How does an investor evaluate a startup’s team?

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A startup’s management team is its lifeblood… no amount of awesome ideas will ever overcome a fundamentally flawed management team. In the early stages of any startup, it is all about the people.

But what makes up a good team? How do you know if you have a good team, if you are a good team member, and if an investor will perceive you the way you perceive yourself?

Perhaps it is best to then approach this question from a different point of view…

A startup is fraught with challenges from day one. These include commercial, HR, and technical hurdles of all sorts, to name a few. These generally require a certain attitude and personality attributes from the founders for the startup to have a chance at surviving.

These personality attributes include a combination of confidence, stubbornness, individuality and a sense of self without arrogance, curiosity, humility, energy, maturity, and an eagerness to learn. I have found that founders that share many of these characteristics tend to fare better over the long run than those that do not share these.

While the above are just personality attributes of a likely ‘good’ founder, the equation is in fact far more complex. In addition to the above, I also believe you need to include the following variables as well when doing an analysis:

1)    The technical or commercial competency (depending on their focus) of the founding team. This can either mean the founder(s) have the relevant experience from either having done a startup before (or the relevant role) or they have developed the appropriate skills necessary to execute on the stated vision of the company.

2)    The ability to resolve conflicts quickly and constructively within a team. As most teams will likely hit road blocks when they can least afford them, an ability to either insert humor at the right time, or to divide a problem into parts, or know when to take a break, can all be really important skills to demonstrate the longer term likelihood of a team staying together and working well in spite of the inevitable conflicts that will arise. Although I have heard of some investors doing an artificial ‘stress test’ during investment reviews, it isn’t standard practice for you can usually tell just from spending time with a team, when a team may have potential internal personality issues.

3)    Intuitively know when to persevere and when to quit (on anything). Some people just quit too early, others keep on going too long beyond the point when a strategy is the right one to use. Although harder to evaluate when meeting a founder or their team, this is an important attribute to have internally so as to use an investors time and money most optimally.

4)    The team understands the assumptions and metrics about the market they wish to operate in, or have at least an understanding on how to research this information (the Lean ‘Build Measure Learn’ loop is a good example of a framework that is applied). An airplane pilot can fly an airplane through the dark and through really bad weather because he understand where he was, where he is going, and what he needs to be keeping an eye on the dashboard during the flight. Every great team I’ve ever met always understood the dynamics of their market well enough, knew what they needed to find out as part of what their startup was attempting to do, and knew how to measure it so as to know if they were going down the right ‘flight path’.

5)    The team or founder can articulate their thoughts and plans. Communication both internally and externally is the most important thing to get right within an organization. It makes absolutely no sense if you have an awesome coder who can put out some amazing things if they are wrong because he didn’t get specificity from management or didn’t understand what he was supposed to be working on. Also, it is pointless if the founders of a company are awesome at building product, but then are entirely unable to communicate their vision to the outside world to both interest others to join their business and also to raise more capital.

6)    Although defined as ‘working together to achieve a common goal’, I believe you could argue that collaboration can be summarized as a combination of both conflict resolution skills and communication skills. A team’s ability to collaborate both internally (with team members) and externally (with biz partners, investors, and the media), I believe, greatly increases the chances that they will succeed.

7)   The geographical spread of a team is also something to be considered. This has mostly to do with the dynamics of working as a team. Yes, Skype has done marvels to revolutionize the way we communicate, but for the necessary ‘collision’ of ideas (borrowing from Steven Johnson’s book on Where Good Ideas Come From) to occur repeatedly, close physical proximity is an asset for any new team.

8) The equity spread between founders. Although generally speaking most founding teams have an equal equity spread (50/50, 33/33/33, etc) an investor will take note if there is an equity imbalance that makes for a key hire or co-founder to feel unmotivated.

So, when I meet a startup’s management team… aside from looking at the attributes I’ve listed above, I generally ask myself three questions:

  1. Does this team have the necessary experience it takes to deliver what they have set out to do? (Teams with technical founders are of particular interest to me).
  2. Does this team have the insight to identify their own weaknesses and hire good people to complement them?
  3. Can this team constructively deal with all the challenges that are and will occur during the life-cycle of a company?

Once I feel like I’ve been able to answer these questions while also keeping an eye out for the attributes I’ve listed above, then I feel comfortable in appending the arguably overly-simplified statement of “they have a good team” when speaking about a startup.

So, some parting thoughts and advice for anyone evaluating their own team in the context of forming a new startup or raising money:

  1. Get a co-founder that complements your skills
  2. Understand what skills you lack as a team and hire them
  3. Research the hell out of your market & understand your customers
  4. var stated_vision = (think_big) *  2; -> multiply your vision by two.
  5. Rehearse your pitch A LOT
  6. Don’t be arrogant, but also add some spice and humor to your presentation

Appendix A:

John W. Mullins, PhD, Associate Professor of Management Practice, Marketing and Entrepreneurship at London Business School has kindly offered for download chapter 7 of his book titled The New Business Road Test.

Appendix B:

In my experience, the more subjective a subject matter is, the better off you are by getting more opinions to ‘triangulate’ around a ‘right answer’. To that end, I asked some friends of mine what their thoughts were around this topic. I have included their thoughts below:

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In my view, I look for three things:

(i) Leadership: a CEO who can articulate a vision that excites and imbues a sense of mission in his team is very important. This is often evidenced by the calibre of team he is able to recruit around him [when he has nothing else to offer].

(ii) Self Awareness:
a) Breadth: businesses need ‘flour to balance the yeast’. The great teams have a balanced breadth of expertise and experience, not just one hero.
b) Evolution: as a business grows, so the team must evolve. A willingness to embrace this change is critical.

(iii) Openness: We look for teams who are willing to consult and collaborate. We are not good passengers and we wish to work closely with and assist teams wherever possible.

