Because Angel Investing takes place so early in the life of the company, as an investor you are taking on very high risks before you see any signs of success. The company may not yet have any customers, revenues or even a product. For this reason, the most important thing to evaluate is the founding team behind the startup.
In the life of the company, nothing will go like the wonderful pitch that this team will give you to present their startup. There will be product pivots, changes in the market, an unexpected competitor or whatever... The only constant in this adventure will be the founding team and that's why you need to believe in them. Make sure they are resilient, flexible and resourceful.
Although you may well develop grids or other analytical models to assess the vision, ambition, complementarity and execution potential of a team, in reality it is more often than not instinct. Sometimes you will like the opportunity, all the lights will be green and yet you will not invest because deep down you will not believe in the team. The reverse is also possible when you have doubts about an opportunity, yet the team behind it seems so good that you trust them to invest. Although counter-intuitive, it is important to trust your instincts about a founding team.
An average idea executed very well will always go further than a very good idea executed badly.
That being said, it is still important to know the major elements to identify in the founding team. Here are a few keys for the most complete reading grid possible:
- All founders must have a superpower: They can do something better than anyone else in the world. This could be attracting users to a service, recruiting the best engineering teams, creating artificial intelligence applications, or raising money from the best investors on the planet like nobody else.
- All the founders, and especially the one who will take centre stage publicly for the startup (usually the CEO), should make you look exceptional and special. Something out of the ordinary that touches or impresses you. This particular concept is not the easiest to write about as it relates to the human connection and your perception of this founding team. This should translate into a strong presence, an ability to captivate, hold the attention of the audience and a strong propensity to convince your audience. That said, being special does not mean being the extrovert salesperson. An introverted developer who is able to move through complex technical architectures is just as special (and often even rarer).
- Regarding the number of co-founders, 2 is usually the right balance. Being alone is very difficult and creates a loneliness that is incompatible with the needs of a startup at launch. 3 is also common and a good way to gather all the skills needed to launch the startup. Above 3, it is rare that this will translate into success for many reasons, starting with governance, involvement, sense of urgency and the ability to make quick decisions.
- Ideally, one founder (usually the CEO) is a business-oriented person and the other co-founder will have a more technical focus (the CTO). Depending on the specificities of the startup, there may be a third co-founder with special knowledge in the field. The most important thing is that there is a natural complicity and complementarity between these founders so that the first steps (developing a first product, finding the first customers, etc.) can be done internally (and therefore at lower cost).
- They have a coherent answer on how much money they want to raise and how they plan to deploy this capital in order to achieve their goals over the next 18-24 months. It is usually difficult to plan for longer time frames and this time frame is usually the time between one fundraising event and the next.
- Founders are mission-driven. They must care deeply about the problem they are solving. Believing that they will get rich is not a good reason to build a company. They need to be obsessed with creating their solution. The story is better if they have personally experienced the problem and have been pushed to come up with a better solution.
- They can identify competitors or, if they are creating a new industry, similar businesses that share similarities with the path they intend to take. It is also helpful if they can identify similar businesses that have been successful in the past.
- The absence of selfishness regarding their shareholding, particularly with regard to the willingness to take dilution to raise the necessary funds or to create stock options to recruit talented employees. The parity between the shares of the co-founders is often a signal of the absence or presence of selfishness.
- They are in control of their business plan. This does not mean that they correctly predict their revenues in three years; no one can do that. But they can deconstruct their thinking on things like the value they expect from their customers, the cost of acquiring customers, the price they plan to set for their product, and the estimated and/or required conversion rate. They do not look to their "finance person" in meetings for these answers.
- The founders are very knowledgeable in their field. They are experts in the sector they plan to enter. Let's say they're starting a travel company: the depth of the sector here could mean that they've worked at other travel companies, have many valuable industry contacts, already have a list of potential travel customers, have built API integrations with complex travel databases, and more. If they are founding a B2B company with an expensive product, one of the founders has built successful sales teams to sell a product with a similar sales cycle.
