How does an early-stage investor review your financial plan?


You are about to go meet an investor… you’ve read on the web and heard differing views from people on whether you need a financial plan… some say you don’t, it’s a waste of time as its all made up numbers anyway… others say, you absolutely need a financial plan… so you walk into an investor meeting full of anxiety as to whether not having something is going to reflect poorly on you or if what you’ve created (if you did create something) will be crap in the investors eyes… so what to do?

The financial plan, for most tech-focused early-stage founders, is probably one of the most dreaded bits of the investment pack to send your prospective early-stage investors. The variety of opinions online don’t help either as they just confuse the matter…

  • Do I need one or do I not need one?
  • If I build one, how do I know it is ‘right’?
  • If I build one, surely the investor will know that my numbers are all “fake” and just slash them all in half?

Let’s face it, as much as we’d like to think we can predict the future with all sorts of fancy extrapolations on growth rates… but we can’t… Considering that most people create financial projections based on assumptions of what needs to happen for an upcoming month’s worth of operating events to happen and then project from there for x number of months or years, you effectively create a series of increasingly improbable chronological events with the last event (month) in the series being effectively a function of the compounded set of decreasing probabilities, all of which are asymptotically approaching zero percent in their likelihood of happening “according to the plan”.

What’s my point? Well, that your financial plan isn’t worth much from an accuracy perspective.
So what then? If my numbers are crap, why bother with whole financials nonsense?

It is in its forensic analysis of your thinking behind the model, however, where an early-stage investor really gets a feel for how you think and how you want to direct your company in the near future. Next, it is in how your cash will be used efficiently to accomplish the mutually agreed goals.

Before we continue further, I want to clarify that I’m not going to discuss how it is that you should format your financials, or explain basic accounting principles, or how financial statements work. There are plenty of resources online that can help you with that. Rather I want to explore how an early-stage investor (well, at least myself) forensically reviews the financial plan of an early stage startup (vs. a later-stage startups where there is a historical performance record already there and with multiple years of budgets and actual figures).

So what do I mean by conducting a forensic analysis of company’s financials?

Well, I certainly don’t mean it in the sense of reviewing the financials of the startup from a post-mortem basis, but rather reviewing them with the same level of scrutiny on ‘reasons’ why things may have occurred or may occur as one sees on TV shows like CSI. Effectively, I’m looking for what are the cause & effects of each of the numbers and what are the key assumptions behind them, with emphasis on the word “assumptions”. The verbal discussion with the entrepreneur’s financials will focus entirely on their assumptions and the reasoning behind them.

When an investor is discussing numbers (which may be entirely wrong from a future-perspective) with an entrepreneur, if the entrepreneur shows a solid understanding on why the numbers are there, having a clear view of the market dynamics in which their company operates, with realistic customer acquisition assumptions, realistic hiring plans, effective use of marketing budgets, appropriate expenses for a growing company, it can have a HUGE impact on establishing the necessary credibility of competence an entrepreneur needs to inspire confidence in the investor. The opposite, seeing a financial plan with current month revenues/expenses projected five years into the future assuming linear or exponential growth in all aspects of the organization and then stated with a confidence of ‘this is what we realistically expect to happen’ can be both demoralizing for an investor if not outright humorous.

Let me share with you a little secret: With a few exceptions, you will always know your industry and its numbers better than any investor will. However, an experienced investor will ask you the right questions to ascertain whether or not you know your industry well enough to increase the probability of your own company’s success. As such, really do your homework… by homework I mean, don’t just go out and build a product and hope there will be customers. If you take the Lean Methodology approach, for example, as soon as you have customer validation, make an effort to understand the market dynamics of that customer… how many of them are there? What is their concentration? How do you reach them? Are they locked in with a competitor with some sort of monthly or annual contract? Do they buy in a cyclical pattern? Do they prefer to buy online or only from salespeople? Do they need help with setting up your product or can they use it as is? What are they generally willing to pay for other similar services? How is the market growing? Mind you that in some circumstances the ability to ‘charge’ money of your customers may not be deemed the real potential for revenues at first (think Twitter 3 years ago), but again it is how you articulate the future value that matters.

