E108 [AI-Translated] Burn Rate Intelligence #3 – Jockey or Horse? | What VCs Really Bet On | Talent Density

00:00:00: The original podcast was recorded in German.

00:00:03: This podcast was translated using Artificial Intelligence, Burnrate the Venture Insider Podcast with Max Meister and Guy Jafredi.

00:00:12: Hello!

00:00:13: And welcome to Burnrate – the VC Insider podcast.

00:00:16: I'm talking here with Guy Jufredi about the startup scene with a focus on venture capital.

00:00:22: Episode One Hundred Eight is coming up.

00:00:24: We're continuing our new Wednesday format, BurnRate Intelligence.

00:00:28: In these episodes, we take up current and relevant topics from the VC world put them into context.

00:00:34: And share the knowledge that we have built up over more than thirty combined years of experience in the VC environment.

00:00:41: The Episodes are deliberately kept compact as a short impulse food for thought and A Knowledge Advantage For The Middle Of The Week.

00:00:49: This podcast is sponsored by our partners Arreventures & Wenger Vieli Guy Wednesday.

00:00:55: What are today's topics?

00:00:56: Today, I think we've once again picked up a really exciting topic namely the question what is an investor actually betting on the founding team or the market.

00:01:06: And I'm really looking forward to the discussion with you.

00:01:09: now, this is going.

00:01:28: I don't know whether it is its own company, but at least its own unit within the Financial Times that focuses on venture capital.

00:01:41: And he recently wrote an interesting article last week and looked at what you are actually betting when investing in a startup, founder or market, jockey or horse?

00:01:56: Historically two fairly legendary investors stand for these positions.

00:02:02: Arthur Rock, one of the early investors in Intel and Apple essentially said I invest in people not ideas.

00:02:09: His logic was a strong founding team can recognize that the original idea isn't working Can pivot?

00:02:17: Can build a new product convince New People and reinvent The Company again And Again.

00:02:23: And this view can still be found among many European VCs today.

00:02:27: Danny Reimer from Index, for example has said that he would rather finance a phenomenal team in a bad market than a mediocre team and an excellent market.

00:02:36: We say that too or we've said it before Guy.

00:02:39: on the other side is Don Valentine The legendary founder of Sequoia.

00:02:42: his view was exactly the opposite.

00:02:44: give me a giant market.

00:02:46: always His argument, people can be replaced.

00:02:49: A small or structurally unattractive market cannot simply be made large.

00:02:53: so bet on the

00:02:54: horse.".

00:02:55: And I think this is more than an academic discussion because this question very concretely determines how investors select companies?

00:03:03: How they conduct due diligence and partly also how they react later when something doesn't work.

00:03:09: according to a survey mentioned in the article of More Than One Thousand Investors Forty-seven percent say that the management team is the most important factor in an investment decision.

00:03:19: Only twenty four per cent name The Business Model as the most import point, but now comes a twist – A little pivot.

00:03:26: here in text John Thornhill refers to study by three Nordic researchers.

00:03:31: They examined two hundred and forty four VC backed Danish startups And conclude we may be overestimating both founders AND THE MARKET Because one particularly important indicator appears Who does a startup hire early on?

00:03:44: So not only how good is the founder personally, but can this person convince other exceptionally-good people to follow him or her.

00:03:51: Can he or she recognize talent?

00:03:53: Can he retain people, can she build a team that at some point is stronger than the founder alone?

00:03:58: and suddenly we have a third investment thesis.

00:04:00: Maybe it isn't jockey or horse at all.

00:04:03: maybe you have to look at the entire racing stable And I find that particularly interesting right now because especially in the AI era We're seeing companies that can grow from five to one hundred employees within two Or three years and very early on.

00:04:16: That determines whether a founder can actually build a company or just a good product.

00:04:22: If you had to choose phenomenal founder in the mediocre market, which one would

00:04:30: you invest?

00:04:49: The market is often not even clearly defined yet.

00:04:53: Where do you really gain a foothold with the product?

00:04:55: Which customer group actually buys the product and who's willing to pay meaningful price for it, perhaps the founding team initially presents the wrong.

00:05:08: Accordingly, you do have to look at that but it isn't the single most important point.

00:05:14: I mean good founders.

00:05:15: change their product they're positioning and sometimes even the market in which they operate in order to generate attractive outcomes.

00:05:22: But of course there are limits.

00:05:24: Even incredibly good founding teams cannot simply turn a small difficult market into a good exit.

00:05:30: They can not simply override The laws of mathematics.

00:05:33: It will...but often sometimes even deliberately starting in a niche market and then finding a path from there into adjacent markets, to move from a position of strength as the best niche player in a specific market into a large market.

00:05:48: And thereby actually compete with incumbents In The Large Markets against whom they would have had no chance at all As A startup where the barriers To entry Would Have Been Too High.

00:05:57: But For Really Large Venture Return At Some Point You Simply Need Both top team, and a market that can become large enough for there to be billion or ten-billion dollar exit.

00:06:07: So I would say in the early stage jockey dominates fastest one out of starting gate later horse becomes increasingly important meaning it gains more

00:06:17: importance.".

00:06:19: And this third factor comes into play the early employees.

00:06:23: should VCs therefore ask much stronger in seed round?

00:06:27: Who are actually employees?

00:06:28: number five, ten or fifteen instead of always focusing only on the founders?

00:06:34: Absolutely.

00:06:35: I mean that is a very important indirect test for The Founding Team.

00:06:38: Every founding team can say in pitch hey i'm ultra ambitious and have best vision!

00:06:47: But if you look at who is willing to work for this team, then you already get a very effective data point.

00:06:52: So let's take an ETH graduate twenty six years old.

