Here I share some of my experiences on the dozens of start-ups I have invested in as well as co-founded as a CTO or CPO.
Considering making an investment into an early stage start-up and feeling that you’re not 100% sure on the founder’s suitability to run the business? Successful angel investors make it seem easy to pick winners. However, most successful investors would admit to identifying certain qualities in founders which make them stand out as funding worthy. This is mostly the result of them knowing the founders through a previous work or personal relationship. Other times, it’s due to a set of criteria or methodology used for measuring up founders to determine their fit for investment.
If you don’t have golden gut feeling about whether or not a founder or co-founder is suitable to invest in nor have relationship history to decide on intuition, here are 7 factors to consider while you’re deciding on making an investment in a founding team. Before we dive in, this guide is meant to compliment the CashingTheCow article on Using Customer & Employee Feedback for Angel Investing.
Relevant skills to the start-up
Does the founder have a particular skill-set or expertise that differentiates it from competitors? They may have 10 years experience in a particular area, however if that experience can’t be applied to running or growing the particular business that you’re funding, then it’s likely not useful. People can learn, but would you want someone to learn on the job with your money especially if they don’t have the right skills from the onset? If they’ve acquired new skills just prior to their funding round, then it should give you more confidence in the founder’s learning capabilities. However, if you sense there are deficiencies in industry knowledge or skill expertise, then it may best to consider passing on the opportunity.
What types of questions can help you gather more info on the above?
- What would you say are your most relevant skills to running this particular business?
- What skills do you bring to the team that can’t be easily replaced?
- If you are a generalist, then how is your approach to this business going to differentiate it from some other generalist’s approach or strategies?
Some history on how not properly sussing an entrepreneurial team’s industry knowledge lost me a LOT of money:
I recently invested in a business that was a short-term opportunistic play on COVID-19 anti-body testing. The founders were strong in every factor except relevant medical industry experience. They talked to the right suppliers, seemed to know what was going on in the area but they didn’t have much appreciation of regulatory risks. This proved to be the killer as they ended up buying kits that they thought were approved for use for the U.K. and U.S. which were revoked shortly after receiving the order. The end result was about 10,000 units of unsalable COVID-19 antibody kits that although were CE approved and of high accuracy, no longer met the medical guidelines of the U.S. or U.K. authorities due to evolving medical requirements. The lack of understanding of the founder’s part and my trust of their limited expertise cost me a lot.Ryan from CashingTheCow
Previous experience in building or selling a company
A founder’s previous experience in selling or building a semi-successful business can increase the likelihood of your investment turning out positive. Research by MIT and others have shown that previous entrepreneurial experience, with an exit, increases the odds of the founder’s subsequent companies going public. Not only does this have statistical importance, research by Venture Capital firms, business schools and think tanks, has also shown that entrepreneurs with previous exits also are more quickly funded and at higher valuations. Investors should be mindful there is a difference between experience and luck. When it comes to successful angel investments, luck or ‘hope’ should be a very tiny factor to rely when compared to experience.
There are plenty of founders and co-founders out there who have cut their teeth working at early stage companies or were ‘intrapreneurs’ at a previous role. You’re better off considering an investment in founders with entrepreneurial experience over those who have none.
LinkedIn, a CV, the pitch deck or a business plan should provide a good amount of info on a founder’s relevant entrepreneurial experience. If not, you can ask the following… Note questions 2 and 3 are meant to weed out those who are likely running a business to for personal validation (bad) over profit and / or excitement (good).
- Do you have previous start-up experience, if so, how did it go?
- When was the first time you remember wanting to start your own business and what did you do about it?
- Why do you want to start a business now?
My two cents on a founder’s previous experience on building a company:
I’ve made multiple angel investments in first time founders and they most always lead to headaches due to issues with execution, failing to meet contractual obligations or just downright mismanagement. In my current angel investment portfolio, after five years and dozens of rounds, only three survive with a substantial shot of an exit. The other investments I have positions in are still running well yet are in the hands of founders with previous exits. The writing and research is on the wall, if you want a higher probability of a successful exit as an angel investment, back founders with some previous entrepreneurial experience, or ideally a successful exit in the past.Ryan from CashingTheCow
Team building capability
This is more relevant to solo founders but can also pertain to co-founding teams. Can a founder recruit employees or other co-founders to join them? Angel investors can fall in love with an idea or get hypnotised by a solo founder. However, bear in mind that if someone can’t get other people to join them or keep them around in their company, then there is likely a problem with the founder. The business model or company itself could also have issues which are making it harder to build faith or trust in potential employees or co-founders.
Here are some questions to ask the founder regarding team building capability, the last one is kind of sneaky but will yield interesting answers to aid your investment decision:
- Have you had anyone else on your team who has recently left the company, and if so, why did they leave?
- Have you managed a team of at least three people before in the past? If so, how did you contribute while overseeing the work?
- What do you find to be the three biggest challenges in getting people to join your team?
Mostly self or team reliant
Does the founder seem genuinely excited or are they complaining about perceived difficulties or constantly needing help? How resilient are they to setbacks and challenges? Are they relying on your expertise, network, or financial resources? If you sense too much dependency on yourself or other non-operational people, it can be sign that the founder or co-founders do not have the resilience to confront and resolve challenges themselves. Although that can seem like an admirable trait to regularly consult with others for help, it indicates weak or inexperienced leadership and is a troubling sign. This is why it’s often beneficial to try and help a founder or co-founders out with a specific task BEFORE investing. As it gives you a good idea of the team mechanics, how they delegate and how they work.
Relevant questions to ask:
- What can I help your team with besides the funding?
- What is your ideal kind of investor?
- If I’m asked to help more than X hours per week, is there an option to receive more shares or options?
