How to Build Founding Teams That VCs Want to Invest In
Introduction
No VC pattern matching is more well honed than the assessment of founding teams. Last year I surveyed a list of top VCs on what they think are the three most important aspects of successful founding teams.?
The top three that came back were:
I compiled all the responses into a founding team builder. The tool is meant for founders, but it’s equally useful to VCs and employees considering investing in or joining a startup.
Founding Team Builder
Each founder has to meet all the criteria on the founder checklist, and the founding team in aggregate has to meet all the criteria on the founding team checklist.
Founder checklist
Founding team checklist
Notes on applying the Team Builder
Working through the checklists
First think carefully about the design of the founding team overall. You want to ensure the team includes a CEO with a clear vision, founder-market fit, sales savvy, and the ability to build the product. Sometimes one person could tick all these boxes, and other times you may need as many as 3-4 founders in order to cover all the bases.
Next, as you are screening each potential founder, ensure they meet all the criteria on the list. Spend lots of time with people you are serious about. Do multiple backchannel references. Don’t only explore a work context: go out together, have fun and get to know each other to make sure you are aligned on values more broadly. You can’t anticipate everything that could go wrong, but look for issues that could escalate and cause founder breakup in the near term. Be especially careful that you think they can really grow with the startup and be as successful in 5 years with thousands of employees as they are today with just the founding team.
What differentiates a founder from an early employee
If a person meets all the criteria for a founder, then consider them as a founder. Otherwise consider them as an early employee.? Early employees share most of the same characteristics as founders, but founders need to be able to grow with the startup.? It's fine to have a star engineer who doesn't want to grow into a manager as the company scales,? but it's not fine if your technical founder can't really grow into something like a CTO – it tends to breed resentment among early employees and founders.
Recruiting founders
If you are starting as a solo founder and want to build a team of co-founders, this should be relatively easy for you. It should be about as hard as an executive search and take a max of 6 months – hopefully much less –since you should be focused mostly on building the founding team before building the product or company overall. If it’s too difficult, that’s a sign that you probably aren’t ready to be a founder.?
Who should be CEO
The CEO should be the natural leader with a strong vision and market orientation. If you are unclear who the CEO is or think you can figure it out later, then you probably don’t have someone who should be CEO. If you have someone who wants to be CEO but doesn’t have the market vision and ability to fundraise, you need to talk about it and see whether this is really the fight founding team or not.
Equity split
When it comes to the equity split among founders, much has been written.? You can readily find equity calculators and blog posts around. Many people, including within the YCombinator community, have been a bit religious about recommending founders have equal equity.? I don't believe in assigning value to past work like who has the idea, who has connections to investors – it should be based on the ongoing roles and contributions. A lot of the recommendations for equal equity are based on not knowing what the contribution among founders will be a priori. What really matters is what’s going to happen in day to day operations: who drives the vision as the CEO, who does the selling, who owns product, who owns engineering. If you have a serial founder CEO who already has some success, is putting in personal money, leading sales and driving management, it probably makes more sense for them to have more equity than a first-time technical founder for example.? Whereas if you have two peers coming out of university together and one is CEO and the other is CTO then equal equity makes more sense.
Detailed VC survey results
I asked top VCs to name the three most important aspects of founding teams that they look for when making investment decisions. I then synthesized the survey results into categories, ranked them in priority order based on how frequently each category was named, and summarized what I think is most important about each category.
The top three were:
Next were:
Unfair advantage due to domain experience and founder/market fit
Founder/market fit can be along many dimensions. It could be domain expertise, or the type of disruption and go-to-market strategy, or the product and technical problems.
Both the founder and the VC need to assess which dimensions seem most important to gain an unfair advantage, whether go-to-market, the tech, some deep scientific or industry expertise, or ultra strong product and design skills. Founders want to think long and hard about this when designing their founding teams.
