Horse or Jockey?

There is much discussion in the venture business about whether you back the horse or the jockey. Some, like Don Valentine at Sequoia, state they look for large growing markets and find the team later. More frequently, you hear VC’s saying that the business is about people, people, people.  In the end, I would argue (conveniently) that it is both. Market readiness makes heroes and fools out of investors (right concept, wrong decade). If the market/customer base is not ready to adopt a technology or solution, for whatever reason, even the best management team will be unable to win. That said, management teams are critical to success in the race. Often, when the market is ready, the trophy normally goes to the team that out-executes the rest. Just look at Google versus Alta Vista, Ask Jeeves and Inktomi. Of these two, market (horse) has the greatest macro impact but management (jockey) has the greatest micro impact.

Warren Buffett, the largest cheerleader for backing good managers, once said however:
“When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Along this line, Prof Steve Kaplan, from the University of Chicago, recently gave a great presentation at the IVCA annual lunch about Horse vs. Jockey, including some fascinating statistics and analysis. He clearly comes down on the Horse side of the arguement.  I highly recommend reading the attached PPT file of it. Download kaplan_horse_jockey_april_2006.pdf

6 thoughts on “Horse or Jockey?

  1. Your post appeared in The May Report today. Ron has another comment on Steve’s POV from 2/10/06.

    >>> A recent study from UofC points out that when choosing to bet on the
    horse (business model) or the jockey (managers), one should bet on the horse first, as Jockeys can be found and replaced <<< Entrepreneurs *AREN'T* "managers". Entrepreneurs are the *ARTISTS* of the business world. The manager of The Art Institute can be replaced seamlessly; "Nighthawks" by Edward Hopper cannot and neither can he. It is a *SERIOUS* error to think of entrepreneurs as being a fungible commodity! An entrepreneur is someone who creates an idea out of thin air and then -- unlike 99% of the other people who say "what if" -- implements the idea, turning nothing into something real. That is art and sorcery -- nothing short thereof, make no mistake. An entrepreneur isn't some jamoke who has $400K to buy into a Krispy Kreme franchise; he's the guy who said let's make and sell a premium donut. An entrepreneur isn't some guy with financing who buys and then runs an existing business (unless he then uses it as a platform for radical change/growth). An entrepreneur isn't a guy who leaves his law firm and hangs out his own shingle. A MANAGER is someone who manages that which was at some point in the near or distant past conceived and implemented by an entrepreneur. A manager can be someone with a HS diploma running a White Hen, or an MBA running something slightly more challenging. The job of the manager in both of these cases -- from one extreme to the other -- is to manage. There are bad managers (who really shouldn't be called "managers" because if they're bad they're not managing). There are good managers. And then there are great managers. Great managers aren't jockeys either. They aren't fungible. Great managers get paid *VERY* well. A *GOOD* entrepreneur is even more rare than a *GREAT* manager. It therefore follows that we should place an even higher premium on the talents of decent to great entrepreneurs, so -- NO! -- I *DON'T* think this point is being overemphasized. Maybe the question needs to be reframed however: Is it really that there is a dearth of entrepreneurial talent here in Chicago? Or is it that the Chicago establishment (a) wants to think of entrepreneurs as fungible jockeys; (b) hasn't yet learned to identify entrepreneurial talent until after the fact; (c) doesn't want to pay entrepreneurial talent the financial premium it justly deserves.

