Are startup investors more likely to bet on you, the entrepreneur and CEO, or your idea? On today’s show, we’re discussing a theory that has been thrown around for decades for business investors. Do you bet on the jockey or the horse? We’re pleased to welcome back George Deeb, Managing Partner of Red Rocket Ventures, Forbes contributor, author of three entrepreneurial handbooks, and venture capital expert.
Transcription:
Jim Fitzpatrick:
Thank you so much, George. Once again for joining us here on the show.
George Deeb:
Jim, it’s my pleasure. Good to see you again.
Jim Fitzpatrick:
Sure. Our viewers and subscribers get so much out of your visits here with us. Thank you for all your contribution on our network over the last years, I should say. And we’ve appreciated it. I know they have, these are crazy times that we’re in right now. This is a question that has been out there, if I’m a superstar CEO and I want to sell wool sweaters on the beach. Am I going to be able to raise money to do that? Or what are they betting on?
George Deeb:
Yeah that’s the age old question, are they betting on the idea, which is the horse, right? Or are they betting on the entrepreneur, which is the jockey.
Jim Fitzpatrick:
Right.
George Deeb:
And in my viewpoint on this topic, I really don’t think it’s either or, I think you’re looking for the right intersection of both the right idea with the right entrepreneur.
Jim Fitzpatrick:
Sure.
George Deeb:
So that’s your perfect world, but sometimes you’re forced to pick.
Jim Fitzpatrick:
Yeah. Well, having said that if you were forced to pick, what is the case for the idea over entrepreneur?
George Deeb:
Yeah. I think that the case there is you’re looking for the idea, that’s just, it’s too good to fail.
Jim Fitzpatrick:
Sure.
George Deeb:
Right. So think Uber, right. Whoever founded Uber and had that great grand vision of taking the transportation market in a new direction, they were first mover in the space. The idea was a monster in size. That’s a good idea that even an average entrepreneur can have success with. So to me where the idea wins where it’s a first mover in a market, and it’s a huge idea that you really understand that this is going to change the world.
Jim Fitzpatrick:
Yeah for sure. Is an idea ever so grand that you say to yourself as an investor, that is a phenomenal idea, but I don’t think this individual’s either asking for enough money or is going to have the horsepower to see it through.
George Deeb:
Well, I mean, there’s a couple pieces to that, the grander the idea theoretically, the better the opportunity, if it could be executed in a bite size way.
Jim Fitzpatrick:
Yeah.
George Deeb:
Right. So for me let’s say a grand idea is, got a bunch of moving pieces to it and it takes the focus away from the story. And it’s just too big. And now because you can’t get the focus, it’s going to make it harder to execute that idea. That’s when you walk away or kind of synthesize it down or narrow down to some small subset of that grand idea to start with. And then as the thing grows over time, then you can expand it and grow from there.
George Deeb:
But for an idea to be too grand, let’s say the idea is, I think there’s an opportunity for travel to Mars. That’s a pretty big idea. You’re never going to figure that on your own. Maybe it’s a good idea. Maybe it’s not a good idea, but you’re not the right person to implement that by yourself. You’d have to surround yourself by experts from NASA or some of these entrepreneurial space organizations that are experts in getting people to Mars and assess whether or not there’s even market demand for something like that.
Jim Fitzpatrick:
That’s right. What about when you’ve got these situations where you’ve got these very successful entrepreneurs that have had, one or two exits successful exits of other companies that they have founded and they suddenly say, I want to sell shells at the seashore and everybody jumps on board because they go, “Oh my God, even though it sounds like a crazy idea, it must be a winner because he has had so many successful exits already.”
George Deeb:
So the question is, do you back that entrepreneur, because they’re a proven winner.
Jim Fitzpatrick:
Yeah. Just based on that, even though you scratch your head and go, “I don’t know about selling at the seashore it seemed pretty obvious to me, but if this guy says it’s where it’s at.”
George Deeb:
Yeah. There’s a couple thoughts to that. I put a lot of weight in a serial entrepreneur. That’s had serial success, right? So if they see something and they’re willing to put their money behind it, and this is their sixth or seventh turn of being an entrepreneur and every receiving entrepreneurial endeavor was better than the one before I’m going to give that entrepreneur the benefit of the doubt. That’s number one, the flip side to that is let’s say that entrepreneur is trying to build a whitewater rafting company in the Sahara desert. Well, there’s not a river. Good luck with that. I don’t know how you’re going to be able to pull that off. That doesn’t make any sense.
Jim Fitzpatrick:
Right, yeah. You’re exactly right. But so just for fun, are there any lessons we can learn from the horse racing world on this topic? I mean, we talked about the jockey and the horse, but.
George Deeb:
All right. So I did a little bit of research on this. Horse racing is not my expertise, but I did a little digging to try to figure out what the history has been. And I came up with three data points and the first data point was, if you look at the Triple Crown winners, the horses that have won the Triple Crown. They won 78% of their overall races as a Triple Crown winner.
