When I first wrote about our 5 Ts approach as a simple tool to score the merits of any new deal, I intentionally kept each section brief, so as not to overwhelm (or bore) the reader. What follows is a more fulsome discussion of what we look for in “team”, the first and by far, the most important of our 5 Ts evaluation.
Quality of the Team
When evaluating any team, the initial focus is on the team’s quality. Many early-stage startups are led by a team of one. That lone founder/CEO makes ALL decisions, always wears too many hats and inevitably won’t have time for or will ignore one or more critical business functions in which they have little to no experience. They may have other employees in the business, but if the founder/CEO is the only person who really makes critical strategic and tactical decisions about any aspect of the business, then we consider them as “a founding team of one”.
As the reader will predict, there remains great investment risk even with the best of these solo founders as they won’t have backup if something unexpected takes them out of the game. I recently witnessed the loss of a CEO who was killed in a random act of violence, an event that none of us could have foreseen. Additionally, I advised another company whose older CEO was diagnosed with cancer. His subsequent change in life priorities led him to quickly accept a mediocre purchase offer from an acquirer.
Finally, solo founders don't have other peers to debate the merits of the many possible decisions that they’ll be faced with on a nearly constant basis. Most junior employees rarely serve such a role as they are often hesitant to challenge ideas strongly supported by their CEO. . This “CEO isolation” poses a significant obstacle to any early-stage company trying to gain a foothold in their market. Bottom line: We are extraordinarily cautious when considering investments in companies with only one person in the leadership team.
So now to the broader issue of the qualities that we look for in a team. As described above, we much prefer a founding team of several individuals who collectively cover all major aspects of their business. We’re even more impressed when such teams have clearly demarcated areas of responsibility.
Quality of the Pitch
When we learn about a prospective deal and want to learn more, our next step is to listen to their introductory pitch. This is a critical gating point for us. Of course we focus on the substance of the presentation, making sure that they cover the critical points of every pitch, which essentially align with our 5 Ts. But even more than just covering these essential elements, can they do so in a succinct manner, not falling into the trap of so many technical founders who spend 75% of their pitch describing the attributes and inner-workings of their technology? Further, can they tell us their story using simple slides with minimal verbiage so that we pay more attention to them than to trying to read “eye chart” slides? I continue to be amazed that so many founders have yet to invest the time to fully understand and prepare a great pitch deck, especially when there are so many mentors and business incubators/accelerators ready to help a new CEO refine an otherwise mediocre presentation.
It should come as no surprise that we prefer investor presentations that quickly highlight the founding team, typically listing (with logos) the companies where team members have previously worked. Not surprisingly, we often see a number of logos in common among a leadership team, as smart founders will often cherry-pick their most valued colleagues to join them from other companies in which they previously worked together. That’s a great sign.
We also want to know about the leadership team’s track record. What did each of the members do before? Were they previously a part of a leadership team or did they serve in other roles? What responsibilities did they have, and what did they accomplish? If we like their initial pitch and decide to spend more time on due diligence, a key part of this process involves conducting reference checks on each member of the leadership team. It's important that we invest the time to determine if this is a superstar team or not.
After hearing the pitch we ask ourselves if their presentation is credible, compelling and exciting. Have they convinced us that they’ve got the right team to execute their plan, that their value proposition is truly disruptive, and that they are addressing a substantial and lucrative market need (versus just a “market want”)? Do they understand product-market fit and their ideal customer profile? Do they have a solid funding/capitalization plan as well as a vision for their eventual exit?
We give a lot of weight to their communication style, including their nonverbal communication skills. Do they create a strong connection with their audience and deliver a compelling pitch? Do they clearly make the case that they have a great team, a great value proposition and that they are serving a vast unaddressed market need? Are their answers to our questions thoughtful, candid, and credible? If the pitch is divided among two or more team members, how well do they tag team with each other? Ultimately, we ask ourselves whether they inspired us sufficiently that we are impatient to follow up to learn more. If not, we give them a handshake and wish them well in their search for the right investor.
Coachability
What about the personal attributes of individuals on the leadership team? Exceptional founders (or founding teams) will have that very rare combination of a strong ego coupled with sufficient humility that they actively seek out the advice of others. They are self-aware of their strengths as well as their weaknesses and the gaps they will need to fill. They are in good health, as leading a startup is a physically taxing endeavor. They must demonstrate a high degree of frustration tolerance and an ability to problem-solve, be able to react and pivot when they encounter the unexpected obstacles and challenges that every founder will face as they work to grow their company. Most will be charismatic and often inspiring, a desirable trait for attracting partners, employees, investors, advisors and customers.
We value founders that are prompt and thorough in responding to our questions, whether we reach out to them by phone, email or text. I’m always pleasantly surprised by the CXO who quickly responds to my late night email. However, too many others fail in this regard, being slow to respond to our inquiries, and that’s a red flag. If they take this long to respond to us when they are appealing to us for investment, can we expect any better after we’ve made our investment? We recognize that their communication discipline, whether good or poor, is likely to carry over to their communications with partners and prospective customers.
“All In”
We want a founding team that is “all in”. By this I mean that they don’t have a separate consulting business on the side, that they are 100% committed to achieving their vision and they may have invested a considerable amount of their own funds to get the company up and running. They may take a substandard salary while they work to generate more revenues or obtain investment. They eat, sleep and breathe their work and their passion for it clearly shows.
Ultimately we ask ourselves if this is a founding team that we look forward to working with for the next 3 to 7 (or more) years, because we know that this is how long a lot of our best investments take to reach maturity and exit. If the answer is “yes”, then we are ready to move forward to the next steps in our diligence and negotiation process.