  2. Your post appeared in The May Report today. Ron has another comment on Steve’s POV from 2/10/06.

    >>> A recent study from UofC points out that when choosing to bet on the
    horse (business model) or the jockey (managers), one should bet on the horse first, as Jockeys can be found and replaced <<< Entrepreneurs *AREN'T* "managers". Entrepreneurs are the *ARTISTS* of the business world. The manager of The Art Institute can be replaced seamlessly; "Nighthawks" by Edward Hopper cannot and neither can he. It is a *SERIOUS* error to think of entrepreneurs as being a fungible commodity! An entrepreneur is someone who creates an idea out of thin air and then -- unlike 99% of the other people who say "what if" -- implements the idea, turning nothing into something real. That is art and sorcery -- nothing short thereof, make no mistake. An entrepreneur isn't some jamoke who has $400K to buy into a Krispy Kreme franchise; he's the guy who said let's make and sell a premium donut. An entrepreneur isn't some guy with financing who buys and then runs an existing business (unless he then uses it as a platform for radical change/growth). An entrepreneur isn't a guy who leaves his law firm and hangs out his own shingle. A MANAGER is someone who manages that which was at some point in the near or distant past conceived and implemented by an entrepreneur. A manager can be someone with a HS diploma running a White Hen, or an MBA running something slightly more challenging. The job of the manager in both of these cases -- from one extreme to the other -- is to manage. There are bad managers (who really shouldn't be called "managers" because if they're bad they're not managing). There are good managers. And then there are great managers. Great managers aren't jockeys either. They aren't fungible. Great managers get paid *VERY* well. A *GOOD* entrepreneur is even more rare than a *GREAT* manager. It therefore follows that we should place an even higher premium on the talents of decent to great entrepreneurs, so -- NO! -- I *DON'T* think this point is being overemphasized. Maybe the question needs to be reframed however: Is it really that there is a dearth of entrepreneurial talent here in Chicago? Or is it that the Chicago establishment (a) wants to think of entrepreneurs as fungible jockeys; (b) hasn't yet learned to identify entrepreneurial talent until after the fact; (c) doesn't want to pay entrepreneurial talent the financial premium it justly deserves.

  3. This is a great way to look at the debate. My thinking is as follows and, I think, is where Steve was going with his analysis. If the market is either a) not large enough or b) not ready to adapt, it doesn’t matter who is running the business. As they say, you are rearranging deckchairs on the Titanic. So, the horse is the precursor. I would argue that we get burned more often in the venture business from missing the timing or readiness of the market than anything else.

    However, as Jim Clark said, great companies are willed into existence. Assuming the market is ready, it is the best connected, most responsive and most determined management teams that take the spoils in the end. You know when you are around a great entrepreneur because they excel at execution.

    I also don’t think there is a complete dearth of talent here…they are harder to see as they keep a low profile. They are here, but you need to look hard to find them.

  4. This is a great way to look at the debate. My thinking is as follows and, I think, is where Steve was going with his analysis. If the market is either a) not large enough or b) not ready to adapt, it doesn’t matter who is running the business. As they say, you are rearranging deckchairs on the Titanic. So, the horse is the precursor. I would argue that we get burned more often in the venture business from missing the timing or readiness of the market than anything else.

    However, as Jim Clark said, great companies are willed into existence. Assuming the market is ready, it is the best connected, most responsive and most determined management teams that take the spoils in the end. You know when you are around a great entrepreneur because they excel at execution.

    I also don’t think there is a complete dearth of talent here…they are harder to see as they keep a low profile. They are here, but you need to look hard to find them.

  5. If you read his study, you’ll see that Kaplan stacks the deck, deliberately or not. See my critique http://www.midwestbusiness.com/news/viewnews.asp?newsletterID=13633
    —–
    PING:
    TITLE: L.A. Confidential
    URL: http://www.alldvdonline.com/2006/05/02/l-a-confidential/
    IP: 65.92.150.102
    BLOG NAME: L.A. Confidential
    DATE: 05/02/2006 06:24:51 AM
    In a time when it seems that every other movie makes some claim to being a film noir, L.A. Confidential is the real thing–a gritty, sordid tale of sex, scandal, betrayal, and corruption of all sorts (police, political, press–and, of course, very…

  6. If you read his study, you’ll see that Kaplan stacks the deck, deliberately or not. See my critique http://www.midwestbusiness.com/news/viewnews.asp?newsletterID=13633
    —–
    PING:
    TITLE: L.A. Confidential
    URL: http://www.alldvdonline.com/2006/05/02/l-a-confidential/
    IP: 65.92.150.102
    BLOG NAME: L.A. Confidential
    DATE: 05/02/2006 06:24:51 AM
    In a time when it seems that every other movie makes some claim to being a film noir, L.A. Confidential is the real thing–a gritty, sordid tale of sex, scandal, betrayal, and corruption of all sorts (police, political, press–and, of course, very…

Leave a Reply

Your email address will not be published. Required fields are marked *