When I first wrote about our 5 Ts approach as a simple tool to score the merits of any new deal, I intentionally kept each section brief, so as not to overwhelm (or bore) the reader. What follows is a more fulsome discussion of what we look for in “team”, the first and by far, the most important of our 5 Ts evaluation.
Evaluating the Team
When evaluating any team, the initial focus is on the team’s presentation acumen, abilities, and track record. What do we mean by each of these terms?
Presentation Acumen
It all starts with the initial pitch. This is a critical initial gating point for us. Of course we focus on the substance of the presentation, making sure that they cover the critical points of every pitch, which essentially align with our 5 Ts.
As the company delivers their pitch, can they do so using simple, concise slides that keep our attention on them rather than overwhelming us with text-heavy "eye chart" slides? I continue to be amazed that so many founders have yet to invest the time to fully understand and prepare a great pitch deck, especially when there are so many mentors and incubators/accelerators ready to help a new CEO refine an otherwise mediocre presentation. Why does this matter? Because if they can’t do a great job presenting their value proposition to us, can we expect them to do any better when pitching to strategic partners or customers? Probably not.
Assuming these presenters give a succinct pitch, do they fall into the trap of spending 75% of their pitch describing the attributes and inner-workings of their technology? If so, and they spend little or no time describing their ideal customer profile, go-to-market thesis or financial projections, we designate them as “technical founders.” This term applies to at least half of the startup CEO’s we see. Our experience tells us that such technical founders rarely build a great company, unless they’ve also gathered together a strong executive team that includes people with strong (i) go-to-market and (ii) operational aptitude and experience. These are all team characteristics that we will evaluate in our due diligence exercise.
Abilities
Some teams are composed of individuals who have very similar skill sets, something that happens in companies started by longtime colleagues and friends. For example, we are often introduced to a technical team where all co-founders are both engineers or both software developers. Sometimes we see a medical device company where the co-founders are both MDs. The challenge with these teams is that they lack balance. We’d much rather see an enterprise software startup led by co-founders where one partner is a talented developer and the other partner has proven marketing and sales aptitude. That sends a strong and essential signal to us that the co-founders appreciate the variety of skills and talents that will be essential to launching and growing any enterprise. We’re even more impressed when such teams have clearly demarcated areas of responsibility, instead of one person who may be wearing a few too many hats.
Not surprisingly, we often see a number of logos in common among a leadership team, as smart founders will often cherry-pick their most valued colleagues to join them from other companies in which they previously worked together. That’s a very good sign.
Track Record
We also assess the leadership team’s track record: What did each member do before? Were they previously a part of a leadership team or did they serve in other roles? What responsibilities did they have, and what did they accomplish? We also want to know where they failed, and what lessons they took away from such experiences. Often, when we ask about what an individual did in his/her previous company, we get a response that starts with “I was part of a team that [fill in the blank]”. That’s not sufficient. We want to know what role they played on that team and with what specific responsibilities and accomplishments.
If we like their initial pitch and decide to spend more time on due diligence, a key part of this process involves conducting reference checks on each member of the leadership team. It's important that we invest the time to determine if this is a superstar team or not. We won’t just rely on what the team says about themselves; we want to know what others say about them.
After hearing the pitch we ask ourselves if their presentation is credible, compelling and exciting. We also actively solicit any input from the skeptics among us. What “red flags” did any of us see? As our profession is full of overly-optimistic investors, we appreciate the critical importance of unearthing any failings, potential problems or other potential deficiencies with the CEO and their team. Are we convinced that this is the right team to execute their plan, that their value proposition is truly disruptive, and that they are addressing a substantial and lucrative market need (versus just a “market want”)? Do they understand product-market fit and their ideal customer profile? Do they have a solid funding/capitalization plan as well as a vision for their eventual exit (other than the noncredible “we plan to IPO in a few years”)?
