Management. Management. Management.

Have you ever heard the real estate valuation maxim “location, location, location”? Well, for startups, the maxim is “management, management, management.”

In real estate, the fundamental principle, “location, location, location,” emphasizes that a property’s location is the most crucial factor influencing its value and desirability, often more than other factors like size or features. It is a fundamental principle in real estate, meaning that even seemingly identical properties can vary significantly in price and appeal based on location. Woe to the real estate investor who forgets this well-established pattern!

Similarly, in startups, the fundamental principle, “management, management, management,” emphasizes that building value depends most on the skills and experience of the startup founders/leaders, with the leadership team often being more instrumental in success than other factors like the idea, the funding, and the industry. In fact, investors have even said that they prefer an “A” team with a “B” idea over a “B” team with an “A” idea because superb execution is so critical to the ultimate success of the venture.

The reason this investor maxim makes sense is that there are so many nuanced and interlocking decisions woven together to build a business, and it is the startup’s leadership team that will be doing that critical, continuous problem-solving and decision-making.  Relying on the sketch of an initial good idea in an attractive market is only the beginning of a long and complex value-building journey, rather than assurance of ultimate success. An excellent team will react effectively to the many opportunities, setbacks, hurdles, and other forms of market feedback and competitive response.  They will ultimately figure out how to navigate the path of developing a compelling product, bringing it to market, and attracting and servicing customers so they keep coming back. Weak or inexperienced managers will sell smoke and mirrors as they thrash behind the scenes, making poor decisions and focusing on the wrong things. A lack of execution causes value destruction, while excellent execution will generate value over time. “Management” is the magic around execution, and a good concept plus excellent execution is what drives value creation.

What does good management look like?

Excellent startup leaders:

• Know what to focus on at any given point in time.
• Can cast a vision that appeals to and motivates critical stakeholders.
• Succeed in recruiting excellent team members with an interdisciplinary variety of skills to help execute their vision.
• Make smart bets that have a high potential of building value.
• Recognize when to cut their losses and pivot.
• Correctly discern where and how much to invest their precious resources to make a difference in building a successful venture.
• Can successfully sell their startup’s innovations to potential early adopters.
• Figure out capital-efficient ways to advance the startup’s development as quickly as possible.
• Secure and spend the financial resources to achieve the critical milestones required to maintain momentum.

What indicators can help investors identify potentially good “management”?

Experienced investors, advisors, and potential team members all seek to evaluate the strength of a startup’s founder(s) and other startup leaders(s) by looking for:

• A track record of success in a variety of contexts. While demonstrated success in building and exiting valuable startups is one version of this, it is not the only one, since serial entrepreneurs are a relatively rare find, given that building startups is often a decade-long process. That means we can also look for a track record of success in other areas to identify management skills, including progressive promotions, success in multiple organizations or industries, and experience developing innovative ideas into market leaders even within a larger organization.
  
  
• A grasp of the whole picture made of interlocking parts. Excellent startup leaders have found a way to develop knowledge of the critical elements of different business disciplines and how they interact and balance one another. This can start with a business degree that provides a foundation in the elements of a business. It can also include exposure to different disciplines throughout a career, especially general management experience with profit and loss (P&L) responsibility. All of these experiences help position a startup leader for understanding how to lead an engineering or scientific team while also staying focused on critical commercialization functions like sales, marketing, and customer service.  Familiarity with the essential and responsibilities of back-office functions like finance, banking, legal, human resources, and other regulatory elements also matters. Perhaps the profile likely to undermine confidence is someone with deep technical expertise with little exposure to the business challenges that will arise in building a business from scratch, and how to oversee functional experts when the organization grows enough to hire those experts. Potential investors will often test the knowledge and agility of a startup leader by jumping around to question their plans in many different aspects of a startup’s operations with an eye towards seeing if the startup leader has a handle on how all the pieces fit together and influence each other.
  
  
• Balanced responses that are not too risk-averse nor too risk-taking. Building a startup requires a certain risk tolerance, however, a startup leader must be able to make astute risk assessments and simultaneously be willing sometimes to make risky decisions while still being sufficiently prudent to develop backup options and not overcommit limited resources. Being too conservative can kill a startup just as overcommitting to a risky strategy can. Investors will be looking at the patterns in a startup leader’s decision-making in prior positions and how they articulate their current plans.

Strong execution decreases risk and increases the chances of success, and is made up of many skills and experiences developed over time. Sometimes, startup founders underestimate how heavily investors weigh the strength of a startup’s leadership team when deciding whether to put their money into a particular venture. Every action, response, example, and evidence point is scrutinized as investors seek to discern the capability and potential of the team to develop nothing into something.