Hey, VCs: Market trumps team

• VCs should look for an idea with a huge market potential first
• Their funds can then be used to hire a great management team

VENTURE capitalists have always been asked what they look for when investing in a business venture and the most common answer is the ‘Team’ behind the venture.
 
“We fund the management team” is the most common refrain, because it is the team that builds the business and an ‘A team’ with a good idea is more important than a ‘B team’ with a great idea.
 
If this is the right strategy, then why do we still see so little success in Malaysia and why do we rarely find companies that can scale and become regional, if not global, players? Surely it cannot be that we don’t have talented management teams in Malaysia, or in the region for that matter.
 
So if it’s not the team, what then should investors look for?
 
One of the most successful investors in the world, Don Valentine of Sequoia Capital, has the answer and it is not the team. He says, “We don’t choose people, we choose markets. We don’t spend a lot of time wondering about where people went to school, how smart they are and all the rest of that. We’re interested in their idea about the market, the magnitude of the problem they are solving.”
 
He goes on to say, “We have always focused on the market: The size of the market, the dynamics of the market, the nature of the competition … because our objective always was to build big companies. If you don’t attack a big market, it’s highly unlikely you’re ever going to build a big company.”
 
The appropriately named Don Valentine is indeed the Godfather of the VC industry in America, having funded some of the world’s largest companies including Apple, Oracle, Google, Yahoo!, Cisco Systems, Electronic Arts, PayPal … the list goes on.

So he should know what he is talking about. Clearly he practises what he preaches because every one of these companies is now a large global company.
 
Once he selects an idea, he then considers “What can happen if in fact the combination of Sequoia and the individuals are correct.”  This is a very important aspect of VC investing because it’s not just about the money but about what more the VC firm can do.
 
This is indeed how investors (not just VCs) should select companies to invest in.

Look for an idea with a huge market potential first and then consider what can be achieved if you fund the idea and find the right people to join the team to make it a great company.
 
The reason why Valentine is not selective about the people is because it’s much harder to find an idea with a large market potential than it is to find people to build the company. People can be “bought.” VC investment funds can be used to hire a great management team and together work to build a great company.
 
If the company has an idea with a big market, invest the money to hire the best people to attack that market, build a great product, capture market share and build a profitable business.
 
VCs should not be looking at the existing team and saying that the team is not good enough to execute the idea, so they will not invest. The point of the investment is to hire the rest of the team, to create an ‘A team’ that can go on to build a great company.
 
The fact is you can put together a great team if you invest enough money and this is what most US-based VCs do, not just Sequoia.

However, in Malaysia, we still don’t see enough risk-taking by investors because they want (almost) everything to be just right in their investee company and this includes a great business model, the right team, a great product, enough revenue to give them comfort and enough execution already happening.
 
This is why there are so few investments and even fewer successful global companies – investors are not supporting the founders with great ideas by providing them with the funds to hire the best people to help build a great company.
 
So it’s time to review the way investors look at investee companies. I can assure you there are enough companies with large market potential which, with the right amount of investment and support, can be successful global or regional companies.
 
If the VCs continue to look for the sure thing, it will never happen. It’s time to take a calculated risk by investing in great ideas even if it is not a complete product or team because the money being invested can help build the product, team and the right execution strategies.
 
Don Valentine is absolutely right: Find an idea with a big market and be part of the team that makes it a great company. Otherwise all the effort that everyone puts into the idea and company will be wasted and we will continue to see a lack of success stories in Malaysia.
 
Note: To watch a video of Don Valentine sharing his secrets of success, click here.
 
Dr V. Sivapalan mentors and coaches companies. He believes that Malaysia has the potential to create many successful regional champions only if angels and VCs believe enough to take a higher risk. Higher risk means higher rewards.
 
Previous Installments:
 
‘Yes we can, too!’
 
The failure of ‘trickle-down’ policies