You need to have a great team
Investors want to invest in large spaces with potential of large businesses being built. At an early stage, the business itself typically doesn’t speak for itself. Hence, the fact that it’s a good team takes gigantic proportions. I can’t emphasise enough on how important this is for investors. Investors don’t want to run the companies they invest in, they need the entrepreneurs to. This means that the entrepreneurs have to be the ultimate champion for the vision, raise further capital, build awesome teams, compete fiercely and basically just execute, execute and execute. All this is a big ask. What is the expectation a team is judged on and what are the attributes?
The expectations mainly are to execute. However, not just execute, but execute at an unbelievable pace. Given the extremely competitive nature of the industry these days, most businesses come down to superior execution. And fast is considered to be superior. In this day of age of agile development, its all about iterating more and more number of times at an early stage. Your product may be quick and dirty in this iteration, but will get better with the next. In executing at pace, there will be some mistakes and there will be some in-efficiency, but things will get fixed also very quickly. As an investor, I have been amazed with how fast some founding teams execute. Apps and technology gets created in days and operations expand at a pace which can only be called crazy. This one team grew from 3 people from 120 people in 3 months. The founders used to conduct 20 interviews each every day and built a fantastic team. On the other hand, some teams just crawl and take months to execute. They lose steam, run out of money and run out of time. When they make mistakes, they are very expensive since they run out of time to iterate one more time. This can easily be the difference between life and death.
So investors try to judge this super charged execution capability. Some of the attributes that teams are typically judged on are as follows:
Number of founders and the dynamic between them
No investor wants to invest in single founder companies. You may have seen some exceptions, but they are rare. Its just too hard for a single founder to build a company. How much can one person really do at a very early stage. There is usually too much to be done. 24 hours are not enough. Its also risky since there is no backup.
2-4 founders are usually good. 2 works, 3 is probably perfect and 4 works if the founders have a good relationship between them and the business is such. More number of founders means more people are convinced about an idea and there is greater bandwidth to execute. They can do much more within themselves.
Camaraderie between founders is also seen as very important. Hence, investors like founders who have some history. Maybe they studied together, have been friends or have been in the business for a year or more together. Maybe seem through a rough patch. All this tells investors that they are going to stick together. When times get rough, founders often fall apart and this is very disruptive for the company. Investors have had these experiences. Hence, it comforts them that the founding team has a good understanding within them.
If there is a leader of the pack, a CEO, its very useful. A CEO has to be picked eventually and if all founders are equal, it can be painful at a later date to elevate one. Egos get bruised and can de-motivate certain founders and put the business at risk. A leader also helps in consensus building when decisions need to be taken.
If the founders can play different roles in the company, that’s a big positive as well. For example, if one can handle technology, one can handle marketing and one can handle operations, you have great coverage of key functions right upfront.
The age factor – Youthful or experienced
Investors have experienced that younger founders execute faster. There are multiple reasons for this. Firstly, they are typically more energetic. They have the ability to work late into the night (or the morning) and get things done quicker. Secondly, they have less baggage and are more experimental in nature. They have a tendency of trying out things and go by data. They think less and do more. They make mistakes but learn quickly. Thirdly, younger founders can go longer, they have lower opportunity costs. They persist longer and eventually find a way. And fourthly, a lot of technology plays are targeted towards a younger demographic of consumers. Younger founders relate to this consumer set better.
Experienced founders gain an edge as the business grows. They have more management experience and are worldly-wise. However, at an early stage, a certain irrational exuberance is required, which younger founders have. If you are an experienced founder at an early stage, you have to carry an extra burden of proving to investors that you can unlearn, you can be free from baggage and you can execute just as fast.
Tech vs. business founders
For the same execution reasons, investors have found that tech founders learn business / domain better than business founders learn technology. Business founders continue to struggle on technology for a long time. I have had more than 1 investor tell me that they would not invest in a team unless there is a strong tech founder in the team. Tech founders may make mistakes, but they will code all night, do more iterations and eventually inch ahead. Additionally, tech founders tend to solve operational and business problems using technology more, which is a more scalable solution.
Many founding teams ask me if its okay to outsource their core technology. In real terms, it slows you down significantly. On one hand there would be teams that are producing gallons of code every night and a product release every few days. On the other hand if you outsource it, you will spend your days negotiating specs, prices and so on. For the outsourced vendor, you are just another customer; their life does no depend on you. At early stages, it slows you down significantly.
IIT or other premium degrees / appropriate company experience
This is one that hurts people a lot. I have heard number of founders say – we don’t have one with IIT stamp and hence we are not getting attention. Unfortunately, their complaint is not without reason. I have seen more than a couple investors ask me about some of my invested companies if they have anyone from IIT. You can replace IIT, of course with any other top name college or if you are from a top name company / celebrated startup company. The investor rationale is that firstly, these founders have proven an ability to work hard. Secondly they are expected to have a normal intellect at the very least and thirdly, they would have the network to build their teams later.
If you are from IIT though, its not that you will get funding for sure. There are many other factors and they have to fall in place. You have an advantage, but its not enough to carry you over. There are plenty of unsuccessful entrepreneurs from top colleges around the world.
If you are not from a top college, you should know that there are scores of successful entrepreneurs who have not come from top colleges. Strategically, you have to try to motivate yourself in a positive manner rather than being bitter about it. You should basically focus on building a good business and build the networks and relationships to give you access to meetings. Many have done this before, so it is do-able.
An investment process at an early stage at the end of the day is about liking people. It’s like an interview process. Its hard to invest in a company if you don’t like the team. Its not just physics, but also chemistry. Good founding teams hence invest in building relationships, not just with customers but also with prospective investors. They cast a wide net and cultivate these relationships ahead of time. Its near impossible to meet you one time and cut a cheque. They need to get to know you a bit.
Good founding teams also tend to find the balance between optimism and realism, between irrational exuberance and cold rational execution, between aspiration and pragmatism. It’s a lot to ask, but it takes a lot to build business.