Welcome to a BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Hague tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.
Early in the life of your company, you won’t have a lot of data. Your company will not have a long track record that investors can review and analyze. Without data, early-stage investors have to make their investment decisions based on “softer” attributes such as your team, your market, or your product.
Most investors cite the team — more specifically, the founding team members — as the most important factor in their investment decision. A lot of things can change throughout the life of a startup, but one factor that generally remains constant is the people. (See our post, How to Fire Your Co-Founder, to see why I say generally).
In this post, we’ll dive into the five main factors investors will look at when evaluating your team for an investment.
Domain expertise refers to your knowledge in a particular area or topic, specifically the area in which you are founding your company. When evaluating a team’s domain expertise, investors look at how qualified a team is to be working on the problem they have chosen. Do they have experience in the industry? Do they have some unique insight that no one else has?
Academic or employment pedigree
By looking at the companies or academic institutions a company is associated with, investors are able to make quick assessments of the quality and experience level of the team. That said, this criteria tends to lead to a lot of bias, as investors tend to value companies they have heard of over ones they have not, or schools they are familiar with. As an entrepreneur, you should be conscious of investor biases. Research investors and try to position yourself in the best way possible for each investor.
Team dynamics refer to how well a team functions. Investors may look at how long team members have known each other and whether or not they have worked together before as a way of determining whether they’ll work well together in the future. Investors will pay close attention to the relationship and interactions between team members in meetings. Is there any obvious tension or misalignment between you and your co-founders? Is everyone in agreement about roles? Are you talking over each other? Is there a team member that is missing from every meeting? Take an objective look at your team dynamics, solve any issues, and be cognizant of how your internal dynamics may be perceived by outsiders.
The diversity of skills on the team
When evaluating your team, look at what skills the founders have. Do they have the expertise needed to actually execute on their solution? If they don’t, what is their plan to get the needed expertise? Avoid showing your founding team as having similar skillsets. Be very clear about who will have what roles in the company, so that investors know there won’t be tension over who gets to be CEO or CTO, for example.
The most common red flag for investors around this factor is a company without a technical co-founder, particularly if you are building a product that requires technical skill. Very often investors meet a founder or founding team with a great idea, but no way of executing it. Often it is much harder to find technical people to work on the problem than a non-technical founder may believe. Without a technical co-founder, it can be hard to understand the intricacies of your product, making it hard to hire and lead a successful product team. Be sure to have the technical competency on your team to execute. If you aren’t technical, bring someone technical from your team to your investor meeting to add to your credibility.
Has your team built a company or a product before? Have you raised venture capital before? Is there some other notable accomplishment in your past that might reflect on your ability to build this company? Past accomplishments can help signal that your company’s founding team has what it takes to execute on your idea.
It is human nature to pattern-match and look for signals that help make our decision-making process easier. Investors are no exception.
Many venture capitalists prefer to back founders that have already had one successful exit. Not only do they feel this proves a founder is able to take a company from idea through to a liquidity event, but it also likely means that the founder has had enough personal financial success that they won’t take the first acquisition offer that they receive. First-time founders find it hard to justify the risk of turning down life-changing money, whereas founders that have already had a successful exit are more likely to hold out for a bigger success.
If you are a first-time entrepreneur, it is very important to stress your commitment to building a BIG company. Don’t talk about being excited about early exit opportunities, or mention that you think you’ll be on to the next company in a couple years. Investors need to feel confident that you have the ambition to build something big enough to provide them with the returns they are looking for.
In addition to these five main factors, investors will also factor in how much they actually want to work with you. Are you someone they want to interact with for the lifetime of the investment? Can they learn from you? Are you coachable? And finally, they will look at your company culture: how you hire, how you work, what your office environment is like. Is this a culture that they want to be a part of? Is it a culture that will be sustainable?
Beyond the reasons why an investor may choose to work with you, there are also red flags that may turn an investor off. We already talked about the lack of a technical co-founder being a red flag to many investors. There are three more that you should consider.
The first red flag is founders who are not working on the product full-time. These founders are seen as lacking complete commitment to the project’s success.
The second red flag is married couples. While there are a number of great examples of successful married couples that have founded companies (the co-founders of Eventbrite, for example), many investors see the presence of married couples as adding too much emotional and personal complexity to the business partnership.
You need to expect that investors evaluating your deal are not going to go through every aspect of your company in detail. They are looking for easy ways to identify that a team is credible.
The final red flag is companies that only have one member of the founding team. We actually wrote a full post on this topic in a previous edition of #AskAnInvestor, which you can check out here. Solo founders are often avoided because investors believe it is a signal that the founder has been unable to convince others of the merit of their idea. Many investors also feel that solo founders are much less likely to succeed in the long run. There has yet to be any conclusive data to support this, but the high number of large companies with multiple co-founders has led the investment market away from solo founders.
It is human nature to pattern-match and look for signals that help make our decision-making process easier. Investors are no exception. You need to expect that investors evaluating your deal are not going to go through every aspect of your company in detail. They are looking for easy ways to identify that a team is credible. Your job as a founder is to assemble the best team possible and then sell that team to investors.
When describing your team, use short phrases. List the recognizable companies, brands, and schools that each team member is associated with. Name any past startup success or past work the team has done together to show credibility and ensure that all key areas of expertise needed to execute the ideas are covered.
Got a question for the investors? Email them here.
Editor’s Note: This entry is an excerpt from Katherine Hague’s new book – Funded: The Entrepreneur’s Guide to Raising Your First Round. The book is now available through O’Reilly Media.
Feature photo from Unsplash