If you take all those questions and research them, what you will find are key components of what will make up the assumptions on your future revenues (or value creation objective). Perhaps your customers are only willing to buy your product during the holiday season, so you will have a hard time with cash coming into your company during the off-season. Financials that didn’t take that into consideration would look to an investor as somewhat unrealistic, not in the numbers, but in the market dynamics of your product. Take other assumptions for example, if you can only reach your customers via another party (perhaps a distributor?)… As in you aren’t directly selling to your end customer, how does that affect the time until you get cash, and the amount of customers you get all at once (or lose all at once)? How long are your customers likely to stay within your service (churn)?

Again, all of these examples are about doing your homework on how your company will operate within its industry and how it will acquire customers. The better you can explain the reasons why a number in your financial model is based on a realistic set of assumptions, the better off you will be. But look at it another way… while you are doing this exercise, you will realize whether there is actually a business that can make money (or other method of value creation) or not. For example, if you do the analysis and find that in the sector you are exploring people aren’t willing to pay and that many other competitors are giving the product away for free, and that there aren’t many opportunities to inject ‘advertising’ as a supplementary source of revenue, you may have just saved yourself a serious amount of wasted energy!

Which brings us to the next part of the homework: the understanding of your company’s expenses. If you have found a market where your product is actually capable of generating some sort of value (note again that I’m not necessarily focusing on “revenues” because there are many ways investors define what “value creation” is, whether it be a growing user base or actual sales) the next part is how do you spend your money to match that customer growth. When do you hire new sales people (and how many sales people do you need relative to a customer sale?),  when do you bring new servers online, spend on marketing, spend on new offices, laptops, etc..  Obviously the types and amounts of expenses vary from company to company, but what matters here is how they map to what you are trying to do and whether that mapping is realistic (what is your customer acquisition cost?). For example, if you have a marketing charge of $500 one month, is it realistic to expect that next month your customer sign ups will increase by 500%? Well, as I said before about the “little dirty secret”… I have no flippin’ idea, but I will expect you to tell me how the $500 will equal 500% in customer growth and I will basically evaluate the credibility of your answer. If you answer, I will buy $500 worth of flyers and pass them out, you can rest assured that I will not believe your 500% figure, but if your team’s background has a track record of low-cost viral marketing campaigns, and your answer is basically a version of that… well guess what, I might just find it plausible. I may be exaggerating the bit about having ‘no flippin idea’ as most investors will have seen enough of what works and doesn’t work to call BS, but again, if you can walk an investor credibly through your assumptions, it will do wonders for the confidence you create.

Lastly and most importantly, is the review of how the expenses map to the revenues as far as cash flow is concerned. The lifeline of a company is how much cash it has before it either dies or needs to go fund-raising again. As such, investors not only want to know how much a company needs in terms of cash to execute its vision (perhaps the subject for an upcoming post), but also on how that cash is being used. If there is a huge mismatch here or there isn’t enough time for you to reach your company’s next point of tangible progress (a validation point), this may be a point worth discussing. Much is joked about how an investor will take your revenues and cut them in half, actually an investor may outright eliminate your revenues from the overall sensitivity analysis he is doing to get a feel for how much cash your company would burn on a monthly basis at time x in your plan (you should know your current monthly burn number by heart, by the way). This is because if your company has to do a pivot or something else goes wrong, this will not only accelerate the cash drain relative to your plan, but also have an effect on when the company needs to go fund-raising again and an investor needs to take all of that into consideration as part of the investment analysis.

In summary, do your homework before you build your financial model, but definitively go through the exercise of building one. It will be hugely helpful in helping you identify how your business may need to grow in order to adapt to the sector in which it operates and how you may need to spend money in order to achieve your goals. Most importantly however, by being prepared with a thorough understanding of why everything is there within your model, the less anxious you will be when meeting potential investors… and remember, you may not know all the answers, such as how much money will it cost you to acquire a new customer, but even if you at least start with a reasonable assumption, confess that you aren’t sure about it, and then play around with a range to see if things work, that is also helpful to the investor for them to get a feel for how you can evaluate uncertain circumstances and adapt accordingly.

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Additional Notes on Early-Stage Startup Valuation

English: Diagram of the typical financing cycl...
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In my recent post on how an early-stage investor values a startup, I talk about how market comparables were the closest guide to how early-stage investors value a startup vs. any other methodology. However, I feel like I left one question unaddressed. Namely, why are there valuation discrepancies for comparable companies across the world (more specifically at investment stage rather than exit stage)?