Alliott Cole (@alliott)- Octopus Ventures

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 “I look for founding teams with a balance of skills in the following three areas:

1) design / ux,
2) marketing / distribution and
3) tech.

However the skills are distributed amongst the founders, they need to be present. I don’t worry too much about traditonal management skills, other than the founder who is the CEO showing a desire to learn them.”

Sitar Teli (@sitar) – Doughty Hanson Technology Ventures

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“When we look at very early start ups, there is not much to judge, but the story and how it is told. The delivery of the story is as important as its content. The founder(s) have to be credible. One of the issues is that technical founders are proud of their technical competence and tend to overdo it on tech and lose the perspective of the other side of the table, that is thinking “are these guys going to make me money?”  That is the bottom line, but it is not a question you can ask directly. The first attempt to answer comes out of the observation of the team during the first hour of meeting (it then needs more time to confirm it, but if the first impression is negative, there is the end of the journey). Are they passionate? Competent? Ambitious? Do they come across as honest and dedicated? Is this “a project”, or is this the thing they will be doing 22 hours a day for the next years? how is the team dynamic? Do they complement each other or are their duplication of the same guy. Is there a decision making process, or is it one guy that decides. Do they argue against each other (bi no-no during the pitch) or they have built a good delivery of the pitch so that it shows maturity and collaboration. “

Ivan Farneti (@ivanfarneti) – Doughty Hanson Technology Ventures

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1) Balance: product, technology, market/commercial.
2) A Leader [in the team].
3) Good mutual respect for one another.

Robin Klein (@robinklein) – Index Seed

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“Eden likes to invest in a team.  That is NOT one founder who has hired a group of employees but still holds all the equity him/herself.  To us, a team is a group of like-minded people who have come together to pursue a common vision.  They are all ‘at risk’ in the opportunity and so are looking for significant wealth creation.  They regard each other as ‘peers’ in the business and have comparable equity stakes.’

 They have to be smart.  And persistent.  One good sign is where the team worked together before, it didn’t work out but here they are again on the next gig.  Let’s call it ‘stickability’.

 ‘It’s easy to build a team once you have raised money.  We often hear that ‘the team will come once the money is in’.  This is not what we are looking for – we are looking for a team that has been built on a common vision through the tough times of starting a company.  Where the founders have got behind the opportunity, as a team, before the cash came in.'”

Ben Tompkins (@b_tompkins) – Eden Ventures

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 “Metrics, knowing your numbers cold, measuring everything. I’m all over that stuff. Seriously. Don’t know what’s going right or wrong if you’re not measuring it.”

Sean Seton-Rogers (@setonrog) – Profounders Capital

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“There are lots of “obvious” qualities which a founder/management team should have – they must know their market, they must me smart, they must be extremely dedicated etc. This has been said a million times already of course, but that doesn’t mean it’s wrong.

To pick one quality which is particularly important from our point of view, the founders need to be able to build a kick-ass product which solves a real problem. As early-stages investors we can and love to help in many areas like sales, marketing, hiring, financing etc., but the ability to create a great product with a clear product/market fit is something we believe needs to be in the founder team DNA.”

 Christoph Janz (@chrija) – Point Nine Capital

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 “I look for teams that innovate vs optimize.”

Jason Ball (@jasonball) – Qualcomm ventures

Appendix C:

I recently wrote a blog post on understanding how an investor evaluates the vision of the founders.

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Do I need a technical founder in my team to get started?

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[Update] If you have a great startup idea, or want to try and hack on problems that industry players have, think about going to http://www.seedhack.com to present it.

This is a quick answer to a frequently asked question.

So you’ve come up with a good idea… you feel like you can get a lot of it going on your own, or perhaps you have another founder in your team, but both of you are not technically inclined, so key parts will need to be outsourced.

Do you need to bring in a technical founder early in the business’s life? Yes!
Do you need a technical founder to get your business idea off the ground if you don’t have one? No!

There are many people out there with great ideas that solve real world problems, but they just don’t know any good technical people. You might be one of them. That shouldn’t prevent you from getting started thinking and doing, but you will hopefully be doing an interesting enough project that you’ll quickly be able to attract top technical talent to join you. What you don’t want to do, is get a company off the ground completely based on outsourced tech help, and never really bring the tech in-house, thus being entirely at the mercy of an external shop for your core technology.

There are clear advantages to having a technical person/founder on board including:

1) A technical founder, unless they are not committed, will continue to work on beer and pizza long after cash becomes a limited resource. An outsourced development shop will probably not show the same level of commitment.
2) A technical founder will help you in creating a product/service that is architected for your specific needs and not based on (possibly) some recycled code.
3) A technical founder will be able to react to tech emergencies far faster than an outsourced shop.
4) A technical founder will help you beta test and a/b test business ideas far faster and more efficiently.
5) A great technical founder will also attract other great technical people into your team. Birds of a feather flock together, and at some point, when you have to bring the technology in-house, you’ll appreciate this.

However, even if you don’t have a technical founder, all is not lost. Viability and execution of your business idea is the most important thing to start. If you need to outsource to kick things off, do yourself and your business a favor by learning how your website/service/product works and perhaps how to modify it on the fly and in the most basic of ways. Otherwise you will always be at the mercy of your outsourcing team. If you don’t know HTML/CSS start there… it will serve you well.

Other articles on the matter:

http://cemagnifique.com/2011/04/15/why-ceos-withouta-technical-background-need-a-strong-cto/
http://www.adamwaaramaa.com/building-a-site/you-need-a-technical-co-founder/
http://rosskimbarovsky.com/2009/10/do-you-need-a-technical-co-founder/
http://www.explainbusiness.com/questions/201/do-i-need-a-technical-co-founder

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