Evaluating Startup Founders

If you ask any early stage investor what is the most important aspect to a deal, she will say, almost without fail, “team”.  Market, product, etc. are all key, but no matter the horse, you need the right jockey.

I always consider my own pillars of execution (aggressiveness, humility, pro activeness, and precision) when evaluating others, but this is the framework through which I evaluate startup founders and their teams:

Do they have domain expertise?  This is a pretty obvious one, but it’s not always quite so simple.  In, for example, a healthcare services company, there are many different vectors along which founders can spike – have they practiced medicine?  Have they run operations at a hospital?  Do they have healthcare (or any) startup track record?  Have they experienced something firsthand and conducted a ton of customer research to validate a problem?  Do they have a deeply drawn out thesis in a relevant area?  Hardi Meybaum of Matrix recently said on Harry Stebbings’ The Twenty Minute VC that MBAs with strong market/industry analysis, but no domain expertise, are able to find great opportunities, but often aren’t able to dig deeper on the underlying reasons why those opportunities have not yet been tackled.  He also adds that “having high empathy for the customer” is key, and without domain expertise, that can be difficult to master.  I agree.

The breadth and depth of a founder’s knowledge will vary, and the expertise will likely comes from a combination of experience and research, but if I meet with someone who doesn’t really understand the customers, suppliers, competition, technology, unit economics, and market dynamics of her startup, I interpret that as a lack of thoughtfulness and precision.

Are they passionate?  I’ve heard people argue that a founder needs to be passionate for the product and problem she is trying to solve; I’ve also heard that while that is great, sometimes a general passion to start a company and be an entrepreneur is enough.  The latter is probably OK sometimes, but I need to see the former to be really interested.  Company building is (generally) not glamorous work, and it’s hard for me to believe that someone who isn’t truly passionate about their idea and space will have the fortitude and commitment to see a company through the inevitable turmoil ahead.

Are they tough/Do they have grit?  Call it whatever you want, but a high level of sticktoitiveness is required to succeed as a founder.  Thinking back to times when you have overcome adversity may give you a flashback to past job interviews or MBA applications, but there is a reason people ask – and that reason is even more important with startup founders.  You will never know for sure without the stress test of real world tribulations, but being confident that a founder can display dogged perseverance in the face of adversity is critical in the evaluation process.

What are their motivations?  Related to passion – this can be tricky because it’s easy to tell investors you want to build a unicorn, but a $20M acquisition when you still own 50% of the company is a life changing amount of money to most founders (and a miss for VCs).  This is another one where you’ll never know for sure just how far a founder is willing to push the envelope, but you can get a feel for it when evaluating their passion and grit.  It’s also good to just ask a founder what her goals are, with the understanding that there is no shame in shooting for a small (by venture standards) win.  There are plenty of good businesses and good CEOs out there – but my job is to find venture-backable businesses and CEOs; those are not the same thing.

Can they execute?  I can generally get a good feel for expertise and passion in an intro conversation (and potentially even before, with some research), but execution can be a bit tougher to gauge.  At the very early stages, the ability of a founder to execute is absolutely critical, yet there is often a chicken and egg problem that you will have to make a bet on.  Best case scenario, you meet a serial entrepreneur who has shown the ability to push a company from zero to one and/or moved the needle elsewhere in some meaningful way.  That, unfortunately, is rarely the case, and I find that the best way to make a call here is to (1) evaluate their skill set (how are they special? domain expertise, rockstars in sales, tech, operations etc.), (2) observe how they handle the diligence process (are they aggressive and precise), and (3) reference the shit out of them (get as many data points as you can).

I have been on a deal before where we loved the idea, believed in the opportunity, and saw a broken business model that could easily be fixed; as the diligence process began, however, it became clear that we simply weren’t dealing with a top performer.  Incoherent pipeline materials, weak financial models, and a general lack of precision and timeliness in response to our inquiries all raised red flags as to the CEO’s ability to execute.  He had built a Potemkin Village – there was no way this guy was ever going to move the needle for us as a fund.  If someone we believed in came in with the exact same company, we would have moved forward – I took this as a good lesson in disciplined investing.

Are they “Truth Seekers”?  I first heard this term from Josh Hannah of Matrix (also on the Twenty Minute VC), and I think it’s an excellent way to evaluate just about anyone that I might be interested in working with.  I love meeting founders with insatiable appetites for knowledge, who devour new information in order to make data-driven decisions.  Founders who are able to preempt my questions about gaps in their business, while acknowledging those weaknesses and exhibiting a willingness and excitement to address them, are incredibly fun to work with.  Hannah says that he likes founders (especially pre-product/market fit) who seek to find and be transparent about bad news, have tempered egos, and know that they don’t have it all figured it out (e.g. not a cult leader with a reality distortion field) – it may not be complicated, but much like humility, it’s not necessarily common.

There are many different ways to evaluate the all important “team” aspect of a startup, and each situation will be different – there is no one size fits all matrix.  I find the above useful as I enter into a conversation, and as things unfold, I press where necessary, remembering that I am being simultaneously evaluated along similar parameters.

Thoughts or comments?  Get at me here.

 

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