Investors talk about betting on the jockey, not the horse. By-the-way, it doesn’t hurt to race a fast horse. While this list is not exhaustive, it is a great place to start.
How do investors evaluate the startup CEO?
1. Judgment – Investors analyze past decisions to predict future trends. Consider how your background reflects your decision making skills. How have you managed risk? What financial decisions have you made in your personal life? The classic tale of the startup CEO that quits their job, burns through their savings and mortgages their house. This is a great story when it has a happy ending. However, it’s not evidence of great judgement given the inherent risk of being a startup CEO.
2. Team – A CEO that can recruit a team is always in demand. A CEO that brings a proven team to the table is invaluable. Great teams understand the interplay of their strengths and weaknesses. Investors realize such nuance takes time to develop, and they prefer you develop it on someone else’s dime. When I see pitch decks present a team working together for the first time, it raises a big red flag. Why can’t the CEO find team members with a track record? Especially if they left a large corporation—no one chose to follow? Hmm.
3. Business Acumen – Investors understand that startups require time to learn and adapt. However, this learning curve should be around market-product fit. No one is investing time in a CEO to learn the fundamentals. Not all functions of a business are expected to be scaled on day one. Knowing the functional areas are imperative to a startup CEO.
4. Coachability – The ability to respond to coaching (and yes, criticism) is key. Some startup CEOs forget that part of their job is to satisfy their stakeholders. In lieu of exceeding business metrics, listening and speed of execution of new ideas become crucial. I have a bad habit of asking startup CEOs absurd questions to see how they process feedback and respond to unsolicited advice. This is a great way to gauge their ability to develop and defend a position.
5. Strength in Numbers – Know your numbers. Know all of them. Period. “Let me ask my CFO” is a horrible answer. Never outsource developing your business model; it’s your job. Be ready to do a lot of math in your head. Have several “what if” scenarios on hand. If you have iterated your business model sufficiently, this awareness will evolve naturally.
6. Pre-work – There are a lot of activities that require investment. Many do not. Customer discovery, developing a business model, initial hiring planning, etc. This pre-work allows you to defend your founders’ valuation. Ideas in and of themselves are not worth much; highly vetted ideas with sound execution plans have great value. Document and develop substantial pre-work to communicate your learning along the way.
7. Resourcefulness – My very first investor said I was great at getting free stuff. I took it as a compliment. When resources are low, you are forced to get creative to meet your needs.
I was awarded six months of free data center real estate because the building owner wanted his space to look full. I was more than happy to fill the space for him, and I also proactively introduced him to prospects. Pay attention to people’s motives and financial metrics, and you will discover surprising ways to collaborate.
8. Focus – Be highly focused on what you want to do. Partner on everything else. Create closed ecosystems of partner companies that can provide complimentary services to your customers. Showing an investor that you have created these relationships demonstrates that you have created a solid foundation and also that your idea has been vetted by people in the industry.
In addition to these traits, many VCs have other traits that are important based on their thesis.
Contact me via Twitter @reddy_kp if you’re interested in me expanding the conversation. If not, this may have become an observational rant, never to be discussed again.