How do you know if you and your team have what it takes to raise capital from investors that aren’t family or friends?
As a founder, one of the most “black box” parts of speaking to an investor is determining what they’ll think of you and your team, after all, its the one variable of your company that’s the most frightening ‘judgement’ to come to terms with, as you can generally deflect any concerned opinions about product, business model, go-to-market, etc because you might have more insight than the investor, but on the completeness and capability of your team? That’s much harder to do.
From an investor’s point of view, however, it’s understandable why the ‘focus’ on teams. So many companies fail not because of the product, but because the team wasn’t able to pull together and deliver the right product, to the right customer at the right time. With a strong team, factors such as market timing can many times be overcome with a quality team that is nimble and reacts quickly to market changes. In some cases, Teams can also generate new ways of looking at heavily competed markets which seem impenetrable at first. Think about how a company like Tom’s Shoes shifted everyone into thinking about how a company can give back charitably whilst also generating profit and thus created a whole new brand/business-model category in highly competed sector that many to this day are trying to replicate. Therefore, the founding team is arguably the most important factor to consider when looking at either investing or joining a startup, as it’s this team that creates the ’nimbleness’ required to overcome the onslaught of ever-shifting market variables.
So if a management team is critical for the selection process of a company, what are the attributes that define an excellent team? A while ago I reviewed some variables of what can define a great team, in an effort to update those thoughts, I asked some of my VC friends (Andy from Uncork Capital, Rebecca from Union Square Ventures, Carl from Creandum, Hadley from Eniac, Andy Chung of AngelList/Tiny.VC) questions, which I’ve also taken the liberty to answer. Hopefully these answers provide you with some further insight into the black box of a great team.
What attributes do you look for in Founding teams?
Andy McLoughlin — (Uncork Capital — US/EU)
I think this depends on the type of business. I invest in a lot of vertical software companies where deep industry experience is an absolute must-have: selling software to slow-moving traditional customers needs the kind of insights that three smart grads from **pick a top tier university** simply won’t have. That’s one of the reasons I like these kinds of businesses — founder background can provide real defensibility. Given I also invest in developer tools and horizontal software platforms (think operational infrastructure, security, productivity, collaboration, future of work etc) where the product is the business, I need to be comfortable that the founding team can get a product to market without needing to hire a huge engineering team. This means at least one technical founder (more is always better) and someone with experience of taking a product to market. More than four founders becomes tricky though as their terminal ownership can become tiny to the point of not being interesting any more.
Rebecca Kaden — (Union Square Ventures — US)
I back founding team with a Product-first mindset, a Bias toward action/testing/doing, and a Hunger/passion/perseverance — you get the gut feeling they just wont quit until it happens. Typically this requires an all star recruiter/talent magnet. This combo gives credibility to the reason they are best positioned to win the market they're tackling (past category expertise/experience directly is one but there could be others in addition or instead). Also very interested in teams that have a consumer/customer-centric approach
Carl Fritjofsson -(Creandum — EU/US)
General industry + startup experience, and complementary skillsets amongst the founders (tech, ops, + sales) is always attractive. But what fundamentally gets me excited are founders with 2 specific abilities. First, the ability to articulate a unique insight or perspective about the opportunity they are pursuing, and how that insights or perspective will give them an unfair advantage to build their business. Sometimes these insights comes from working experience but sometimes it simply originates from a visionary mindset.
Secondly, the ability of fantastic storytelling. Any company changing the world needs to be known to the world, and founders ultimately needs to be able to sell the opportunity of their startup to employees, customers, investors, press, and everyone else.
Hadley Harris — (Eniac Ventures-US)
I’d say we optimize for founder market fit first followed team completeness. Founder market fit can come from a number of areas but most commonly it stems from deep expertise in a particular area. This could be functional or verticle. Team ‘completeness’ is also very important, but a complete team that isn’t well suited for their market is not interesting to us. We tend to put less emphasis on founders’ external relationships since that is an area where we’re especially helpful.
