In the world of startup investing and especially in the early stages, the most important thing that many investors look at is the team. Thus, for any angel who is starting out, it is crucial that he/she understands how to assess founders and what specific traits to look out for. Having delved into the topic further through my own research and interactions with prominent angels at AngelCentral, here are some key areas for investors to look at when assessing a founding team.
An ambitious co-founder is one who acknowledges what he doesn’t know and is always learning. The zest to absorb new information and focus on continuous learning will help contribute to the initial growth of the startup. The co-founder’s curiosity to adopt new methodologies to improve, seeking more efficient methods to streamline current operations contributes to the pace at which tasks can be completed. The periodic targets he sets for the company he is driving plays a huge role in how fast the company will grow. As such, the appetite for growth and curiosity to learn are key elements of an ambitious founder, which is an important trait to support a company past the product/market fit phase.
Teachability / “Coachability”
How teachable a founder depends on his ability to listen, acknowledge mistakes and learn. Presumably, as an experienced Angel, you would have amassed a wealth of experience and would be inclined to share this experience with the companies you have dealt with, in hopes that your current founder will learn from the good and prevent mistakes from reoccurring. A “teachable” founder would be open to taking advice and learning from the mistakes of other companies. A stubborn founder may be less open to inputs and thus a challenge to work with. Yet, at the same time, it is essential for the founder to be able to make decisions on his own. Founders should have a concrete plan themselves, be clear of their own goals and be willing to make a firm decision and follow through with it.
The current Partner of AngelCentral, Huang-Shao Ning shared this in her blog : why I didn’t invest in them. Based on her previous experience, founders who tend to show disrespect in meetings exhibit behaviours of being unteachable. They include interrupting investor’s questions too quickly, being defensive to every question and feedback, etc. On contrary, founders who bother to listen, acknowledge feedback and recognise mistakes, suggesting their openness to adjusting their strategies when necessary. But be mindful too that founders who are overly receptive to Angels may not have a clear goal in mind and this is a major red flag. The key here lies in being able to assess the founder – you should look for a founder who has gained insights in his fields, able to articulate/defend that with logic and reason, AFTER listening to your views.
This factor may be one of the most overlooked ones, yet it remains one of the most important. More often than not, the family background of a founder will play a part in his commitment levels. The fact is, founding a startup is not an individual decision. It is one that to a certain extent, revolves around an individual’s family. A young bachelor who has more time on his hands compared to a married man, with two children. Most likely, based on availability, the former is more able to devote energy into the startup. Of course, apart from time, family support is extremely important in this start-up journey.
At the same time, family background is not always representative of a founder’s capabilities and intrinsic motivations. The partner of AngelCentral, Der Shing explains how you should never judge a founder’s family background too quickly. Previously, based on his personal experience, he realised that founders who came from poorer family backgrounds tend to succeed. The wealthier founders tend to be more arrogant and less receptive to learning. As he worked with even more founders, he realised that the latter didn’t always hold true. Some wealthier founders are equally driven, except that their motivation stems from different aspects.
Solo founder vs a founding team
Statistically speaking, angels tend to shy away from single founders. This is generally because it is nearly impossible for an individual to do everything and be good at everything. Even if this founder has great technical depth, he needs complimentary skillsets to scale the business, seek funding etc. It’s relatively rare to have a superman or superwoman who can analyse data, design infrastructure, code the backend, market, fund raise, scale, handle finances, form partnerships etc. Considering temperament and aptitudes, the full spectrum of business skills usually “reside” in 2-3 people.
“Teamwork makes the dream work”. Amongst the many reasons, a team of co-founders bring about a shared passion that realises the product. Having a team also means a holistic viewpoint brought to the table, rather than a narrow-minded and subjective viewpoint. Having contesting ideas mean heavy critiquing and lots of room for improvement.
Complementary skill sets
“The ideal founding team is two individuals, with a history of working together, of similar age and financial standing, with mutual respect. One is good at building products and the other is good at selling them.” says Naval Ravikant, co-founder of Angel list. Now that we have established that the ideal founding team comprises at least two individuals, it is important to assess whether they have skill sets that complement each other.
Ideally, one founder is in charge of the technical know-how and the operations of the business. This founder should have a sufficient degree of technical depth. The other founder is in charge of the overall business and forming of partnerships between the team and its external stakeholders. This founder may bring his niche-specific experience to guide the company’s development. Having worked in an existing industry with a strong network, the connections he forms can go a long way in the company’s growth.
Clear division of equity
Having evaluated a broad array of startups as an Angel, by now, you probably would have discovered that there is no such thing as equal division of equity between co-founders. Most of the time, “equal share” does not translate to “fair share”. The founder who has brought something valuable to the company during its formative stages, such as a patent of a prototype of the product should be accorded a good portion of equity. The founder who is able to secure more funding and has more experience and under his belt should be accorded higher equity. Naturally, the founder with a more established reputation should also get a higher share.
Typically, first-time entrepreneurs who start off as friends tend to divide their shares equally, which results in aiming to get the consensus of the majority during decision-making. In theory, this sounds harmonious but realistically speaking, equal split of equity means everyone controls the company equally. This is nearly impossible in reality. In the scenario where one founder is the CEO, he is unable to make key decisions without taking time to convince the majority to approve, which is an arduous chore. Ultimately, decisions always have to be made and one person has to have the final say at the end of the day.
Above all, there is a key reason why the CEO should hold a significant portion of equity. That boils down to responsibility. The responsibility accorded to the CEO means the authority to decide how the company moves, formulate policies and visions. Although the insights of the co-founders should be taken into consideration, the one responsible for the implications of decisions will be the CEO.
All in all, the skill of evaluating founders is one that is obtained through experiences (can you read people?) and most definitely a keen eye. Mastering this skill goes a long way in your angel investing journey. Through this piece, I hope that angels will have a clearer idea of some of the key traits to look out for when speaking to startup founders.