Jim Fitzpatrick:
Okay.
George Deeb:
The average top 100 horse that wasn’t a triple crown winner. They only won 48% of their races. So the fact that those Triple Crown winners were consistently winners over and over again, and winning double the rate of the average great horse that score one for the horse. Right, so that’s one data point. The second data point, if you look at Steve Cauthen, who was the jockey unaffirmed in 1978, he won 20% of his races as a jockey. The average top 100 jockey only won 16% of their races. Right. So in that case, you could argue, it was because that jockey was 25% more efficient or better winner than all the other jockey that he was up against. Now you’re scoring one for the jockey.
Jim Fitzpatrick:
That’s right.
George Deeb:
So that was a second data point. There’s a case study for each one in that scenario.
Jim Fitzpatrick:
What is the inflection point where the idea outweighs the entrepreneur?
George Deeb:
Yeah. Now you’re going back to kind of the common sense here. Right, let’s say you’ve got a business like Bitcoin new mover in the space, you’re opening up a new cyber currency marketplace, and it’s never been done before. And boy that’s a huge idea. You’re reinventing an entire way of about money flows and all that kind of stuff. That idea is so grand. That’s an example, one of those great, big, huge ideas. That’s worth betting on, right. Whether Jeff Bezos is doing it or you and I are doing it, that’s worth giving it a try regardless who’s got their hands on a steering wheel.
Jim Fitzpatrick:
Yeah, for sure. And what’s your advice for entrepreneurs on this topic?
George Deeb:
Well, if you’re honest with yourself and you and I have had this conversation in the past, you need to separate your chairman hat, protecting the shareholders from your CEO hat of actually running the business. Sometimes it’s in your best interest to hand the keys off to another jockey in this case, another entrepreneur that has proven expertise in that market, because they’re going to have a much better, easier your time of growing it either they have deep expertise in that industry or they’re a serial entrepreneur. They know how to scale companies over and over again, or whatever it is that you need to give them the keys.
George Deeb:
If you don’t think you’re the right person to actually grow it yourself. So, bet on the right jockey, sometimes you’re the right jockey and you’re going to be able to do it. You’ve got the right skillset to do it, but sometimes you don’t and make sure you know when you don’t to be able to hand those keys off.
Jim Fitzpatrick:
Sure. And is it in the best investment community, is it common that somebody, that investors would say, we’ll invest with the caveat that you actually do replace yourself and we think we’ve got just the man or woman to take over and run this deal. If you’re agreeable, then we’ll go ahead and fund it.
George Deeb:
Well, that’s part of the terms of a financing, right. In addition to the valuation and the size of the capital raise and the changing control rights and the claw back provisions. Now you’re introducing this another concept of management, operational control. Well, you’re either going to like that deal or you don’t, right. So some entrepreneurs will say, “Okay, this is my baby. And I want it to be successful.
George Deeb:
And I’m not the right guy to grow it. And this big venture capital firm is willing to throw me money to kind of scale the company. And they’ve got the right guy or girl to grow this business. And I’ve met that person and I trust that person and they’ve got a fantastic resume and I’m happy to step aside and maybe take a less CEO role. Maybe I’m the head of product development, or maybe I just have a board level role as the chairman of the company or whatever it is. And I’m still involved with the story, but now it’s in really good hand hands.”
George Deeb:
Some entrepreneurs will say, “Fantastic. Let’s do it.” Other entrepreneurs would have too much pride. They say, “No, this is my baby. I’m only taking money if I’m running it, I’m willing to walk from your deal because I’ll find another investor that will back me.”
Jim Fitzpatrick:
That’s right.
George Deeb:
So every entrepreneur will have a separate reaction to that.
Jim Fitzpatrick:
Sure. So what’s your advice to venture capitalists on this topic?
George Deeb:
In a perfect world, you’d have an A plus idea being run by an A plus management team, right? That’s the perfect scenario, but if you can’t do that, I’d rather bet on a A plus team building a B plus idea because the team most likely will outweigh the short falling’s of that particular idea. And I trust that team to be successful in kind of whatever they’re doing. The way I kind of think about this is always, if you’ve got a big idea and a first mover in a new market you could typically bet on the idea, right?
George Deeb:
That’s perfectly fine, regardless of who’s running it, right. If you’re a third, fourth, fifth mover in a space, and it’s very competitive and you’re blocking and tackling, and you really need someone that understands the competition and the marketplace and the industry, and can block and tackle in a heavyweight fight, that’s typically where the team becomes extra important. And then you’re betting on the team more than the idea.
Jim Fitzpatrick:
For sure. And is right now from your perspective, is there a lot of money out there available to entrepreneurs and to small businesses to grow their business?
