How Investors Think About Assessing a Startup Team: Competency, Complementarity, Coachability, Communication
Fact #1: Founders spend most of their time pitching Product, Problem & Solution.
Fact #2: Investors spend most of their time reviewing Financials & Team.
These insights are based on recent research on Seed and Series A stage companies conducted by DocSend and Prof. Tom Eisenmann from Harvard Business School.
So, if your team is so important to investors, what are the criteria that investors look for when assessing a team? They go far deeper than the job titles or logos that appear under the names on a pitch deck.
Having insights into how investors think about assessing a startup team will also help you think about designing your organization and hiring for the right qualities. I’ll break down the questions investors may ask themselves into 4 easy to remember categories:
For a company at this stage, do you and other key team members have the required level and types of skills and past experience required? If experience is lacking, how strong are the team members in other respects? Are you founders that can grow as the company scales, or will an additional layer of senior leadership be required to take the business to a successful exit?
Competency can cover a broad range of skills and experience beyond just job function – technical fluency, management skills, strategic thinking, ability to execute effectively. Depth of experience in business and finance, product, marketing and sales also will be reviewed during the due diligence process.
“Use each opportunity to learn about what investors value about teams, ask them to describe examples they have of the best teams they’ve invested in, and take that feedback to help in building your own team”
Are you and your key team members able to communicate and work well together? Do your functional areas provide breadth of scope for building a successful business? Are there any active advisors or board members who supplement the team’s capabilities?
A high functioning team equals more than the sum of its parts. It’s the reason why acquirers are willing to pay a significant premium to hire intact teams. Hiring people you’ve worked with previously can be a positive signal, indicating that you already work well together, and understand one another’s work styles, strengths & weaknesses – and also that there is a high level of trust that exists for people to leave other opportunities to work with you.
“Investors flee from weak teams that lack complementary skills and experience. If you are a technical founder, how are you addressing the business end?”
Investors flee from weak teams that lack complementary skills and experience. If you are a technical founder, how are you addressing the business end? Through key team, advisors with specific subject matter expertise, interim staff, or other investors?
As Reid Hoffman of Greylock points out, even rich entrepreneurs raise funds for the value-add that invtestors bring to the relationship. This is called “smart money”. In essence your investor can be complementary to your team’s capabilities.
It’s a recent buzzword, but it merits a great deal of attention. This characteristic is an indicator of management style, adaptability, and openness to guidance and learning.
How receptive are you to feedback – from investors, board members, or peers? This can be picked up on by observant investors very quickly in pitch meetings. Your pitch may be interrupted for questions from time to time – and how well you navigate the conversation and respond to feedback will give investors a sense of how you may communicate and react in a management situation or board meeting.
Moreover, given feedback, how readily are you able to respond by putting it into action? What lessons have you learned along the way and how have you been able to put those learnings to use (self-coaching)?
Expect all communications to come into play as indicators to investors – emails, in person meetings, video calls, etc. Responsiveness and openness is usually a signal of interest and motivation. Are you prepared to respond quickly to requests for financial projections, references, a data room? Are you on time for meetings?
When meeting with an investor, be crystal clear about your purpose. Let them know if you’re not currently raising capital, still working on product-market fit, or are pre-launch & pre-revenue. Transparency gives the relationship it’s best chance to turn into an investment.
Don’t try to hide weaknesses, instead identify, own, and steer into your risk factors. Understand your competitive landscape and the economic factors that may affect your business. Think about the skills and expertise your team may currrently lack. As Hoffman says, “Explicitly identify the one to three risks that could thwart your success and how you will mitigate them.”
Also, make an effort to continually communicate with your co-founder, board, and investors to ensure alignment on your exit strategy and opportunities that may present themselves along the way. At Mighty Capital, we look for founders and coinvestors that have a similar appetite for risk, and a clear exit path.
Encounters between you and potential investors provide opportunities to network, learn and grow. Use each opportunity to learn about what investors value about teams, ask them to describe examples they have of the best teams they’ve invested in, and take that feedback to help in building your own team – and you’ll be a long way closer to having a successful fundraise.
Jennifer Azapian is a Partner at Mighty Capital and works actively to source, assess, and invest in deals and to support portfolio companies with their HR strategies. Since starting her career scaling Virgin America from 10 to over 2200 employees, she has spent the last 15 years working with growing businesses, their leaders, and investors as an executive coach and advisor on issues such as compensation, organizational design, headcount and performance strategic planning — all with an eye to helping companies prepare for smooth, rapid scale or for an exit. Jennifer holds a BA from Dartmouth College, an MBA from INSEAD, and Compensation Committee Certification from the Economic Research Institute.