What Investors Look for in a Startup Founding Team

I often get asked about what investors look for in a founding team. These are my thoughts and not based on rigorous research, but my experience is that they are pretty common among angel investors and VCs. In no particular order….

Drive and passion

“I was born to solve this customer problem.” That’s what investors want to hear. Your life has been leading up to this. You are highly motivated to succeed. You have quit your highly paid job, because you were destined to be an entrepreneur. You have made the leap, cut the cord, burned the bridge, there is no Plan B. If the founders are hedging or only working part time or really only exploring the idea of this startup, then the risk is that they quit when the going gets tough. And it will get tough.

All that said, it is legitimate that someone on the team is working part time until the funding comes in. Some people are highly skilled but not in a position to work without income for the many months that it may take a startup to get to a fundable state. Investors are often fine with this scenario assuming the part timers are committed to coming on full time once the company is funded.

Domain expertise

Domain expertise means that you know the industry or the “space” that your startup fits in. You need to understand the ecosystem: customers, competitors, distribution partners, service providers, vendors, etc. In particular, you understand the customers and their pain points. You were one of these customers or you provided services to them in your last role with a company. You understand how to find these customers, who the decision makers are and how long it takes to sell to them. You understand the technologies and trends in this space and all this knowledge has allowed you to see the gap in the marketplace. You have the industry insights to “see around corners” in a way that those outside can’t.

Having been in the industry for a while means you have developed a network in the space and likely have the contacts you’ll need to get those early partnerships or customers that are so critical to initial traction.

Without direct experience in the domain the team will have to do massive research on the ecosystem and customer pain points. I have seen pitches where the CEO was not aware of a direct and much more established competitor in the space, and it blew their credibility in the Q&A section of the pitch when an angel brought them up. Often investors focus on what they know, so your best potential investors may well have expertise in your space.   You’ll have to prove you know your stuff, respect their experience, and then ask if they want to be an advisor or if they could provide contacts. Most angel investors like to help entrepreneurs they believe in even if they don’t invest.

Complete Set of Skills

The founding team should have the skill set needed to get the business off the ground.

Technical Expertise:  Executing most of the types of businesses that angel investors and VCs get excited about almost always requires some technical expertise whether that is software development, hardware development, robotics, mechanical engineering, or something else. You’ll want a technical founder to build the MVP and begin building the foundational technology. In theory this can be outsourced, but if you have a technical product and you have outsourced your technical architecture and execution, you have taken on a lot more risk. And you still have a critical early hire to make which adds execution risk. You don’t need to have a founder who is going to be the CTO, but someone who can lead the building of the V1 product.

Sales and Business Development:  You also need someone who is a natural sales person or deal maker. You’ve got to get those first customers or those first partnership deals done to move the business forward and show the traction that is so important to potential investors. This person needs to have the energy, skills, drive, and perseverance to be on the phone all day long prospecting and being told “no” nine times out of ten. This is most true for B2B businesses, but even if your customers are consumers the business often needs suppliers or data providers or distribution partners. This person is often the CEO, because CEOs are selling all day long: selling the idea to investors, selling potential employees on their vision, selling key customers, etc.

Marketing:  Marketing is important for any business, but critical for B2C businesses. Who on the team understands brand and positioning, segmentation, PR, copywriting, and is going to create Facebook ads, SEM campaigns, optimize SEO, drive content marketing, landing pages, etc. And spend their evenings grinding through the analytics to see what’s working. If you have a very technical product with real intellectual property (you are solving a hard technical problem), investors will put less weight on your marketing expertise, assuming that you (with the help of your advisors or board of directors) can hire that person.

9Mile Labs, the Seattle B2B incubator looks for teams that have a Visionary, a Hacker, and a Hustler.

Prior Startup Experience

When you work for someone else, you operate by their rules. When you are an entrepreneur, you make the rules, you make all the decisions, and you have to make things happen. You can’t operate by “magical thinking.” If you have been at all successful as an entrepreneur before, you have demonstrated that: You can execute. You have a “bias for action” as we used to say at Amazon. You know how long it typically takes to raise money. You have learned a bias for conserving cash. You know how important it is to get the first hires right. You have persevered through the hard times, when it took longer than expected to land the first big customer or hit a milestone or when some large player in the ecosystem announced a product just like yours. 

Coachability

Investors, whether angels or VCs tend to think they are smart. As mentioned above, they often focus their investments in areas where they themselves have domain expertise. They like to think they can reduce risk by providing advice and guidance to the CEO. For that to work, the CEO has to be “coachable.” This criteria comes up over and over in discussions among investors who are looking at a deal. The CEO and the team in general should be open to learning from the experience and expertise of those considering the deal. You don’t have to do what any investor or advisor says, but you should be willing to hear and really consider their opinions, especially if you are a first time entrepreneur. Many angel investors have started their own successful companies or have invested in at least several and have learned painful lessons of why companies succeed or fail. Benefit from that breadth of experience and insight. You don’t know it all and investors won’t expect you to, but if you won’t ask for advice or digest the advice you get, then you will quickly frustrate and alienate your most ardent potential allies. Investors will have their own hard earned money in your company and they really, really want you to succeed. They have no ulterior motive.

Summary

If you don’t meet some of the criteria above you can still raise money, but you should think about how to close some of the gaps, either by finding the right co-founders or doing a convincing amount of research. Also think about how to position your experience and your co-founders’ experience as relevant against the above dimensions. Good luck.