It is often said that the team is the most important asset in a startup. An excellent team can turn a mediocre idea into a great product, but a mediocre team will not make a great product out of a great idea. Teams that are killing it and who know how to hustle are praised and favored over others startups.
Although I agree that the team is of utmost importance, using the above approach as a mantra can create problems. I see several issues with placing too much emphasis on the team (and potentially underweighting the rest of the business).
- The most obvious one is that the rest does matter. While the team is very important and a required component for success, no matter how great a team is, it will not make a great business or product without a good base. And that base is made by the market opportunity (demand) and the product itself (technology, design, unit economics etc.). This is especially important in domains rooted in deep technology/science, such as biotech, materials science, energy, engineering and many others. There, the underlying technology is a top concern because of the complexity, the amount of specialist knowledge required to understand it, and the fast pace of technological progress.
- A charismatic founder can imagine a great product and sell their vision to the press and to investors more easily than other founders who lack these psychological skills. And it's easier to manipulate people in highly technical fields. Some startups have seemingly great founders, leading everyone to believe in their execution skills, but eventually falter because the technology wasn't there in the first place.
- What VCs are not telling you is that with many years of experience, they have trained their intuition to pick up subtle signals about startups that cover all of a company's business, including the business model, product, economics, market opportunity and other factors, not just the team. The team is the focal point because often it's the only tangible asset in a startup. Experienced VCs often sense great potential in a startup, but perhaps can't pin it down, so they look at what clues they have at hand - and these often come down to their contact points with the company, i.e. the management team. This doesn't mean they are not evaluating the market opportunity, the product, the technology or other factors.
- VCs also have access to experts in technical domains who help them do some of the due diligence. This means that VCs are biased to reduce their idea of due diligence to what they personally do, which again comes down to communicating with the team extensively. Essentially, they are showing you the tip of the iceberg, but a lot of work is done behind the scenes: screening, initial due diligence by associates, expert opinions, document reviews etc. It's just not that sexy to talk about.
- Often individual investors don't have a chance to get to know the team. Except in the very early stages, founders are not motivated (nor do they have the time) to talk to and answer questions from every single investor. This means that their ability to evaluate the team is relatively limited. On the other hand, compared to VCs, smaller investors lack the expertise to evaluate deeply technical opportunities or the budgets to hire experts.
Thus, smaller investors are at a disadvantage: performing due diligence of the same quality as VCs is difficult and expensive, while the media perpetuate the fashionable idea that the team is everything, at the same time churning out stories about the next Steve Jobs. Investors without specialist background opt to skip or invest blindfolded, hoping that what sounds great 'on paper' will turn out great in real life. Neither option is good, and we are working on a better alternative.