George Deeb:
Yeah, for sure. There’s money all over the place across the country. And actually what I’m seeing now, which I hadn’t seen before is investors are becoming more liberal in where they’re willing put their investments. So, what I mean by that is in the old days, a Chicago investor might only want to invest around Chicago or the Midwest, or as far as the United States, they would never look at a deal globally or internationally.
Jim Fitzpatrick:
Okay.
George Deeb:
Now you’ve got investor groups that they don’t really care where the company’s located. You got some great company in Croatia or Saudi Arabia or Nigeria, or wherever it is. If you can sell me on, this is a good idea with good traction, a good team, there is money out there that will fund those ideas where historically that would’ve never been able to happen.
Jim Fitzpatrick:
Right. Do you think that’s also a byproduct of investors doing so well on, out there with their investments that they’ve got just a plethora of capital to deploy that they go, sure give it a shot, whether it be in Saudi Arabia or whether it be in Israel, at some tech company or in Australia. I mean, it seems some of the multiples on these deals are so outrageous that you’ve got to believe that there are private equity companies and venture capitalists out there that are just laughing with all of cash. They’re drunk on cash, going, “Sure give it a shot, what do we lose?” A million dollars on it or three million, I mean that’s jump change compared to so many of these huge winnings, right?
George Deeb:
Yeah. There’s a lot of moving pieces in that question. I would say that for most of the venture capital community, it’s become a very competitive market, right. So when they’re going to pitch, sorry, when a company is coming to pitch the investor, you think, okay this company’s competing against a thousand other companies for that investor’s money, which is true. But the flip side is equally important right now that entrepreneur has now got 10 or 20 investors that are now throwing him term sheets and throwing them money. And those investors are now competing for that one company’s opportunity.
Jim Fitzpatrick:
Yeah.
George Deeb:
Which is taking evaluations up. So one of the ways to get around that is you find new opportunities that are less competitive, and that means broadening it into less metropolitan markets, more rural communities international wherever it is, where you can stand out and be a single mover a small competition kind of environment where you’ll succeed.
Jim Fitzpatrick:
Yeah, for sure. It’s a great time to start a business right now. We’re hearing from so many small business owners and entrepreneurs that have echoed that even in light of the fact that we went through some tough times here in the last couple of years. There’s huge opportunities out there. And companies are just doing very well right now. And look at the shortage of vehicles. Although car dealers are making a ton of money, the shortage of boats, although boat dealers are making a ton of money, whether it be the RV industry, home sales, whatever it might be, everything seems to be on fire. So just in light of this terrible pandemic, that’s been with us here now for the last 18 months or two years, entrepreneurs and man it’s tough keeping them down, but the markets are so strong right now, right?
George Deeb:
Yeah. Well that’s a scary part to me because the markets are abnormally hot.
Jim Fitzpatrick:
Yeah.
George Deeb:
Right. In the core of my belly, I feel the economy is frothy. I feel like it’s too hot. Right, it doesn’t make sense in light of all the other data points. And at some point there’s going to be a crash, and when that crash comes, the venture capitalists or the company seeking venture capital money are going to have a harder time raising that money, cause there’s going to a flight to security, a flight to safety, a flight to predictability.
Jim Fitzpatrick:
Yeah.
George Deeb:
And it might be easy to raise capital as a risky series a company today. It’ll be much harder to do that in a year or two after the market crashes.
Jim Fitzpatrick:
Right. So you just it from a high George to a low with entrepreneurs. So just to wrap, put a bow on this, as they say is now a good time in your opinion to start a business.
George Deeb:
Yeah, absolutely. If you can go out there and get the capital right now, when the ducks are quacking feed them right. Get your money now while you can, while it’s hot, but make sure you raise enough money that can carry you through profitability and through all the different levels of success. If you’re requiring a series B or a series C financing down the road, be careful because you’re raising this series A will be really easy raising that series B or series C will be really hard after the market crashes.
Jim Fitzpatrick:
Yes, that’s exactly right after it crashes. I mean, you’re convinced.
George Deeb:
I’m not.
Jim Fitzpatrick:
Is just a question of when right. Will we get two years? Will we get a year? Will we get five years? Who knows right?
George Deeb:
I wish that was that smart. I’m embarrassed on the market for the last few years. To me it feels like a balloon is getting bigger and bigger and bigger. And I don’t know when that pin’s going to come and pop it, but at some point there’s got to be a pop.
Jim Fitzpatrick:
Some kind of correction, right.
George Deeb:
Something.
Jim Fitzpatrick:
Well, let’s hope it doesn’t wipe us all out. George Deeb managing partner at Red Rocket Ventures, author, Forbes contributor. Just a great guy. Thank you so much. I really appreciate all your contribution as I said during these last couple years, especially during COVID because so many of our subscribers have let us know that they’ve gotten a lot out of your information that you’ve shared with them. So thanks so much really appreciate it.
George Deeb:
It’s great seeing you, Jim. Thanks again.
Jim Fitzpatrick:
You too. Bye-bye.
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