How to assess a startup founder

Welcome back to our three-part series on evaluating deals! (Missed last week’s lesson? Click here.)

This week, we’re going to take a deep dive into one of the most important components of an early-stage company: its founding team.

Building a successful business from the ground up is an incredibly challenging pursuit. There’s a reason for the stereotype that tech entrepreneurs are ramen-eating, garage-dwelling insomniacs: creating a company takes hustle, determination, and sacrifice.

In short: a great idea is only part of the picture. Having leadership that can execute on that idea is absolutely key.

There’s no “one type” of person who can pull off that feat. Mark Zuckerberg and Oprah Winfrey couldn’t be more different… and yet both started their own companies and eventually became self-made billionaires.

Still, there are a few common traits that can help investors decide whether they believe a founder is up to the task. Here are three big ones used by many VCs.

1. Experience, expertise, or both

Statistically speaking, founders that have experience building companies in the past are more likely to succeed at it again. A study from the National Bureau of Economic Research found that venture capital firms that invested in skilled founders–those with track records of past success–generated better returns for their investors.

Of course, if investors only backed founders who had succeeded in the past, they’d run out of inventory pretty quickly; even experienced founders had to start somewhere. That’s where expertise comes in.

There’s no better example than the Zuck himself. Zuckerberg started building computer programs when he was in high school; by the time he was a student at Harvard, he was considered a computer programming prodigy. Facebook was his first company… and it made him one of the richest people on Earth.

2. An “all-in” mentality

When it comes to a founder’s hustle, Shark Tank’s Lori Greiner said it best: 

“Entrepreneurs are willing to work 80 hours a week to avoid working 40 hours a week.”

Simple but true: being your own boss, launching a business, and building it into something successful is seriously demanding work. That’s why so many founders talk about working 60, 80, even 100 hours a week. It’s also why communities of van-dwelling tech entrepreneurs have sprung up throughout Silicon Valley.

Yet despite those sacrifices, many entrepreneurs don’t start making “real” money until their business is already at least partially off the ground. Often, that first VC investment (or crowdfunding raise) provides the infusion of capital a company needs to start paying its founders a living wage. Think back to that trope of the founder as an unwashed ramen-eater. It’s a common caricature because, well, it can be incredibly accurate for entrepreneurs in the “idea stage” of business-building.

It takes immense determination and grit to muscle through those first few years of building a startup–so when VCs look at founders, they want to see leadership that’s “all in.” Some good signs they like to see: an all-consuming passion for their work; demonstrated hustle; and, when possible, a founding team that’s invested their own capital into the business.

3. An open, honest communication style

This one’s impossible to assess quantitatively; after all, there’s no cut-and-dried method to score a founder’s personality. Still, investing in a startup can be a long-term commitment… one that involves placing a lot of trust in the entrepreneurs at the helm.

In traditional VC, founders would meet up with a firm’s partners, pitch to them in person, and in some cases, spend an entire day or longer trying to earn an investment. That still happens to an extent—but today, you don’t need to be a VC or fly to San Francisco to get a read on a startup’s founding team. You can find hundreds of entrepreneurs raising right here on Republic—and there’s more you can do than just Googling their names.

For example, many founders that raise capital on Republic are active in the comments sections of their campaign pages. You might find it helpful to see how they respond to prospective investors’ questions and comments. Do they answer in a timely manner? Are they polite, respectful, and thorough? Do they provide details to add context to their replies? Do they address tough or critical questions with humility and candor?

Don’t get us wrong–-it can’t hurt to Google them, too. Just make sure anything you read about a founder online (or anyone, for that matter) comes from a reputable source.

So far in this series, we’ve covered some of the ways seasoned investors evaluate a company’s market and leadership. Those two things are incredibly important; they can make or break a startup’s ability to even make it out of the starting gate.

Still, you wouldn’t pick the winner of the Kentucky Derby based solely on the jockey and the conditions that day. It’s all about picking the fastest horse–and nine times out of 10, that means picking a horse that’s already proven its potential to win.

Next week, we’ll dig into the startup equivalent of time trials and qualifying races: traction.

From product-market fit to VC backing and more, a company’s traction can indicate how far the business has come since its inception… not to mention how well it’s done with customers, investors, and press coverage.

We’ll cover it all next time. Until then, click here to check out all our offerings closing between now and May 1st.