The answer has to do with liquidity of deals, the localized risks for investors, and the supply of investors.

As I mentioned in my last post, there are various factors that can come into how an investor values a startup, but using market comparables from deals done in the USA doesn’t always incorporate all the risks that are prevalent in the specific geography where the company and investor in question operates. Furthermore, the availability of capital in any geography will also affect how an investor gauges his own risk/reward ratio when pricing deals.

I’m going to talk about this point abstractly and without incorporating the argument of the global nature of internet-based businesses (they do have some localization risk still, but less so). So, for example, startup exits for investors in certain developing economies will happen less often than say, in Silicon Valley. This has to do not only with the number of companies coming out of the country, but the universe of potential buyers for these companies in that geography.

This affects that risk an investor takes, as he is less likely to get that 10x that I mentioned in my previous post. Therefore an investor seeks a ‘discount’ to take on a deal in order to have a portfolio of deals where there is the possibility that one will be able to exit in spite of whatever market conditions exist locally. Add to that the fact that the investor may be one of very few investors, and therefore can command this discount more forcefully than if more competition existed (once enough investors exist, market pricing becomes more stable and in parity with other larger markets).

Think of it this way… If you’ve been on tourist holidays to resorts abroad, you’ll have noticed that things that are generally cheap(er) back home are notably more expensive at the resort store. This higher cost is due not only because of the transport cost to the resort, but also the cost of holding them there in inventory without knowing if anyone traveling to the resort will buy them. If the seller doesn’t include a higher premium on these items, he will not break even considering the high scrap-age risk he must take on inventory not-bought, and if there aren’t any other stores around, the store doesn’t have to compete on price either, but can continue to seek profit under the circumstances.

So, the point of this post is only to highlight why in certain parts of the world financing can be more difficult to get, but also why it can be priced differently than equivalent deals elsewhere.


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How does an early-stage investor value a startup?

English: Diagram of the typical financing cycl...
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One of the most frequently asked questions at any startup event or investor panel, is “how do investors value a startup?”. The unfortunate answer to the question is: it depends.
Startup valuation, as frustrating as this may be for anyone looking for a definitive answer, is, in fact, a relative science, and not an exact one.

For those of you that want to cut to the summary of this post (which is somewhat self-evident when you read it) here it is:

The biggest determinant of your startup’s value are the market forces of the industry & sector in which it plays, which include the balance (or imbalance) between demand and supply of money, the recency and size of recent exits, the willingness for an investor to pay a premium to get into a deal, and the level of desperation of the entrepreneur looking for money.

Whilst this statement may capture the bulk of how most early stage startups are valued, I appreciate that it lacks the specificity the reader would like to hear, and thus I will try and explore the details of valuation methods in the remainder of my post with the hopes of shedding some light on how you can try and value your startup.

As any newly minted MBA will tell you, there are many valuation tools & methods out there. They range in purpose for anything from the smallest of firms, all the way to large public companies, and they vary in the amount of assumptions you need to make about a company’s future relative to its past performance in order to get a ‘meaningful’ value for the company. For example, older and public companies are ‘easier’ to value, because there is historical data about them to ‘extrapolate’ their performance into the future. So knowing which ones are the best to use and for what circumstances (and their pitfalls) is just as important as knowing how to use them in the first place.

Some of the valuation methods you may have have heard about include (links temporarily down due to Wikipedia’s position on SOPA and PIPA):

While going into the details of how these methods work is outside of the scope of my post, I’ve added some links that hopefully explain what they are. Rather, let’s start tackling the issue of valuation by investigating what an investor is looking for when valuing a company, and then see which methods provide the best proxy for current value when they make their choices.

A startup company’s value, as I mentioned earlier, is largely dictated by the market forces in the industry in which it operates. Specifically, the current value is dictated by the market forces in play TODAY and TODAY’S perception of what the future will bring.

Effectively this means, on the downside, that if your company is operating in a space where the market for your industry is depressed and the outlook for the future isn’t any good either (regardless of what you are doing), then clearly what an investor is willing to pay for the company’s equity is going to be substantially reduced in spite of whatever successes the company is currently having (or will have) UNLESS the investor is either privy to information about a potential market shift in the future, or is just willing to take the risk that the company will be able to shift the market. I will explore the latter point on what can influence you attaining a better (or worse) valuation in greater detail later. Obviously if your company is in a hot market, the inverse will be the case.