We place significant weight on their communication style, including their nonverbal communication skills. Do they create a strong connection with their audience and deliver a compelling pitch? Do they clearly make the case that they have a strong team, a solid value proposition and that they are targeting a large, unaddressed or unmet market need? Are their answers to our questions thoughtful, candid, and credible? If the pitch is divided among two or more team members, how well do they tag team with each other? Ultimately, we ask ourselves whether they inspired us enough to want to learn more. If not, we give them a handshake and wish them well in their search for the right investor.
Personal Qualities We Look For
What about the attributes of individuals on the leadership team? Exceptional founders (or founding teams) will have that very rare combination of a strong ego coupled with sufficient humility that they actively seek out the advice of others. They are self-aware of their strengths as well as their weaknesses and the gaps they will need to fill. They are in good health, as leading a startup is a physically taxing endeavor. They must demonstrate a high degree of frustration tolerance and an ability to problem-solve, be able to react and pivot when they encounter the unexpected obstacles and challenges that every founder will face as they work to grow their company. Some will be charismatic and often inspiring, but we know the ultimate appeal of the best entrepreneurs is great competence coupled with the ability to persevere, execute and attract a strong ecosystem of partners, employees, investors, advisors and customers.
We value founders that are prompt and thorough in responding to our questions, whether we reach out to them by phone, email or text. I’m always pleasantly surprised by the CXO who quickly responds to my late night email. However, too many others fail in this regard, being slow to respond to our inquiries, and that’s a red flag. If they take this long to respond to us when they are appealing to us for investment, can we expect any better after we’ve made our investment? We recognize that their communication discipline, whether good or poor, is likely to carry over to their communications with partners and prospective customers.
“All In”
We want a founding team that is “all in”. By this I mean that they don’t have a separate consulting business on the side, that they are 100% committed to achieving their vision and they may have invested a considerable amount of their own funds to get the company up and running. They may take a substandard salary while they work to generate more revenues or obtain investment. They should eat, sleep and breathe their work and their passion for it clearly shows.
A Note About Solo Founders
Many early-stage startups are led by a team of one. That lone founder/CEO makes ALL decisions, always wears too many hats and inevitably won’t have time for or will ignore one or more critical business functions in which they have little to no experience. They may have other employees in the business, but if the founder/CEO is the only person who really makes critical strategic and tactical decisions about any aspect of the business, then we consider them as “a founding team of one”.
As the reader will predict, there remains great investment risk even with the best of these solo founders as they won’t have backup if something unexpected takes them out of the game. I recently witnessed the loss of a CEO who was killed in a random act of violence, an event that none of us could have foreseen. Additionally, I advised another company whose older CEO was diagnosed with cancer. His subsequent change in life priorities led him to quickly accept a mediocre purchase offer from an acquirer. More often, some solo founders will burn out early, giving in to the enormous pressures of trying to grow their fledgling enterprise, selling out in a undervalued exit. All CEO’s will need a break from work to spend time with family and friends and even for an occasional vacation, but taking time off is really hard to do when one has no bona fide senior partners to rely on.
Equally important, solo founders don't have other peers to debate the merits of the many possible decisions that they’ll be faced with on a nearly constant basis. And junior employees typically won’t serve such a role as they are often hesitant to challenge ideas that are enthusiastically supported by their CEO. Bottom line: Solo Founders are more successful when they’ve built a strong foundation of support with a complementary executive team.
A Final Question
Ultimately we ask ourselves if this is a founding team that we can look forward to working with for the next 3 to 7 (or more) years, because we know this is how long many of our best investments take to reach maturity and exit. We have to really value this executive team, and believe that they have the rare combination of intelligence, savvy, determination, fortitude, and vision to see this through to a hoped-for strong exit. They absolutely cannot be jerks! Life is too short for that. We should have the confidence in them to be willing to follow them into battle, and at the same time we should like them enough that we’d love to have them as next-door neighbors. If we can check all of these boxes, then we are ready to move forward to the next steps in our diligence and negotiation process.
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