A strong business plan is most important when investing in start-ups

April 8, 2009

When making investments, investors look for start-ups that have a strong business plan and a strong management team. A new study in The Journal of Finance reveals that while strong management is important, ultimately a strong business idea matters most to investors.

Steven N. Kaplan, Berk A. Sensoy, and Per Stromberg studied two samples of start-ups. The first sample consisted of 50 start-ups that went public in an initial public offering for which there was a very early plan. The second sample included all start-ups that went public in 2004.

In both samples, researchers found that very few successful start-ups change their business direction. At the same time, many start-ups change . Ultimately, a bad management team does not necessarily kill a good idea, but a bad idea is rarely overcome by a good management team. On the margin, and entrepreneurs should spend more time making sure the business idea is solid.

At the same time, this result does not mean that good management does not matter. Strong management is valuable and important. However, poor management is much more likely to be fixed by new management than a poor idea is likely to be fixed by a new idea.

"Our findings are useful for investors, particularly ," the authors conclude. "Results indicate that you should invest in great business ideas. If the founders or management are not getting the job done, be ready to replace them quickly."

Source: Wiley (news : web)

Explore further: Entrepreneurs value 'ideas' over weatlh, study finds

Related Stories

Technology Start-Ups Get Tips on Starting Out

December 14, 2007

Talk more about business and less about technology. Have a solid team. And consider calling on angels. Those were some of the key lessons at a UT Dallas workshop last week for would-be entrepreneurs seeking capital to turn ...

Recommended for you

Experts uncover hidden layers of Jesus' tomb site

October 27, 2016

In the innermost chamber of the site said to be the tomb of Jesus, a restoration team has peeled away a marble layer for the first time in centuries in an effort to reach what it believes is the original rock surface where ...

Important ancient papyrus seized from looters in Israel

October 27, 2016

(Phys.org)—Eitan Klein, a representative of the Israel Antiquities Authority, has announced that an important papyrus document dated to 2,700 years ago has been seized from a group of Palestinian looters who reportedly ...

Ancient parrot fossil found in Siberia

October 26, 2016

(Phys.org)—A Russian paleontologist has discovered a parrot fossil uncovered in Siberia several years ago—the first evidence of parrots living in Asia. In his paper published in Biology Letters, Nikita Zelenkov describes ...

1 comment

Adjust slider to filter visible comments by rank

Display comments: newest first

not rated yet Apr 09, 2009
I'm not interested in being replaced.

It's my company. No investors.

Blow me.

Got it?

Which is WHY smart people don't trust venture capitalists.

It's all explained in the definition of the word 'capitalist'.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.