Therefore, when an early stage investor is trying to determine whether to make an investment in a company (and as a result what the appropriate valuation should be), what he basically does is gauge what the likely exit size will be for a company of your type and within the industry in which it plays, and then judges how much equity his fund should have in the company to reach his return on investment goal, relative to the amount of money he put into the company throughout the company’s lifetime.

This may sound quite hard to do, when you don’t know how long it will take the company to exit, how many rounds of cash it will need, and how much equity the founders will let you have in order to meet your goals. However, through the variety of deals that investors hear about and see in seed, series A and onwards, they have a mental picture of what constitutes and ‘average’ size round, and ‘average’ price, and the ‘average’ amount of money your company will do relative to other in the space in which it plays. Effectively, VCs, in addition to having a pulse of what is going on in the market, have financial models which, like any other financial analyst trying to predict the future within the context of a portfolio, have margins of error but also assumptions of what will likely happen to any company they are considering for investment. Based on these assumptions, investors will decide how much equity they effectively need now, knowing that they may have to invest along the way (if they can) so that when your company reaches its point of most likely going to an exit, they will hit their return on investment goal. If they can’t make the numbers work for an investment either relative to what a founder is asking for, or relative to what the markets are telling them via their assumptions, then an investor will either pass, or wait around to see what happens (if they can).

So, the next logical question is, how does an investor size the ‘likely’ maximum value (at exit) of my company in order to do their calculations?

Well, there are several methods, but mainly “instinctual” ones and quantitative ones. The instinctual ones are used more in the early-stage type of deals and as the maturity of the company grows, along with its financial information, quantitative methods are increasingly used. Instinctual ones are not entirely devoid of quantitative analysis, however, it is just that this “method” of valuation is driven mostly by an investor’s sector experience about what the average type of deal is priced at both at entry (when they invest) and at exit. The quantitative methods are not that different, but incorporate more figures (some from the valuation methods outlined) to extrapolate a series of potential exit scenarios for your company. For these types of calculations, the market and transaction comparables method is the favored approach. As I mentioned, it isn’t the intent of this post to show how to do these, but, in summary, comparables tell an investor how other companies in the market are being valued on some basis (be it as a multiple of Revenues or EBITDA, for example, but can be other things like user base, etc) which in turn can be applied to your company as a proxy for your value today. If you want to see what a professionally prepared comps table looks like (totally unrelated sector, but same idea), go here.

Going back to the valuation toolset for one moment… most of the tools on the list I’ve mentioned include a market influence factor , meaning they have a part of the calculation that is determined by how the market(s) are doing, be it the market/industry your company operates in, or the larger S&P 500 stock index (as a proxy of a large pool of companies). This makes it hard, for example to use tools (such as the DCF) that try and use the past performance of a startup (particularly when there is hardly a track record that is highly reliable as an indicator of future performance) as a means by which to extrapolate future performance. This is why comparables, particularly transaction comparables are favored for early stage startups as they are better indicators of what the market is willing to pay for the startups ‘most like’ the one an investor is considering.

But by knowing (within some degree of instinctual or calculated certainty) what the likely exit value of my company will be in the future, how does an investor then decide what my value should be now?

Again, knowing what the exit price will be, or having an idea of what it will be, means that an investor can calculate what their returns will be on any valuation relative to the amount of money they put in, or alternatively what their percentage will be in an exit (money they put in, divided by the post-money valuation of your company = their percentage).  Before we proceed, just a quick glossary:

Pre-Money = the value of your company now
Post-Money = the value of your company after the investor put the money in
Cash on Cash Multiple = the multiple of money returned to an investor on exit divided by the amount they put in throughout the lifetime of the company

So, if an investor knows how much % they own after they put their money in, and they can guess the exit value of your company, they can divide the latter from the former and get a cash-on-cash multiple of what their investment will give them (some investors use IRR values as well of course, but most investors tend to think in terms of cash-on-cash returns because of the nature of how VC funds work). Assume a 10x multiple for cash-on-cash returns is what every investor wants from an early stage venture deal, but of course reality is more complex as different levels of risk (investors are happy with lower returns on lower risk and later stage deals, for example) will have different returns on expectations, but let’s use 10x as an example however, because it is easy, and because I have ten fingers. However, this is still incomplete, because investors know that it is a rare case where they put money in and there is no requirement for a follow-on investment. As such, investors need to incorporate assumptions about how much more money your company will require, and thus how much dilution they will (as well as you) take provided they do (or don’t ) follow their money up to a point (not every investor can follow-on in every round until the very end, as many times they reach a maximum amount of money invested in one company as is allowed by the structure of their fund).