Founder/market fit doesn’t only refer to deep experience in the business domain. In fact,? sometimes it’s coming from outside the domain that gives them the advantage to think differently and innovatively. The type of founder/market fit may not be obvious. For example, a founder may understand exactly how to build a team with the right domain expertise even though they may not have the domain expertise themselves. Someone who is great at building sales teams going after small businesses, but hasn’t ever worked in insurance before, may be better as the commercial cofounder of an insurtech selling to small insurance agencies than someone with years of experience working with insurance agencies. This is because many times the go-to-market domain is even more important than the business domain and the commercial leader can work with experts from the domain on their team and other teams.
A common problem is founders want to start a business but don’t have the industry domain expertise. The question is – is that expertise one of the top 2-3 most important dimensions to gain an unfair advantage? For example, for many industries the biggest issues are delivering better products and tech with a streamlined SaaS go-to-market. In those cases I’d rather have a CEO, CTO pair with the GTM, product, and engineering chops to deliver something 1000X better, and I’d entrust them to bring the right domain experts onto the leadership team. On the other hand, there might be a deeply scientific biology company that only makes sense with the scientific founder as the technical leader and domain expert.
VC Keywords
Vision, Clarity, Thoughtfulness
Someone needs to be the ‘keeper of the vision’ and able to synthesize massive volumes of information from the market, customers, and team to define a crystal clear vision and roadmap to get there.
Normally, it’s best this is one person and not a decision by committee.? They need to be masters of building an open creative environment that takes any and all ideas from the team into the creative process. This person needs to be able to see the world through multiple perspectives: users, customers, investors, employees, partners, competitors, and any relevant stakeholders in their markets or adjacent to their company.
It’s very important to recognize the ongoing value of vision and thoughtfulness. This isn’t a one time up front process of defining the vision. This same thoughtfulness is required to navigate the business to product-market fit on an ongoing basis.
What if the market changes – for instance when Netflix needed to pivot from mailing CDs to a streaming service. Consider Steve Jobs’ return to Apple and subsequent pivot in Apple’s focus and the series of product launches that ensued from iPod to iPhone and iPad. Consider Satya Nadella’s strategic acquisitions and product focus at Microsoft since taking over. If you have a thoughtful visionary at the helm leading through these times in a business’s history, you might make it out the other side even better off. If you don’t have someone who can process the vast data and shepherd towards a clear and thoughtful vision for the future, you may not make it out the other side at all.
VC keywords
Grit, Persistence, resilience, tenacity, confidence and energy to win
Startups are as difficult and painful an activity as you can undertake. The emotional rollercoaster is notoriously intense. One day, it can feel like you're the next Google. The next, it feels like you're about to fail and one of your best team members quits. You have to hear “no” almost all the time. Whether it's raising money, selling your first products or attracting top talent, you have to push through a hundred no’s for every yes. Also, when you get “hot”? you might hear 100 yes’s for every no but they're not actually real yes’s, they might easily evaporate overnight. Then also you need to keep your head on straight because if you let it go to your head you will easily implode. So there's a kind of steady unwavering confidence and energy that comes with this type of persistence and resilience –? you can feel your feelings and go through the highs and lows without letting them overwhelm you and shut you down or send you into the heights of mania.
There is a counterexample which I call the ”keepin’ the dream alive”? mode.? This is where persistence becomes toxic in the face of a startup that just isn't working.? It's tough to say anything useful about this one, especially for first-time entrepreneurs. Sometimes if you dig six more feet you strike gold and sometimes you've reached the depth of your own grave, the trick is to know which is which before you’re lying in a coffin.
VC keywords
Being ethical and likable
Likability is an interesting one that's less straightforward than it might seem. Sometimes people who can come off as abrasive or argumentative are actually very likable in the long run. This is because being honestly direct and vulnerable is actually extremely valuable in environments of high uncertainty. Excessive polish, posturing, and oversensitivity can actually make people less likable in a startup environment. Sometimes these can be signs the person is a charming manipulator and plays politics rather than focusing on getting things done. Likability ends up having a lot to do with transparency, honesty, some basic sense of empathy, and how you treat others. I've seen a ton of fake nice people treating their colleagues poorly when push comes to shove and engaged in constant political shenanigans rather than being transparent and addressing conflicts. So be careful because in the startup game likeability is probably more about realness with a dose of empathy then it is about overt polishing politeness and coming off as ”nice.” For example if a project is failing and the team is unwilling to see that and embrace change, gently validating them and saying nice things won’t stop them from running head-on into a brick wall.