00:06:56: can they really convince and outstanding VP of engineering from Google?

00:06:59: To work for the startup?

00:07:01: so Can They win over some fifty five year-old in A fantastic position with The best know how For their start up And Their vision so that they suddenly Work for a Startup At a lower salary?

00:07:11: And that can represent an extremely high opportunity cost for those people.

00:07:15: If you look at these Google engineers, they earn several hundred thousand while the startup then earned relatively little money and really have to be convincing with it.

00:07:25: That already tells a lot about vision leadership persuasive power of founding team.

00:07:31: Good founders recruit better than themselves in areas where they are hired.

00:07:37: They have the confidence in themselves to learn from that and become better rather than fearing someone might take their place.

00:07:52: And accordingly, they start a negative flywheel instead of talent attracting talent.

00:08:02: and you can sometimes or relatively often already see that in the first few hires as startup makes max.

00:08:08: You've also built several companies yourself?

00:08:10: Can you really tell early on whether someone is good recruiter leader?

00:08:15: do only recognize once company has one hundred to two hundred people.

00:08:20: funny i was asked exactly this question yesterday at once again.

00:08:24: it's very difficult say I mean off course if ask How many people have you hired?

00:08:29: That's a standard question for me.

00:08:31: Who were the best with the employees themselves?

00:08:42: Exactly.

00:08:42: Because

00:08:43: especially for a first employee, money is normally not the decisive factor because they know they are taking big risk.

00:08:51: so if exceptionally good people say I could work in ten other places but want to work specifically this person who's building company then that certainly very strong signal.

00:09:04: So for me, the quality of the early people is almost a kind of confirmation.

00:09:09: Of The founder meaning validation.

00:09:12: it isn't perfect but It's still quite meaningful.

00:09:15: and

00:09:15: let's go a little deeper.

00:09:16: Let's play devil's advocate.

00:09:18: if we have an excellent team in A bad market?

00:09:21: can the good Team really turn things around that much?

00:09:23: or does our industry?

00:09:25: Meaning the VC Industry sometimes romanticize founders too Much?

00:09:29: I Really do think the industry Romanticizes Founders somewhat.

00:09:33: Of course we love the story of the brilliant entrepreneur who wins against all odds but there are also economic realities.

00:09:40: if the market is small.

00:09:42: If customers are barely willing to pay or if they unit economics structurally don't work then at some point even the best founder won't be able to help you anymore.

00:09:52: so for me, the point is that an exceptional team recognizes this much earlier and doesn't stick with a false thesis four five years but moves Pivots.

00:10:02: So when you invest in a strong team, perhaps you're not necessarily investing in their first idea.

00:10:07: You are investing in there ability to eventually find the right opportunity.

00:10:11: That is the statement from Arthur Rock that we heard at the beginning.

00:10:14: But eventually even the best jockey needs a horse that can run.

00:10:17: and now We live in time When AI startups In particular Can sometimes grow incredibly quickly.

00:10:24: so The question Is How does AI now change this equation?

00:10:28: Is talent even more important today than it used to be.

00:10:31: What do you think

00:10:33: before I get the question, um...I'd like add something on a topic of good founder and bad market which one is better.

00:10:41: as an investor You always have ask yourself Where do I allocate my capital?

00:10:46: And if you really face the choice between a top team and truly shit market or a shit market in the top team, You can also simply say hey i'll wait another two months.

00:10:56: Then Another opportunity may come along where perhaps atop team In a mediocre mark it appears that you can invest there.

00:11:03: so as an investor My recommendation is Only invest if you really believe there can be a good outcome and not simply because, well this is the top team in the worst market.

00:11:13: I wouldn't recommend that to anyone if those are your only two options.

00:11:17: On AI changing the equation i think it does Because capital & technology have become much more easily accessible In some areas.

00:11:25: A small team today Can use Ai tools To build things That would previously Have required fifty or one hundred people Or even more And that naturally makes the quality of every individual employee massively more important.

00:11:39: In a team of ten, one person is ten percent.

00:11:42: in a team Of hundred One person is one percent.

00:11:45: Accordingly you don't just want ten average people or programmers You want ten exceptional ones.

00:11:51: You might even be able to pay those ten a little more because they are top, top talent.

00:11:56: And that's why talent density meaning the average quality of team could become one of key competitive advantages and perhaps it changes the question for VCs as well.

00:12:08: It is no longer simply Is this an exceptional founding team?

00:12:12: But also...is this team capable attracting exceptional team members?

00:12:17: Now let's get a little more practical.

00:12:20: Tomorrow two identical pitch decks land on your desk, same market similar technology similar traction.

00:12:26: what do you look at next to figure out which team would finance max?

00:12:30: I would look at the people who aren't in a pitch deck, i always find that interesting part.

00:12:35: Who were first employees?

00:12:37: where did they come from?

00:12:38: what alternatives to day have?

00:12:39: why do you join this company and good people also stay?

00:12:43: I will definitely looked as well because perhaps that is actually best connection between two old investment theories.

00:12:50: founder certainly important.

00:12:52: he or she sets direction market it's all so important how large can become.

00:12:59: We look at that very closely in The New Delicious, but the team actually shows you whether a good idea or a good founder and large market can really turn into an organization.

00:13:09: And so perhaps investors should spend less time arguing about whether they are betting on the jockey or horse... ...and instead check earlier who else is standing in the stable?

00:13:20: So this was it for Burn Rate Intelligence, the VC Insider podcast.

00:13:24: If you want to support our podcast, subscribe to our newsletter and share it with your network.

00:13:29: Thank you very much for listening!

00:13:31: We wish a good second half of the week.

00:13:33: take care and goodbye.