Now, armed with assumptions about the value of your company at exit, how much money it may require along the way, and what the founding team (and their current investors) may be willing to accept in terms of dilution, they will determine a ‘range’ of acceptable valuations that will allow them, to some extent, to meet their returns expectations (or not, in which case they will pass on the investment for ‘economics’ reasons). This method is what I call the ‘top-down’ approach…

Naturally, if there is a ‘top-down’, there must be a ‘bottom-up’ approach, which although is based on the ‘top-down’ assumptions, basically just takes the average entry valuation for companies of a certain type and stage an investor typically sees and values a company relative to that entry average. The reason why I say this is based on the ‘top-down’ is because that entry average used by the bottom-up approach, if you back-track the calculations, is based on a figure that will likely give investors a meaningful return on an exit for the industry in question. Additionally, you wouldn’t, for example, use the bottom-up average from one industry for another as the results would end up being different. This bottom-up approach could yield an investor saying the following to you when offering you a termsheet:

“a company of your stage will probably require x millions to grow for the next 18 months, and therefore based on your current stage, you are worth (money to be raised divided by % ownership the investor wants – money to be raised) the following pre-money”.

One topic that I’m also skipping as part of this discussion, largely because it is a post of its own, is “how much money should I raise?”. I will only say that you will likely have a discussion with your potential investor on this amount when you discuss your business plan or financial model, and if you both agree on it, it will be part of the determinant of your valuation. Clearly a business where an investor agrees that 10m is needed and is willing to put it down right now, is one that has been de-risked to some point and thus will have a valuation that reflects that.

So being that we’ve now established how much the market and industry in which you company plays in can dictate the ultimate value of your company, lets look at what other factors can contribute to an investor asking for a discount in value or an investor being willing to pay a premium over the average entry price for your company’s stage and sector. In summary:

An investor is willing to pay more for your company if:

  • It is in a hot sector:investors that come late into a sector may also be willing to pay more as one sees in public stock markets of later entrants into a hot stock.
  • If your management team is shit hot: serial entrepreneurs can command a better valuation (read my post of what an investor looks for in a management team). A good team gives investors faith that you can execute.
  • You have a functioning product (more for early stage companies)
  • You have traction: nothing shows value like customers telling the investor you have value.

An investor is less likely to pay a premium over the average for your company (or may even pass on the investment) if:

  • It is in a sector that has shown poor performance.
  • It is in a sector that is highly commoditized, with little margins to be made.
  • It is in a sector that has a large set of competitors and with little differentiation between them (picking a winner is hard in this case).
  • Your management team has no track record and/or may be missing key people for you to execute the plan (and you have no one lined up). Take a look at my post on ‘do I need a technical founder?‘.
  • Your product is not working and/or you have no customer validation.
  • You are going to shortly run out of cash

In conclusion, market forces right now greatly affect the value of your company. These market forces are both what similar deals are being priced at (bottom-up) and the amounts of recent exits (top-down) which can affect the value of a company in your specific sector. The best thing you can do to arm yourself with a feeling of what values are in the market before you speak to an investor is by speaking to other startups like yours (effectively making your own mental comparables table) that have raised money and see if they’ll share with you what they were valued and how much they raised when they were at your stage. Also, read the tech news as sometimes they’ll print information which can help you back track into the values. However, all is not lost. As I mentioned, there are factors you can influence to increase the value of your startup, and nothing increases your company’s value more than showing an investor that people out there want your product and are even willing to pay for it.

Hope this helped! Feel free to ask questions in the comments.

UPDATE: I wrote some additional notes on early-stage startup valuation because I felt I didn’t quite cover all parts in the above summary. You can ready those by clicking here.

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How does an investor evaluate a startup’s team?

Management structure of BEST
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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:


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


 “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


“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


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

Robin Klein (@robinklein) – Index Seed


“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


 “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


“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


 “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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