple Crown winners won their races 79 percent of the time, compared to the top 100 that won 48 percent of the time. That is a pretty good argument for the horse.
Then, I looked at the last four Triple Crown winning jockeys -- Ron Turcotte (1973), Jean Cruguet (1977), Steve Cauthen (1978) and Victor Espinoza (2015). I compared them to a typical top 100 jockey in 2016. I was surprised to see the Triple Crown jockeys won 15 percent of the time, a little less than the top 100 jockeys who won 16 percent of the time. That basically suggested that the jockey didn’t matter at all. Said another way, any of the top 100 jockeys could have lead any of the Triple Crown horses to their wins. Another data point speaking to the importance of the horse.
But, as an entrepreneurial leader rooting for the jockey, that left me unsatisfied, so I dug a little deeper. I learned Cauthen’s better than average 19 percent win rate (twenty percent better than the average top 100 jockey win rate of 16 percent), could have been a major contributor to Affirmed’s Triple Crown win -- as the horse’s 76 percent win rate was below the 80 percent win rate of the other Triple Crown winning horses. A good argument for the jockey taking a great horse and making him even better.
But then I learned Cruguet only won 12 percent of his races, far behind the 16 percent average of the top 100 jockeys. But Seattle Slew, the horse he lead to a Triple Crown, had won 82 percent of his races, in excess of the 78 percent average win rate for the three other Triple Crown winning horses. Chalk one up for the horse, making a jockey look better than he really was.
What is the point of all of this?
Based on the above examples, from both the business world and the horse racing world, there are times where the jockey is more important, and there are other times where the horse is more important for driving success. With all other things being equal, always bet on the jockey to take a good idea and make it better. But, when the idea is so big, you have no choice but to bet on it, assuming a competent leader is in charge. But, if need be, upgrade an average entrepreneur for a proven winner, and that will be like putting gravy on top of your turkey dinner -- one that is guaranteed to fully cook and taste great in the end.
Related: Will Your Big Idea Make You Money?
A key lesson here for most of you entrepreneurs -- lose the ego and the pride of feeling you are the only person who can build your startup, as your personal equity value from your big idea could become worth materially more money in somebody else’s hands. Separate your CEO hat from your chairman hat, and figure out what would truly be best for your shareholders, of which you are presumably the largest.