Stacked Edge: Adding the Stable to the Track, Jockey, Horse Model

"We are in the business of developing thoroughbreds. We consider the track, horse, and jockey to build our stable. And then give them the fuel to run and win races." (Mark Buffington)  

This post is an updated version of a blog shared in May 2023.   

The track/horse/jockey model came up in a recent conversation with investors in the BIP Ventures Evergreen BDC. Someone asked: why is the founder the horse, not the jockey? Another inquired why the model doesn't consider how the horse and jockey are trained and fueled. These are good questions. We have updated the original post to answer the horse/jockey question and consider the role of appropriate post-capital support. 

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The question of what drives startup success is a long-standing and ongoing debate in the venture capital industry. While many factors can influence the outcome of a new company, it's generally agreed that four elements are particularly important:    

1. The Market (the "Track")   
2. The Business Model (the "Jockey")   
3. The Leadership (the "Horse")   
4. NEW: The Capital Partner (the "Stable")  

While the approach is straightforward, it raises two questions: Which factors play the most significant role in determining a startup's success? And when is one element more important than the others?  ‍

An Argument for the Track (aka The Market)  

Some Venture Capitalists argue that the market (the track) is the most critical factor. They suggest that even the most innovative idea or visionary leadership will struggle to make an impact if there isn't significant demand for the product or service. In that view, startups need to identify a market with a large and growing addressable customer base, ideally one experiencing disruption or change that creates new opportunities.   ‍

An Argument for the Jockey (aka The Business Model)  

On the other hand, there are other VCs who believe that a great idea or business model (the jockey) is paramount. This camp argues that a truly innovative and compelling concept can create demand even if the market isn't yet receptive to a new product or service. As it does, it can shift consumer behavior and open new opportunities. They also point out that a well-executed idea can improve existing products or services, creating more value for customers and ultimately driving market adoption.   ‍

An Argument for the Horse (aka The Leadership)  

Some investors prioritize the leadership qualities of a founder or management team as the primary driver of success. In their view, a strong and experienced leader can navigate the challenges of building a new company and motivate the team to achieve great things. They suggest that a founder with a proven track record of success, particularly in the same industry or vertical, is particularly valuable. These people not only bring leadership skills, but also valuable industry knowledge and networks.   

"A horse race can't happen without a horse, just as a startup can't happen without a visionary, bold founder. In the same way, a racehorse is unlikely to run in the right direction, at speed, without a jockey to guide it. A startup without an excellent business model won't endure or meet its potential, no matter how exceptional its technology might be." (Mark Buffington)  ‍

NEW: An Argument for the Stable (aka The Capital Partner)  

Many VCs, especially those that embrace the Power Law, take long shots on the companies in their portfolios. They believe one or two potential 'winner circle' investments are worth more than a series of consistently good or great ones. Even if most of the companies in a fund fail, the fund's LPs will earn net positive returns from the winners. Instead of endeavoring to nurture a stable of exceptional competitors, some VCs put capital behind the leadership (the "horse") and business model (the "jockey") and then leave them to do their work. Nonetheless, academic and economic studies show that portfolio differentiation happens post-capital.1 High-potential companies gain competitive advantages in the market (the "track") not only because of their funding.  

To continue the metaphor, a high-quality portfolio is like a racing stable where dedicated trainers work directly with their jockeys and horses. They provide appropriate fuel and supply expert training. The trainer walks the horse in and out of the gates, builds their stamina to stand and run, and teaches them to know when to race. These efforts result in the ability to compete against other well-qualified teams on the same racetrack. In the same way, the quality of the partnership between a VC and founder can yield competitive advantages for a startup as it launches and scales.  ‍

Sustaining the Competitive Advantage  

In the early stages of a startup's life, identifying a great market (track) is the defining factor of success. No amount of founder willpower, business model adjustments, or investor capital will overcome market indifference to a product or service. That said, once a company gets off to a strong start, the need for an enduring, high-quality business model and leadership team increases rapidly.

Success attracts new market entrants. To retain first-mover or disruptor advantages, companies must adjust and refine their value propositions to maintain a competitive advantage—that demands resources, support, and know-how.  

Early success is usually fleeting, especially in developed economies where competition is intense. Empirical data supports this viewpoint. Very few companies can maintain high revenue growth for long periods of time. It might be because they face market saturation (due to a limited addressable market) or because competition causes lower win rates and reduced pricing power.   

That's why we begin investing in helping our founder-partners develop durable competitive advantages from the early stages of a company's life. These advantages persist through time, regardless of the challenges a company faces. Building advantaged business models—a collection of product, pricing, and go-to-market strategies—requires know-how and leadership.

Ultimately, successful startups combine the track, jockey, horse, and stable—effective training and preparation. They identify attractive and growing market opportunities. They develop a strong value proposition and business model that meets the needs of that market. They build a talented and experienced leadership team that can execute that vision. And they partner with a capital provider that will stay with them through their startup journey, providing fuel and training appropriate to their maturity.

While there may be some disagreement about which of the three factors is most important—and when they are most important—it's clear that all four are critical components of startup success over time. 

Reference Articles:

• ‍Venture Capitalists as Principals: Contracting, Screening, and Monitoring. Kaplan and Strömberg, 2001‍
• The Venture Capital Cycle. Gompers, Paul, and Lerner, Josh, 2004 ‍
• A Theory of the Going-Public Decision. Chemmanur, Thomas J., and Fulghieri, Paolo, 1999 ‍
• How Smart Is Smart Money? A Two-Sided Matching Model of Venture Capital. Sorensen, Morten, 2007‍
• Venture Capital and the Professionalization of Start-Up Firms. Hellmann, Thomas, and Puri, Manju, 2002