The Importance of the Management Team and Founders

To convince an angel group or a VC firm to give you money, you need a good presentation. The presentation contains things like a description of your idea, your business plan and projections, your company’s current position and history, a description of the people on the management team, a list of current customers and sales figures, the exit strategy and so on.

Two of the most important things in your presentation, and in your meetings with investors, are

  • Your management team
  • The traction you can demonstrate

Investors tend look favorably on businesses that have a strong management team and demonstrated traction. If your business has a good team, it can greatly improve the odds of investment. If a company has great traction, it can also improve the odds. With enough traction, investment becomes a no-brainer.

Why is the management team so important?

Imagine that your management team consists of one or two people with an idea but no business experience. Compare that to a management team that consists of a software developer who has a bright idea and the deep technical experience needed to implement it, combined with a person who has already led a previous company through several rounds of venture-backed funding to a successful exit, combined with an industry expert who understands the marketplace and has recently worked for one of the competitors. Which of those two teams would you invest in? The probability of success with the second team is significantly higher because a management team like that knows what they are doing. That is the kind of management team that a venture capital firm or angel group is much more likely to invest in.

Many people who read the previous paragraph might say,

“wait a minute – just last week I read about a college kid getting $2 million from investors all by himself. Why do you put any emphasis on management teams? Why do I need a management team?”

One answer might be: try it. Start talking to angel groups and VC firms as a lone, inexperienced person and see if you can raise money. Chances are that you cannot unless there are special circumstances. It can happen… I can think of two reasons why a VC firm might, on occasion, invest in a single person or a couple of college students.

  1. The first is this: sometimes a college student comes along who just blows people away. There are a lot of smart college kids, and some are geniuses, and these people can sometimes get funding based strictly on the strength of their intelligence, insights and presence. I have heard a partner at a VC firm say to me, “this guy came in and spoke to us, and after 10 minutes I knew one thing – I don’t care what his idea is, I would invest in HIM.” If you are that kind of person, you may be able to get funding.
  2. The second reason involves momentum and traction. If a college student comes up with an idea that is gaining traffic or gathering revenue at a breathtaking pace, and who seems to be managing it well, then that person can probably land investors. Let’s say you have a web site that starts making millions of dollars in revenue in its first year or two. Technically you may not even need funding, because the money is rolling in. VCs will gravitate to a company like this, and the equation flips around. Now you can choose from a pack of suitors. Dropbox is one example of this kind of situation. In the Dropbox case, you want to choose the smartest money in the room, because the right investor can open a lot of doors for your company and greatly accelerate things. You take in the money for the investors network and expertise. [We will talk about the difference between smart money and dumb money in a bit.]

An Example

Let’s say that you are a person who has a good idea and would like to form a company that can raise money from investors. There are several ways to do it. One way is to build a prototype and start proving that there are customers from whom money can be made – i.e. you demonstrate traction. If you are successful, you can then start meeting people in the entrepreneurial community and forming a good team. This is how I was able to get HowStuffWorks started. I was able to build the site and attract a lot of visitors. Then the site began winning awards. The traffic and awards gave the idea credibility when talking to people in the entrepreneurial community. HowStuffWorks received angel funding and then VC funding. After nine years the company reached a successful exit when it was purchased by Discovery Communications for $250 million.

In that case, right as the company was becoming nationally prominent with its traffic and awards, I met a person who had raised venture capital before and successfully exited. He liked the idea of HowStuffWorks and was willing to join the company. He had credibility and connections (not to mention personality and charisma) to successfully introduce HowStuffWorks to investors. We were able to build a presentation that showed good traffic/revenue projections and several exit paths. We were looking for money in order to accelerate traffic growth, and we got it.

The point is that I, as a lone individual, was able to build an idea to a point where it became interesting to the entrepreneurial community. From there it became possible to bring experienced people into the company and then approach investors.

Another way to do it is to meet people in the entrepreneurial community so that you know everybody. Then, when you have an idea, talk with your entrepreneurial friends, convince them that you are onto something big and form a team of like-minded people. Then you do one of two things:

  1. You can moonlight with a side-project to develop your prototype and prove that people are interested, or
  2. You can raise seed-stage money to build your prototype.

Both paths are possible with the right team.

Now that you understand the importance of the management team to investors, let’s walk through the process…