So what exactly are startup investors investing in anyway?



If you ask most budding entrepreneurs what it is that investors put their money into they will tell you: the idea! Everyone is looking for that breakthrough “innovative” idea that will attract VC money. And I can’t blame them. If you try to reverse engineer many great companies you will find a great idea: Google with PageRank, AirBnB with renting out space in your own house or apartment to strangers, SnapChat with its disappearing messages and photos, eBay with online auctions, PayPal with sending people money via email and on and on.

But rear view mirrors don’t always have 20/20 vision. Why it may look like VCs made their billions by betting on breakthrough ideas like Airbnb and Netflix, that’s not the way it really works.

I still remember asking Paul Maeder, a very very successful VC with Highland Capital, who had invested in my first two companies, how he made his investment decisions. The most important element to him was not the idea or the market opportunity, but the team. His experiences was that most successful startups end up with a different idea, business model and/or target market than they started with. So the original idea was not that important. And of course if the idea changes the market opportunity changes. So the team was by far the most important factor in his decisions. But he went a step further for me. He told me that the CEO was at least 70% of the team. What this all boils down to is that most successful VCs invest in great CEOs. Of course, it helps that those great CEOs come up with great ideas, but their ability to execute is paramount. Google was far from the first search engine and Facebook was not the first social network.

The story in today’s Wall Street Journal WeWork: A $20 Billion Startup Fueled by Silicon Valley Pixie Dust is subtitled CEO Adam Neumann sells investors on his vision for communal workplaces—critics say it’s an overvalued real-estate play [emphasis added] has multiple quotes about how VCs were really investing in CEO Adam Neumann, not the idea of communal workspaces.

Fueled by showmanship, an expansive vision and the occasional shot of tequila, Mr. Neumann has propelled the New York-based office-space provider into being one of the world’s richest startups.

Mr. Neumann has dazzled tech investors by portraying WeWork as a Silicon Valley-style company that provides a “physical social network” for millennials.

Here’s a quote from one of the VC investors that makes it clear they invested in the CEO.

Bruce Dunlevie, a partner at Benchmark Capital Partners who sits on WeWork’s board, said charismatic, creative and motivated entrepreneurs are valued differently by investors “based on their ability to figure out how to skate to where the puck is going to be,” he said. “Adam has many of those qualities—he’s just a very charismatic, compelling person.”

And Neumann also dazzled a real estate investor as well:

Joel Schreiber, a Manhattan-based real-estate investor, said he was captivated by Mr. Neumann and his vision early on. After a three-hour conversation in 2010, the entrepreneurs offered him a 33% stake in WeWork for $15 million. “I didn’t negotiate—I said yes,” Mr. Schreiber said. “I loved Adam’s energy.”

Many VCs I’ve talked with believe that if you bet on a great CEO he (or very seldom, sadly, she) will figure it out somehow. Pivoting is a good thing, so long as you eventually end up in the right place!

“Let’s give him some money and he’ll figure it out,” said Mr. Dunlevie, the Benchmark partner in charge of the deal. Benchmark led a $17 million funding round in 2012.

So when you are thinking about raising your first round of capital forget about fancy Excel spreadsheets showing how you’ll be more profitable than Facebook in 3 years (and I’ve seen a lot of those!). Forget about the fancy slide deck. Look in the mirror! As founder you are the number one asset of your startup. Do you have the drive, the charisma, the vision, the persistence, the grit that will convince investors you are the one? Here’s a hint, virtually all great CEOs, whether or not they are extroverts have tremendous ability to sell their vision. Steve Jobs was the ultimate example, but virtually all successful CEOs I’ve met have such a burning passion for their vision that they stand out from the herd, and thus will be heard, despite the literally thousands of competing pitches aimed at investors. Great CEOs push the envelope, and occasionally like Travis Kalanick, former CEO of Uber, they go too far. But better too far than not far enough.


Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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