Should VCs Invest In ‘Jockeys’ Or ‘Horses’?

Here’s a question that gets at the heart of venture capital: Should investors focus on the “horse” (the business) or the “jockey” (the founder)?

This debate goes back to the foundation of venture investing, where three distinct schools of thought emerged from the early pioneers.

Tom Perkins of Kleiner Perkins championed technology as the primary driver of success. Don Valentine of Sequoia Capital believed markets were paramount, and Arthur Rock of Davis & Rock put his faith in people above all else.

Today, the “people-first” approach has become overwhelmingly dominant, with 53% of early-stage VCs rating team as their most important consideration, compared to just 10% for business model, and 6% for market opportunity.

This modern consensus around “founder-first” investing might seem logical on the surface. Much of the success in venture capital is attributed to generational founders like Mark Zuckerberg or Elon Musk. Thus, the mantra “venture is a game of jockeys, not horses” has become gospel in Silicon Valley, with firms eagerly courting the most charismatic and well-pedigreed founders.

However, research suggests this convention is flawed. One study tracking startups from inception to IPO revealed that business quality is more predictive of success than founding team characteristics. Additionally, analysis of investment outcomes shows that VCs consistently make “predictably bad investments” by over-indexing on founder attributes.

Superficial pattern-matching

It would appear that many VCs interpret founder first as pattern matching on superficial attributes, such as education, previous employment or demographic characteristics. They mistake correlation for causation, seeking founders who look like previous winners rather than optimizing their strategy to find outliers.

The best investors take a radically different approach. As Peter Thiel has explained: “I don’t separate the ideas and the business strategy and the technology that much from the people. It’s all some sort of a complicated package deal.”

This explains why two seemingly contradictory statements can both be true: VCs make poor decisions by focusing too heavily on founder attributes, yet top-tier firms like Founders Fund and Y Combinator are right to prioritize founders above all else.

Expanding the aperture

Indeed, great investors evaluate founders through the lens of their business. As Nabeel Hyatt of Spark Capital outlined: “You look at the product, and you try to learn about the humans behind the product by evaluating the product.” This approach reveals the potential of an opportunity with greater depth than any pattern-matching exercise.

Y Combinator famously (and successfully) makes investment decisions with a 10-minute interview. Speaking at a Khosla Ventures summit in 2016, Sam Altman (then president of Y Combinator) emphasized “clarity of vision” and “the non-obvious brilliance of the idea” as important elements in that process, in addition to personal characteristics like determination and communication skills.

This approach expands the aperture for early investors, creating more data to drive better decisions. Most importantly, it grounds investment decisions in observable reality rather than limited subjective impressions, reducing an investor’s susceptibility to the cognitive biases that plague venture capital and drive predictably bad decisions.

The venture industry’s founder-centricity isn’t wrong, founders do matter enormously. But the current understanding, with its emphasis on pattern-matching and demographic characteristics, misses the point entirely. Investors must recognize that great founders and great businesses are inseparable, two sides of the same coin.

In the end, the most successful VCs don’t look for jockeys or horses. They find centaurs.

Dan Gray, a frequent guest author for Crunchbase News, is the head of insights at Equidam, a platform for startup valuation.