When venture capital investors are doing due diligence, they focus carefully on the financial side of the business. Does the company have an interesting business model? How big is the addressable market? What are the growth plans of the company? What are the growth plans of the company? They hire expensive experts and use advanced data tools to answer these questions and ensure that every financial detail is on the table.
But when it comes to evaluating the startup team, gut feel and intuition tend to be the main due diligence instruments that come into play. This isn’t a great approach. Data shows us that 60% of new ventures fail due to problems with the team.
What makes a successful startup team?
One common answer is that prior startup experience, product knowledge, and industry skills predict the success of a new venture. But is prior experience sufficient for a team to work well together? In a recent study of 95 new startup teams in the Netherlands, we explored that question.
We also found that greater team experience only leads to better performance if team members share a strategic vision for the company. Thus, when team members don’t agree on the future strategy of the firm, the knowledge and skills they have will only marginally contribute to team performance.
Stellar teams have it all: hard and soft skills.
When we talk about this balance between team member experience (hard skills) and passion and vision (soft skills) there’s a sweet spot where stellar teams seem to live. If team members are super smart and experienced, but they don’t feel like sharing this knowledge due to a lack of alignment about the vision for the company, their knowledge is useless for the business. Instead, these differences in passion and vision make teams perform worse. For example, if the CTO in the startup team has a lot of experience in the cyber software industry that is useful for building the current business, but she doesn’t agree with the CEO on the future strategy of the company, she is less likely to share all her previous knowledge on cyber software within the team.
While previous experience has often been cited as a key ingredient for entrepreneurial success, our results show that experience alone will not lead to success. Instead knowledge, skills, and passion are equally important for succeeding as a new venture. Experience and expertise only lead to better performance if team members share their knowledge and have a common vision for the company.
When investors evaluate startup teams they should keep in mind that a great resume alone is not enough to achieve great performance. Building a successful startup is a long and bumpy road; without entrepreneurial passion and strategic vision, a stellar resume merely becomes a piece of paper.