Andy Chung — (AngelList-EU/US)
As an early stage investor, my preferred founding team is one that has worked together and built something before in a relevant market. The Centrifuge.io team are an example of this — Maex, Philip and Martin — previously co-founded Taulia together. The only thing to watch out for is survival bias — where one thinks the thing that worked before will work again, but I try to screen for this separately.
Carlos Espinal —( Seedcamp — EU)
One thing that we look for at Seedcamp is the maturity of founder relationships. I recently wrote a post about the nature of co-founder relationships and find that teams where the relationship is strong and long-lived, there is better speed of overcoming difficulties and fighting fires, so to speak. Furthermore, a strong founder-market-fit is something we also look for, meaning that founding teams that tackle industries they have experience in are more likely to succeed.
If a team is not based in your home geography, what additional elements do you look for in order to consider the investment opportunity?
Andy McLoughlin -
We primarily invest in North American (US and Canada) but have teams who come from all over the world, many of whom build a secondary centre in their home countries. We really like having a co-investor based in that geo as we know that on-the-ground support is so important at the early stages. We haven’t invested in an internationally headquartered company yet and never say never but the bar would need to be extremely high in terms of team, product and market opportunity. My gut is that they would most likely be working on a B2B software opportunity where North America is the key market, and they have a plan to move HQ to the US in the coming year or so.
Rebecca Kaden -
I don’t think my bar or filter is really different because of geography — likely unless I feel like I don’t know the market they are playing in/their customer base is in enough to have a good sense of their advantage and/or opportunity, in which case I need to be passionate enough about the potential to do a lot of work to figure that out (ie outside of the US.)
Carl Fritjofsson -
With 3 offices but investing across all of Europe and the US we constantly evaluate investment opportunities outside of our “home geography”. We have no different filter when evaluating these companies but instead as a firm we believe we need to travel to the places where the best founders are rather than wait for them to come to us.
Hadley Harris -
We generally only invest outside of our home geography when the opportunity tightly aligns with one of our theses. For example, we recently led a seed round in London based on a thesis we have around AI driven developer tools. Interestingly, now that we have one company in London, it makes more sense for us to consider it part of our core addressable geography.
Andy Chung —
“We always try to co-invest with a “local” investor we trust. Local for me means closeness to the founder or team. This could be economic closeness (ownership), physical proximity (geography), or where they have a strong prior relationship (advisor / mentor). A simple data point is how often this investor is talking to or meeting with the founder or team. “
How do you decide when an opportunity justifies going off-thesis? (generally investors have a thesis they state when they go fundraising for their own funds and thus going off-thesis means they are pursuing a deal that is likely too big, too small, in a different area than their expertise or something unorthodox about it that is deviating from their stated strategy).
Andy McLoughlin -
It’s hard to know when you’ll fall in love but when you do you definitely know it :) There will be the occasional deal that doesn’t fit our stated strategy in terms of geography (we just did our first deal in Austin, for example), stage, or sector but we are so excited about the team and product that we’ll bend our rules. It probably boils down to being excited enough to convince your partners it’s worth dealing with the extra diligence work and convincing yourself that you can get your LPs on board with the decision too!
Rebecca Kaden -
We don’t often do this since we are really thesis driven in where we spend our time but the most likely reason we’d go off thesis is because a team we know and have high conviction in is starting something new.
Carl Fritjofsson -
The most important factors when evaluating a company is market, traction and team. Going off thesis would require at least 2 out of those 3 elements to be off the charts.
Hadley Harris -
Based on our experience investing for 8 years, we’re very hesitant to go off thesis. We’ve set the bar for going off thesis to a level where all four partners would need to have extremely high conviction.
Andy Chung —
“We adapt our thesis based on new data points. Each investment and non-investment gives us more data to make better investment decisions.”
Hopefully the answers to these questions give you some insight into how investors think about investing in teams across geographies and in different sectors than their specialty, but in the end, it comes down to chemistry. One thing I’ve noticed over the years, is that no matter which way you slice and dice it, investing in startups and/or taking money from an investor is ultimately a relationship business.