Most investors state that a startup’s team is the most important determinant of its success.
Simultaneously, when a few companies in a category run into trouble and/or fail and the category therefore falls out of favor, we are quick to dismiss new companies which emerge in that category.
This happened for mobile gaming companies several years back when Zynga, the at the time leader of the pack, started facing difficulties.
More recently, it’s happening in e-commerce as all but a horizontal approach is falling out of favor.
The first two statements of this post are contradictory. Specifically, if a startup’s team is indeed the most important determinant of its success, it isn’t correct to explain failure by pointing to the category.
And the reality is exactly that. Most startups that don’t succeed are faced with this outcome because of the team’s approach to and decisions within a category, not the category itself.
Outsiders don’t see the inside of a company. As a result, they assign responsibility for the outcome to the category. When, in most cases, insiders know that responsibility lies with the team.
This creates opportunities for great teams in out of favor categories.
Sometimes an investor comes across a team in a large market that they believe is likely to change in an important way, thereby presenting an attractive market opportunity.
However, the team isn’t just right. There’s something off which prevents you from getting comfortable making an investment.
On the other hand, it’s tempting to invest because you don’t want to miss out on the disruption that you foresee taking place in a big category.
At times like this, you need to remind yourself that, if the opportunity turns out to be as big as you believe it is, it will also attract the interest of other teams. And the eventual winner will be the team with the smart and hard working mover advantage, not the first mover advantage.
So you have to patiently wait to find the right team.
Scott Belsky of Benchmark Capital recently wrote a great piece on organizational debt. Scott defines organizational debt as “the accumulation of changes that leaders should have made but didn’t”.
I like to think of organizational debt as the outcome of the obvious people decisions you know you should be making but avoid making due to short-term thinking. The key words here are “obvious” and “people”.
So a mistaken entry to begin serving an unprofitable customer segment or a mistake in your product pricing strategy are not examples of organizational debt. The reason is that such decisions are usually non-obvious and not directly about people.
Continuing to work with someone you know you should no longer be working with, or having a culture where team members avoid challenging each other in exchange for not having their own views challenged, are examples of organizational debt. The reason is that the changes necessary in these cases are both obvious and clearly about people. The discomfort resulting from addressing these obvious people issues is what makes them so tempting to put off.
You can read the full piece here.