Dec 12, 2019

How to Choose the Right Startup: Founders and Investors

Mike Sienkowski
How to Choose the Right Startup: Founders and Investors

In part I of my blog series, “how to choose the right startup”, I discussed finding a startup that is attacking a large market with key differentiators that enable a competitive advantage. That is a good first step, but there is more to it, of course. In part II, we will focus on a few of the important, but also subtle, signals I look for when evaluating a startup’s founders and investors.

First, let’s look at the founders. When looking at the founders at a start-up, what I want to know is, “are these the people that can execute on this idea and bring the company to a meaningful exit?”

The natural question to ask is, “what have they done?” The easiest thing to look for is whether they have already created a company and took it to IPO or some other type of successful exit. Have they built a solid company? That is obviously a pretty good indicator. When names like Elon Musk or Andy Bechtlsheim start a new company, people tend to buy-in. It’s a good leading indicator, assuming the idea is valid, that they can execute again.

In truth, most start-ups are not going to be founded by people who have already created a company and led it to a large successful exit. Most founders are not Elon Musk. Chances are you are going to be looking at a set of founders who have “failed” before, or perhaps it is their first go at a startup. So what are some of the other things to look for? I look for what the founders have built and shipped, whether is it a past startup or a meaningful product within an established company. Was what they shipped a very difficult technical challenge?

Most startups don’t succeed, but great founders gain wisdom from failure. When speaking with the founders, if their first one or two startups did not succeed, ask them why and what lessons did they learn? Do they know and acknowledge why they did not succeed and what they learned? Is there a degree of humility? I view humility as the key, it’s often a hidden signal of a founder’s ability to learn from past mistakes, and the wherewithal to apply that wisdom to future endeavors.

So, now I know “there founders can solve difficult technical challenges and ship product, and if they failed, they know why and intend to learn from those mistakes. I like that.

On another note, I have found job seekers sometimes give inappropriate value to the companies from which the founders come. There is value to exposure to many large company engineering cultures, but that is just a small piece of the puzzle. I have found candidates will often say with some sense of aplomb, “but the founders are from big famous company.” There are benefits to a large company, but the better question is, what have they built at that company? What have they shipped? What have they taken from inception to delivery?

Let’s turn to the question of investors.

The first, and most obvious, thing to look for when looking at the startup’s investors is what have they invested in the past and what were the results. If the investor is Mike Speiser at Sutter Hill Ventures and we can see he did the initial series-A investment for Pure Storage and Snowflake, that is a good story to tell. If Mike is investing in a new enterprise data infrastructure startup, I would take notice. The data tells me Mike knows the space and knows how to pick winners

To drill down a little further, look to whether the investor has a track record investing in early startups (seed, series A and B). This is meaningful. The early rounds are the riskier rounds. When an investor has been able to identify great companies in their very early stages, multiple times, that is a great signal. They see things others have not.

Don’t get hung up on the venture institution – meaning don’t be overly concerned that funding came from XYZ firm, but rather look at the track record of the individual investor. Does this person have a history of investing and building early-stage startups and bringing them to fruition? A good friend, and prominent investor, once told me, there is usually only one, maybe two, great investors at each of the big name firms. Those are the people you want.

There are other reasons startup founders crave investment from a relatively small subset of these proven, early-stage investors. It’s also about having people who have built amazing companies validate your idea and the momentum this can create. It’s not really about the “how much” with early-stage investing, it is more about the individual “who”. There is a herd mentality inherent to humans. When we see people we trust validate something, we, and others, are more apt to lend it credibility. It’s just a natural phenomenon. This, in turn, can result in a momentum otherwise unavailable to a startup. When we see shrewd investors have validated a company we and others are more apt to join the herd. There is nothing wrong with that.

When a start-up has raised from this proven subset of investors, especially series A, you are given a strong signal. Subsequent raises and who is involved matters, but in different ways than the early rounds.

Another great signal is when the majority of a start-up’s investment has come from a single renowned investor. I try to avoid start-ups where the initial investment appears to be cobbled together in small chunks from many investors. This tells me that nobody was willing to invest the lion-share, so why is that?

To summarize, when looking at founders, a few things to look for are what they have built, and what they have learned along the way. When researching the investors look at the track record of the person making the investment, not the firm. Understand the story the signals tell you about how the VC community has valued the startup.

I hope you find this helpful. In my next blog post, I will delve into some of the more obscure signals to look for, particularly when looking at enterprise startups.

Happy hunting.