- They are mentally agile and responsive. They can produce meaningful answers and think on their feet.
- If the founders have formal advisors, they are recognised experts who add value in areas where the company needs help. They are probably not the founder's uncle...
- They are frank and respectful in their interactions with you as an investor, are honest, respond quickly and are transparent in their requests (assuming your requests are not unfairly demanding). Honesty is the basis of a healthy relationship between founder and investor.
- You like them personally. This does not mean that you will be friends with them outside of work or that you are interested in them because they are like you, but you admire them, respect them, trust them and look forward to spending time following their development and that of the business
- They don't have to have founded a business before, but the less experience they have as founders, the more they will need to be able to prove their success in their past jobs or projects. For example, someone who founds their first company after being a senior engineer at Google and at a start-up that had between 5 and 400 people at the time has an excellent profile, whereas a founder who has worked mainly in design agencies with few people will have a less appropriate background for a company looking for rapid and strong growth.
- Founders are most likely to work in the same physical location. A distributed team of founders is an additional challenge. It may work (especially in the age of increasing teleworking), but usually after a company starts in one location it expands geographically as it grows. Nevertheless, most investors consider a physically close-knit team to be an asset. Exceptions: crypto investments where a decentralised platform and business model lends itself to a decentralised team, and very young companies that outsource their development teams to countries with cheaper labour.
Red flags 🚩 (what to look out for when evaluating the founding team)**
Most of them are the opposite of the positive characteristics described above, but here they are in case it's helpful:
- They are in it mostly for the money.
- Intellectual dishonesty: they are not honest with themselves or with you about how things are going; they will downplay problems and highlight successes, which will make it difficult for you to help and will not give you visibility into the true status of the business.
- The usual dishonesty: they will lie to you about facts such as fundraising status ("we have several termsheets right now" when we don't) or metrics ("we have 50% month-on-month growth" when we don't).
- They all come from academia and have no business experience. Or they are all [business oriented with no technical skills].
- They have not left their jobs
- They don't seem passionate about the idea
- They are thinking of doing something else in a few years and do not see this business as a long-term project
- They don't know their competitors, or act as if they don't have any
- They don't take feedback or criticism well, including from themselves, get defensive and don't listen
- They contact you via a cold and/or non-personalised email (https://startupsventurecapital.com/how-to-cold-email-pitch-a-vc-372548fa1a35) which may be copy/paste
- There are more than 4 founders and they all have arbitrary, unusual, usually non-technical titles such as "CRO", "CEO", "COO" and "CMO". Ninety percent of them are MBA students.
- They are not good communicators: for example, late responses, poor grammar and spelling, poorly conceived or written pitch deck. There is no excuse for someone in a founder's role to present a poor pitch deck.
- Any personal traits or behaviours that you feel are negative, such as overconfidence, rudeness, sexism or the like should be taken very seriously
- Signs that they are amateurs: they spend a lot of time negotiating minor and irrelevant details in their answers, they ask you to sign a confidentiality agreement before presenting anything, or they give you a multi-page PDF business plan (no investor wants that).
- They want to raise too little money, which shows that they do not understand the reality of the cost of setting up and developing the business. It can also be a sign of a lack of ambition.
- They have an extremely high or low valuation that seems to you to be far from what it should be. Note that a low valuation may seem like a bargain to an investor, but if you take too many shares, you may be depriving the founders of enough equity to motivate them. In addition, you may not be leaving enough equity for future investors to want to get involved. A really low valuation may also suggest that the founders do not know how to raise money.
- They have a strange capitalisation table, with unsophisticated investors like family members holding large stakes.
- Greed around equity or fundraising; selfishly protecting their ownership at the expense of providing the necessary funds or allocating those funds to people important to the business
- They fail to raise funds
- You receive a negative reference about them from someone you really trust.
Remember: people and market opportunities are the most important elements of the investment, in that order. Follow your instincts. In Angel Investing, the founding teams are the main reasons for success or failure