Some of my experience on the importance an entrepreneur’s self-reliance:
One start-up I invested in 2018 nearly gave me a heart attack several times over the past two years due to ongoing stress and frustration with how the founder kept relying on my input for fairly trivial decisions. The founder was on their own, and had shown multiple times the inability to form or keep a founding team together. This individual ended up breaching our shareholder agreement and joined a pre-product competitor that had funding lined up, even though we were generating revenue with our product! People do weird things when they get desperate and lonely. A different outcome may have been possible had I worked full-time alongside the founder, however, for 5% equity it would have been a criminal abuse of my time and insult to the money I invested and the platform I built for the start-up.Ryan from CashingTheCow
This is not a make or break factor but one to definitely consider when you’re going to working with the founders or co-founders on an ongoing basis as an advisor, mentor or board member. I’ve invested time and money before in companies where I like the founder on paper but just didn’t like their personality. However, I let my judgements pass for what seemed like the mutual benefit of funding and building the business together. This unfortunately resulted in a few mistakes. Well-known investors have commented in the past about having a requirement of liability for founders of their portfolio companies. Getting burned on an investment is never nice, but it’s much worse when done by someone you didn’t like in the first place. Plus, building a business with people you like is more fun anyways, so why do it with people you don’t like? Seems obvious but it’s hard to avoid. We let the strength of other factors outweigh likeability but it’s one of the most important ones. This attribute can also affect the ability of founders to build teams. So, if you think a founder is not likeable nor have they proven themselves to be able to form a team, then its likely others won’t find them enjoyable to work with either.
If you haven’t decided if you like a founder yet, here relevant questions to ask. Some of these are trick questions to see if there is a conflict with your personal beliefs versus their answers).
- What type of critique have you received from colleagues or collaborators in the past in regards to your work or management style?
- What’s the most annoying thing about team-members you disliked working with?
- Who would you say is your biggest role model and why?
My thoughts on likeability:
Often overlooked but very important. One of the companies I co-founded in 2018 was with a person I brought along after I built the initial product (MVP). We were both looking at doing the same thing, except their product was website with no value-add functionality whereas mine was built for customer use and ready to transact. Since I was fairly desperate to get someone in to run the business at the time, I jumped ahead and offered him the role of CEO shortly after our first meeting. I didn’t pay so much attention to likeability at the time as I just wanted to get out of running the day-to-day. I ended up paying the price for my haste as the ensuing months turned out to be awkward as our working styles varied greatly. We were not compatible team members nor were we trying to improve the working relationship as there was probably a mutual dislike bound by some level of perceived future mutual benefit. Had I been willing to spend more time sussing this person out we both may have made a better decision in deciding not to join forces.Ryan from CashingTheCow
Good connections take a long time to build. LinkedIn is great for message blasts when you quickly need help. However, real and non-superficial network building takes time. Thus, assess the value and relevance of a founder’s existing network when making an investment in their company. Do they know the right people in the right industries? If not, are they comfortable reaching out to people on LinkedIn and making those necessary connections? Do they find it unethical to leverage public information or other social media platforms to get a hold of the right people when they need to? Do they network well in face-to-face settings?
Related questions on determine the network strength of a founder:
- Have you ever had to hunt down a person’s contact details for one reason or another and how did you do it and for what reason?
- Who would you say is the most influential person in your network?
- Is anyone in your current network likely to provide value in building the business and why?
Can the founder focus on a particular goal? Or are they straying amongst several goals at the same time without being able to complete anything in a timely manner. If so, then the founders have issues with time and priority management that likely outweigh problems of the business itself. With the prevalence of remote work, and therefore endless work+life distraction becoming the norm for most early stage companies from 2020 onwards, focus becomes a founder attribute that is probably one of the top three. Fortunately, it also happens to be a factor that a founder can work on and improve with the help of their co-founders, friends, family, employees and mentors.
Here’s the last question set. The third question is a fun one. If they answer “no one” or “my clone” then they may find it hard to delegate low-value add tasks to someone else or may have tendencies to micromanage.
- What do you find to be the most distracting thing taking your attention from the business?
- Where do you currently spend most of your focus versus where you want to spend your focus?
- What type of person can help you with your most time consuming or low value work tasks?
Criticisms of this methodology
As always, I try to answer a few criticisms of my methodologies to save everyone some time 🙂 Here we go:
So many great founders would have negative qualities which would lead to an angel investor missing out on a great investment. So, why is this useful?
There is no such thing as a perfect founder to invest in. All we can do is stick with a set of values or factors we use as investors to gauge a level of suitability of which founders which should give our money to. This article highlighted some factors which I have found learned through my experience of angel investing and launching dozens of start-ups. Thinking back in retrospect, I would have had a better success rate had I stuck with a framework of assessing founders using criteria similar to the above.
Timelines to invest in start-ups are short, how can I gather the necessary info to make an informed investment decision?
You’ve got to gather this info through a series of calls or face-to-face meets. Try to plan out how you will gather the info pertaining to each section before your calls or meets. Some of the info will be readily available without explicitly asking. This includes info on previous entrepreneurial experience, relevant skills, and strength of network, all of which can be obtained from LinkedIn, the pitch deck or business plan. Try to hone in on the factors that are most concerning, they tend to be the 800 elephants in the room which we avoid thinking about until we hit the ‘send’ button on the money transfer.
Aren’t you missing the factor of ‘ability to raise funding’?
No, I don’t think it’s a factor that you can determine for an early stage start-up. It takes founders a while to get their stride in selling their business to investors for a fundraising round. Plus, the factors of previous start-up experience and likeability discussed above relate to this more appropriately for an early stage company.
Angel investing is tough, emotional, time consuming and often very expensive when done wrong. If we apply a consistent framework rather than rely purely on intuition or luck, we can achieve better investment results and notice trends in our investment winners.