4 Factors VCs Consider When Deciding to Invest In a Founder
By Dave Hochman (@davehochman)
When venture capitalists (VCs) evaluate entrepreneurs seeking funding, they look for two things -- a big opportunity around a technology/product and a strong, well-lead management team. Which of the two is more important? The age-old debate still rages on. Does one bet on the horse (technology/product) or the jockey (founders/management)?
At the beginning of the funding process, at least in the early pre-seed, seed and Series A stages, for many VCs, it is essentially all about the jockey. The best of ideas in pursuit of the most lucrative markets will probably not overcome poor leadership. On the other hand, Arthur Rock, a legendary VC known for early investments in Intel and Apple, has said that “a great management team will find a good opportunity, even if they have to make a huge leap from the market they currently occupy.”
If management strength is the earliest most important determinant of a startup, then it stands to reason that the founder is the most important component of management. Assuming that the founder has, at least on paper, solid enough credentials to get to the point where his or her idea is seriously considered for funding, it behooves the VC to get a solid handle on the general aspects of the founder’s personality.
We spoke with some of the leading VCs in New York about personality types, specifically, what kinds of personalities VCs look for in entrepreneurs that they want to fund... and what tends to send up red flags.
1. Age is just a number.
In psychology, the “Maturity Principle” concept says that people become more agreeable, more conscientious, and more emotionally stable as they age. While these are all generally positive attributes, to assume that personality issues become less of a risk factor with older founders kind of misses the point. The fact is, age is largely irrelevant when it comes to evaluating entrepreneurs.
“A founder should be the type of person a team can respect and look to for guidance and leadership, and often that requires a certain degree of maturity that comes with experience,” says Bob Goodman, General Partner of Bessemer Venture Partners. “However, some very young founders have become exceptional CEOs by learning fast and cultivating an A+ group of supportive advisors.”
Gil Beyda, a veteran VC at Genacast Ventures, agrees. “Age is unimportant. However, if looking for businesses to be disruptive, maybe we’re looking for someone who is a little bit more adventurous, and that might mean somebody who is younger, on the other hand, if we’re looking for somebody who has deep experience in a space, the right fit may be someone who’s older, who has a little more experience, who brings a deeper understanding of the problems felt by potential customers. Someone who potentially was a customer.”
2. Get culture right and get it right fast.
According to Josh Wolfe, a Co-Founder of Lux Capital, the first three people on a startup management team “set the DNA, and are effectively the parents, setting the tone, the intensity, the values, the ethics. And, every new employee -- even if not subservient to a hierarchy -- is like a toddler watching its parents for cues of how to behave.”
Goodman adds, “If an executive doesn't exhibit behaviors you want emulated by the rest of the team, it might be time to look elsewhere.
Gil Beyda adds, “by the time headcount is 10 to 12, you’re probably 80 percent fixed on the culture for the company. Potentially there are some key senior hires that are made after 10 to 12, there’s some potential for some readjustment, some shifting in the culture, but I think you need to have a pretty good idea of where you want to go, what culture you want to have in the first handful of hires, because I think it gets incrementally more difficult to change the culture.”
3. So, what’s your story?
Personality is shaped by personal experiences. So, how much does the personal history of an entrepreneur weigh into a VC’s decision to fund or not? Not so heavily, as it turns out. At least not in the early stages. According to Wolfe, “what we try to understand is what is driving this person? What experiences inform their judgment? How might they behave under conditions of uncertainty in the future? How will they recruit and retain people? Since all the personality-related questions that matter are future unknowables, our only way to decide to invest is based on our best judgment of the people -- which itself is of course a pastiche of our own idiosyncratic experiences.”
Quite simply, “a founder's personal history isn't as important as proving that the team they've assembled is the right fit to address a large, promising market,” says Goodman.
4. Startup veteran or unconventional thinker.
On the one end of the spectrum is the serial entrepreneur. The startup veteran who offers a clearly viewable track record of success, failure, or both. Their personality type can be observed and assessed, previous decisions analyzed and though-processes discussed. On the other side you have the first-time founder, untested, unknown, and offering, in many cases, some kind of unconventional insights.
The question is, what might cause a VC to tend to orient toward one or the other when deciding to fund or not?
“Every successful entrepreneur needs deep empathy with his or her target customer and a sizable chunk of grit and determination to make it through tough times,” says Goodman. “Generally this comes from founders who have lived the problems they're solving and have a history of succeeding despite big setbacks, but they don't necessarily have to be a serial entrepreneur.”
Wolfe says that “some entrepreneurs that do it all over again may have a playbook, and can do the right things faster and avoid the wrong things sooner, or at all, but they also risk being generals fighting the last war, and being authentic and unconventional are great…to the extent they inspire their team or make strategic decisions that trump competitors.”
According to Beyda, “the first-time entrepreneur has a particular insight into a space, into a problem, into a technology that has the potential to disrupt a space, that’s what gets me excited. I can also get behind the serial entrepreneur… if they have that unconventional insight, for me, it’s all about that unconventional insight which to me as VC is the nectar that I live on. Somebody who walks in the door and blows me away with a point of view that is radical.”