Seedfunders reviews hundreds of startups a year and one of the first things we look at is the number of founders. We typically use three buckets: Solo founders, teams of 2 or 3, and 4 plus. In this episode Dave shares which bucket he prefers as well as many other factors we consider important about founding teams.
How are you sir?
I’m great, Joe.
Today, we’re looking at the people behind the startups – the founding team. When you look at a company, how important is the founding team?
Most angel investors would say it is the most important factor. I would agree to an extent, but there are about 10 other factors that are also important. I would say, we certainly take a hard look at the team, but a great team alone isn’t sufficient to follow through with an investment. You need more. There is an old saying, “You should bet on the jockey not the horse,” but you really need both. Everyone remembers that Secretariat won the triple crown, but who remembers that Ronnie Turcotte was the jockey.
What qualities do you look for in a founding team?
Well the word team is critical as well. We prefer really a three-person team. Ideally, a founder who might be an industry expert, a technology person to manage the IT and a sales and marketing person. Ideally, that’s what we’d look for. Most founders however, fail to recognize the importance of sales and marketing. They might have a technology and an industry expert then say, “It’ll just sell itself. Build it and they will come.” That’s really one of the biggest problems that founders have in not recognizing that without sales and marketing, you’re going to have to continue to raise capital until a point you can’t raise capital anymore because you don’t have enough revenue. Sales and marketing is very important. It’s one of the three founders of the team.
I also say that this is ideal. Sometimes you can outsource some of those functions, but that could lead to problems. The most common problem we see in outsourcing is in technology development. If you don’t have internal expertise to control or management, it could turn out to be a disaster. Many, many times we’ve seen thousands of dollars spent with no product developed and no end in sight, because they didn’t have someone on the team with the capability of managing the technology. That also can happen by the way in outsourcing sales. Without internal expertise in sales and marketing, you could waste thousands of dollars with no result, because the sales and marketing was not managed internally and totally outsourced. Ideally, as I said in the team, ideally an industry expert, an IT expert and a sales and marketing expert.
Focusing specifically on the founder or leader of this team, what are the qualities you look for in that person?
I talked previously on John Wooden, UCLA’s famous basketball coach and his pyramid of success that leads to greatness. His pyramid can be applied to business, but really, it’s geared towards sports. So, I developed my own pyramid of success specifically, as it relates to startups. The base of my pyramid, I call core values. Are those that I say are required to be successful as a startup. I do mean required, all four. Those core values are passion, initiative, perseverance and integrity. I really think a founder needs all four of those corners of the pyramid or the pyramid will collapse.
That makes a lot of sense necessary, but maybe not sufficient. In limited interaction, how are you able to tell if the founder has all four of those core values?
It really is not easy. It’s actually easier to tell if one is lacking. I said all four are required. So, if obviously, one is lacking that makes our decision easier of not pursuing with an investment. I could give a lot of examples of companies that we rejected based on lack of one of those four core values. Like, we had one applicant that said he’d been working on this for four years. And wasn’t going to give me any details, because he considered it proprietary and working on it for four years. I see a big lack of initiative there, if he’s been working on something for four years and hasn’t gotten anywhere. You need to take that initiative and do something with that.
We had another submittal where I saw an advisor on the list of the submittal. I knew the guy, and I approached him. I said, “John, what’s the deal on this company that you’re an advisor for?” and he said, “What company?” I explained it, and I told him who the founder was. And he said, “Oh yeah, I talked to that guy about a year ago.” Right there is a big lack of integrity I think, in the founder listing somebody as an advisor of somebody that he had basically talked to a year ago. Other areas that we see, developers who are working full time. They develop an app. It’s not really a company. They launch it part time. They’re doing some maintenance. Really, there’s no passion. We see no passion in doing something like that. That’s not investible to us, because of the lack of passion of the founders.
We also had an Orlando. The industry expert founded it. We liked the guy. We solved the problem. We liked the numbers. We liked everything. And we were following up, and following up and it just faded away. In that case, I would say there was no perseverance to follow through. After it was developed, we wanted to follow up, but there was no perseverance and follow through on that. We see a lot of ‘easily rejectable’ because the founders lack one of those four core values.
Assuming the founder meets those and has those four values as best you can tell. Then what are you looking at next for other traits?
I would say coachability is very important to us. Some angels say it’s not that important. They think founders need to be independent, bold, forceful and take charge, and not necessarily listen to what other people are telling them, but at SeedFunders, mentoring is part of our investment philosophy. We have extensive experience, 50 partners statewide. We really can help in a lot of areas, in a lot of industries, in a lot of ways. So, it’s frustrating to offer assistance to a founder and be ignored. So, we do consider coachability very important.
Again, as an example of a company we did not follow through with, we did due diligence on a company. Liked the plan, again the financials, the industry, but there was no marketing plan. I said, “What are you doing with the $200,000 that you’re raising?” “Well, I’m going to do some SEO and some paper click,” but no real plan. I introduced the founder to a marketing firm. They talked on the phone. The founder came back to me, and literally almost verbatim said, “There is no way I’m going to ask an outside marketing firm to come in here, and market my company. Again obviously, not very coachable and we did not make an investment.
How about financial investments from the founding team? Do you require founders to make a significant financial investment in the companies?
Not really, we recognize some founders just don’t have the financial wherewithal to make significant investments. If on the other hand, they claim to have had a very successful exit or two, and didn’t invest in their new company, that raises a flag as well. The other thing I would say – related to that – funding from friends and family is typically – as I said previously – the first investment round where the entrepreneur starts the company, develops an MVP and moves on from there. If the entrepreneur hasn’t been able to convince friends and family to get funding, and is looking for us to replace them in that round again, that raises a red flag. Certainly, there are exceptions where a founder may or may not have the capital, or not have the friends or family. But those are all things we look at when considering making an investment. It is something we look at, but not mandatory.
Beyond the team itself, how important are support organizations or groups that are involved with the startup?
Support organizations are critical to a startup. And it’s something we take a hard look at. For example, “Is cousin Vinny your attorney?” or, “Do you have a reputable law firm experienced in startups?” on the other hand are the other extreme. We don’t like to see a large, well known, expensive law firm on board. Selecting the right law firm is an important decision. It shows a lot about the founder and the founder’s approach and their insights on their company and the industry. We look at things like the attorney that they’re using or other support groups.
Other parties that we look at include the board of directors, if that is established or a board of advisor. Do they have industry experts participating in their board of advisors and board of directors? Even better, have any of them actually invested in the company? The people who are on the board of advisors or board of directors, have they made an investment in the company? That could really seal the deal for us on a decision, whether they have an industry expert on their board who’s actually invested in the company.
You talked about the jockey and the horse analogy, in mentioning that you thought the traditional wisdom is the jockey. The jockey, but you said the horse is also important. When you’re looking at the horse, how do you tell the difference between the black stallion and white glue?
There are 10 critical areas we analyze when considering an investment. They would be the product or service, the market or industry, the sales plan, the competition, traction, intellectual property, financial projections, valuation, geography and the exit plan.
There is a lot, but we are running out of time with this podcast. Let’s cover that in the next podcast.
That’d be a good idea.
But before we do that, any closing thoughts?
Just like to say – as always – if any of our listeners have any questions or comments on this topic or anything we’ve discussed in any podcast, just email me at firstname.lastname@example.org.