All investors say they invest in exceptional founders. But how does an investor tell if a team is exceptional? In this blog post, Reima Linnanvirta shares his thoughts on the subject.
Quantifiable vs. a Gut Feeling
Often, I hear the argument, “I know a great team when I see it.” While I agree with the statement to some extent, it offers very little guidance for the aspiring founder trying to build their team or the VC associate trying to develop their skills. Thus, I try first to focus on quantifiable items, at least to some extent.
Experience
The relevant experience is the most straightforward to assess. If you are building a startup, it is much easier to do so if you understand the customer problem or the solution you plan to offer them, ideally both.
The problem can either be known if you have been suffering from the problem yourself (e.g., starting a healthy ready-meal company after not finding such meals from the market) or if you have been working with some competing way of solving the problem (e.g., starting a legal automation startup to perform some task you did as a corporate counsel more efficiently).
While experience with the problem can come from either the demand or supply side, experience with the solution (i.e., the technology and product) should come from working with relevant technologies and products. Without this know-how, product development slows down, and the team may be unable to find the best ways to utilize the technology. (Now and then, I see teams that have outsourced their CTO, a huge red flag for me.)
Skills
Since I already ranted about the CTO, we can move forward and examine the relevant skills. This is an area where the team, instead of individuals, is involved.
Generally, a startup has four areas to cover: Mission, vision, strategy, and implementation; product and technology; growth; and execution. I want to see all these areas covered when looking at the team. Often, the challenge is that the team is strong in one or two of these fields but lacking skills in others. (I used to joke that a team of four engineers loving the technology will build a product, then a better product, a better product, a better product… until they run out of money as they never sell the product).
Track record
Experience and skills lead to a track record. And while (as our banks remind us) historical performance is not a guarantee of future performance, the track record is a good indicator of whether the person in question has the qualities helping them to succeed in building their startup.
People’s personalities and traits tend to change relatively little over the years. Thus, if a person has been active in the past, has been creating things, and has been achieving challenging goals, it is likely that the person still possesses the qualities to repeat this.
So, what kind of track record are we talking about? Obviously, if one has previously built a successful startup, that is a good signal. But the track record may come from other areas: What did the previous career look like? Was the person moving on to more challenging roles quickly, or was the person stuck in the same position for years? How did the person perform in school?
Competing at the Top
Building startups is a challenging and long journey. It is not a sprint or a marathon but an ultra-run. Thus, a strong startup founder must be committed to the project long-term.
When a startup is started, all founders are committed to the project. Unfortunately, the startup journey is almost always more challenging and longer than expected, and only a few founders stay committed throughout.
To tackle this issue, I look for founders who have shown determination to stay committed to a goal that takes years to reach. Often, this can be found in people who have demonstrated the capability to compete at the top level.
Let’s think about elite athletes: They may start training while young juniors, moving to professional-level training in their teens and entering the world championships in their late twenties. By the time they are at the top, they have been training for over a decade.
When I say “competing,” I mean more broadly than just sports (we don’t have just athletes in our portfolio). It can mean getting into and graduating from a demanding university, advancing fast in a career, competing in ballroom dancing, ultra-distance running, winning a mathematics competition, mastering an instrument, being accepted into military special forces, running a previous successful company, or otherwise overcoming challenges to achieve what they want.
Constantly developing oneself in pretty much any area shows the kind of long-term commitment I am looking for. In addition, competing at a top level prepares for the game of startups, where only the top ones will succeed.
How Do They Think?
When I ask the founders to provide data, I typically ask for the key data they follow. This way, I get not one but two pieces of information: what the data shows and how the founders think. (The added benefit is that the team doesn’t need to prepare anything, making the process a bit smoother for them.)
As a data-driven investor, I like data-driven founders. Building a startup is a game of testing: You build a hypothesis and test it. The right data may help you develop these hypotheses, and relevant metrics will quickly tell you the results of the tests. Considering this, I am surprised how often metrics are used only to report to shareholders and not to lead the company.
Tuning In
While I promised to discuss quantifiable items, I need to conclude with a gut feeling, as this last item is essential but a bit more challenging to explain. I have noticed that with some founders, I tend to really tune in to our discussions and stay super-focused.
This seems to result from a founder who is an expert in their field. They can crystallize the problem, explain why their solution is best, and communicate everything clearly and efficiently. They clearly understand what needs to be achieved in the long term and what milestones need to be reached. They show strong long-term strategic thinking, which they turn into actionable next steps.
This kind of tuning-in doesn’t happen often. Considering that I meet hundreds of teams every year, there might be just a few teams with whom this happens, but those are typically the best meetings.
End Notes
I wrote this blog post as this is a topic I get asked quite often. I have actually postponed writing this for quite some time as I had doubts about whether this would be useful to anyone. After all, this is just my approach, and every investor has their own approach. Still, talking with many people in the startup ecosystem convinced me to publish this, so here we go. If you are reading this, I hope you found it helpful.