Many years ago I attended a talk given by a venture capitalist.

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He was introduced, and stood up to speak.

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“Let’s play a game,” he announced. “Let’s play Hangman,” he said, referring to the strangely named guessing game. He stepped to the white board and drew the scaffold.

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“Can anyone tell me what the most important thing is to a venture capitalist when deciding whether or not to make an investment?” he asked. “If anyone guesses correctly, you all collectively win. Each time there’s a wrong answer, I’ll draw part of the man. If I get all the way to drawing the hung man, I’ll win,” he explained.

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A few people in the audience raised their hands.

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He indicated to one person. “Having a strong patent” was volunteered.

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“That’s very important” the venture capitalist replied, “but that is not the most important” he continued. He walked back to the whiteboard and drew a head.

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He nodded to another member of the audience. “A large market,” was said.

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“That’s really important as well, but it’s not the most important,” he repeated. Again, he headed to the whiteboard and drew another body part on the emerging stickman.

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He repeated his question, “what is the most important thing is to a venture capitalist when making an investment decision?” This time he emphasised “most”.

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“A quick pathway to market” one person responded.

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“A realisable exit” another responded.

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“Reliable financial forecasts” was volunteered.

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With each suggestion he shook his head, and drew another body part on the almost completed stickman.

He smiled. “One more incorrect response and I win” he said gleefully.

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There was hesitation. No one wanted to be the one to give the last incorrect answer that would give the game to the venture capitalist.

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A hand arose.

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The venture capitalist looked over and acknowledged the hand’s owner.

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“A good CEO,” was volunteered.

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“No,” the venture capitalist said, as he triumphantly stepped back to the whiteboard to draw the stickman’s last body part.

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“Hung. I win,” he announced.

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Turning to his listeners, “the most important thing to a venture capitalist when deciding whether or not to make an investment is 'People' he said.

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A protest ensued. “The last response was 'a good CEO'. That qualifies, surely.”

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The venture capitalist shook his head.

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The audience clearly felt that the answer qualified. The controversy was left unresolved.

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Whether it should have qualified or not, the venture capitalist had made his important point.

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Amongst the many factors that a venture capitalist considers when deciding whether or not to invest in a start-up company, the most important is the people behind the start-up company.

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There is an old anecdote that supports that assertion: “A venture capitalist would rather invest in a second (or even third) ranking opportunity backed by a good team, than invest in a first ranking opportunity backed by a doubtful team.”

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In fact, so important is this single factor that the second-most important factor influencing the venture capitalist’s decision is not in proximity, but instead ranks in a distant second place.

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Having a strong intellectual property position almost goes without saying. A venture capitalist needs to be confident that the start-up company’s business, in which the speculative investment will be made, can be protected with a robust intellectual property position. This deters infringers, and provides confidence that an infringer can be stopped.

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A large market may or may not be important.  A start-up company with a small but niche and profitable market can be very attractive.

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A quick pathway to market, may or may not be important. For a biotech start-up company, there is no such thing as a quick pathway to market. It is most often a case of developing the intellectual property to a point where a trade sale would be attractive. For an IT start-up, a quick pathway to market will rank with importance.

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The importance of a realisable exit cannot be understated. A venture capitalist is not a long term investor. Having an achievable exit opportunity (by which the venture capitalist gets its return on its investment) is of critical importance.

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Financial forecasts for a start-up company that is still to complete the “D” phase of its R&D, a venture capitalist knows, can be wishful and fanciful, and therefore of little persuasive value.

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So, what does it mean when a venture capitalist says that the single most important consideration in its decision to invest in a start-up is the start-up’s people?

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What attributes in the people behind the start-up company is the venture capitalist seeking?

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There are many.

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Expertise. Is the team expert in the start-up’s technology? (Vital) Does the team have experience in business? (Desirable)

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Trustworthiness. Can the founders be trusted to accept corporate decision-making? (That is, will the founders accept and carry out the decisions of the start-up company’s board, instead of doing what they please?). Can the founders be trusted to share information? (That is, share all information with the Board, the good, and the not-so-good?). Do the founders keep promises? (From something as simple as calling back when they say they will, to furnishing a report when its due?). Are the founders willing to be influenced? (That is, are they willing to listen to and take into consideration the experience and suggestions of others – like the Board?). Are the founders fair?

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Motivation and commitment. Are the founders ready to work 10 – 12 – 14 hours a day if necessary, 7 days a week if necessary, to make the start-up company a success?

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Connection. Do the venture capitalist and the founders like one another? They will work together, intimately, for a long time, so they need to like each other.

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All of these “people” considerations dwarf all other considerations.

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They boil down to the question “Will this team make this start-up company a success?” If that question, with all its components, cannot be confidently answered in the positive, all the other considerations do not matter.
 

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