A study of 49 companies financed by venture capitalists that subsequently went public classified and described each firm's financial performance, business idea, points of differentiation, non-human capital assets, growth strategy, customers, competitors, alliances, top management, ownership structure and board of directors.
It also assessed which characteristics stay constant, change or disappear as companies evolve.
The most striking and surprising result was the almost complete stability of firm business models. Only one company saw its core business change. Within the same core businesses, firm activities tended to stay the same or broaden over time.
Firms stressed the importance of proprietary intellectual property, patents and physical assets in all three stages, and these characteristics became increasingly important over time.
The human capital of the firms changed substantially. Founders were heavily involved with the companies at the time of the business plan, but their involvement declined. Turnover of chief executives was relatively low from the business plan to the initial public offering, with 84% of CEOs remaining in place.
The turnover of the CEO and five other top executives was more common after the company went public. From the initial business plan to the annual report, only 50% of the CEOs and 25% of the other top five executives remained the same. But the uniqueness of the firm, non-people assets, customers and competitors remained relatively constant.
The results are seen as favouring the product/market (horse) view of VC investing over the best-available-management-team (jockey) view. At a relatively early stage, the businesses were fixed and did not appear to change appreciably.
At the same time, it appears that VCs were regularly able to find replacements for their management teams if they were not appropriate for the business.
Indeed, the importance of specific people and initial expertise diminishes early in the firm's life cycle. Once the firm's non-human assets are established, it seems possible (and not unusual) to find other people to run it.
Source: Bet on the horse: determining success factors of new businesses
Steven N Kaplan
Capital Ideas, selected papers on entrepreneurship, University of Chicago Graduate School of Business, December 2005
Review by Roger Trapp