A 2004 study, recently updated, adds to the debate about whether management or the company is the important focus of investment screening. The study, written by Steve Kaplan of the University of Chicago, Berk Sensoy of USC and Per Stromberg of SIFR, found that over 90% of successful VC-backed companies have the same business model at the time of IPO as they had at the time of initial VC funding. Conversely, only 72% have the same CEO, and that number drops to 44% by the third annual report. Interestingly, the researchers also examined a sample that included both VC-backed and non-VC backed IPOs for 2004, and found no demonstrable difference in the human variable’s importance.
You might question the sustainable value of management, however, the results may be a bit sterile and simply reflect the effecient evolution of business aided by experienced VCs. As a company grows from early stage to a self-sustaining critical mass, the nature changes from entrepreneurial and adds other dimensions. This requires a changing culture of management, which often requires new skills at the top which may not be displayed by the founder or (incumbent CEO).
While we think management is critical to the success of VC investment, it is also certain that if the company is in the wrong business, because the market is not ready or passed, then even the best CEO won’t make the numbers.
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