Integrity and ethics are crucial. It can sometimes be hard to assess this up front but you can look for small signs and you can conduct reference checks. Over the years I've decided to adopt a zero-tolerance policy for integrity slip-ups and charming manipulators. If you see even a small sign that the person puts optics and politics ahead of execution, walk away.
VC keywords
Ability to recruit top talent and execs
Recruiting top talent happens in three main phases at startups.? In the first few years, founders recruit both the founding team and then all the early employees. I like to see the team putting in 20% of their time into recruiting at a fast growing startup. Later, after the founders have fully embedded the focus on elite talent throughout the organization, the recruiting team will be working mostly with other leaders that the founders have brought on board. These leaders need to have the same relentless focus on attracting and retaining top talent that the founders do.
VC keywords
Technical ability to build out the vision
The old saying goes that vision without execution is hallucination.? Whatever the product is, your team needs the technical skills to build it, whether it's design, engineering, hardware, machine learning, biological sciences, or physics. Depending on the focus of the company and its product someone with these technical building skills should probably be a founder. They don't have to be actually building the thing themselves for years, but it's important that they are hands -on building themselves in the first few years to overcome the chicken-and-egg problem.? If you have a core skill that you must be strong at to be successful, and nobody is even remotely confident in that area on the founding team, it can be quite challenging to assemble the right early team before you have enough traction to attract people just based on the business and career growth opportunity. Talent attracts talent within core skill areas.
VC keywords
Team composition and history
You have the right mix of skills on the team so that you can attack the problem with high velocity from day one. They have to cover the cases of founder market fit, visionary CEO, selling capability and building capability. You don't want to have a founding team with three sales people on it, three product people, or two engineers.
Most VCs like to see some history of the team working together knowing each other being friends longer-term. My opinion is this is kind of a mixed bag. Sometimes overly deep personal connections can cause drama and huge falling out during the course of the start up. Teams that are more professionally connected than personally connected can sometimes perform in a more stable and rational way without these kinds of flameouts. It depends a lot on the situation you see founders that are even family or even spouses and it can work.
VC keywords
Learning machines and ability to grow with the startup
Great Founders learn and scale very quickly.? It's amazing to watch a person start a company with just a few people and then a few years later they're running a team with thousands of people. A lot of times folks will talk about the stage fit for employees. Some folks work well in big corporations but would be ineffective at a startup or vice versa. The most amazing founders are remarkable at every stage. They just keep learning and growing with the business. These types of founders receive coaching extremely well and then proactively follow up on the coaching to learn more and impress everybody around them consistently. They realize that by taking the advice they get from folks that have very valuable time and running with it and doing much more on their own that these really high-level advisers will take the time to come back and teach them more. They are rabid readers spending thousands of dollars a year on books and educating themselves. They rapidly build support networks in areas that they don't know about yet, for example the founder CEO with a technical background will build a huge network of world-class sales people or vice versa, a CEO with a sales background will build a big network of product and engineering folks.
VC keywords
Sales savvy
Startups are about growth. They need to be masters of sales and marketing. Great products don't sell themselves and it's naive to think otherwise. The reality is that product, marketing and sales are so deeply intertwined that they aren’t even really distinct disciplines at the earliest stages. The earlier the stage of the startup, the less well-formed the product, the more the way that you're communicating the product in sales and marketing activities is deeply connected with the way that you are building the product. Sales, marketing, and product are all about learning how to meet the needs of your customers – master salespeople, marketers, and product managers are all masters of listening to their customers and the market. You also need to be able to run a sales process and close deals efficiently relative to the size of the deals; this means you need one kind of approach for large seven figure enterprise deals and something completely different for a ten dollars a month SaaS product.?
VC keywords
Resourcefulness
Startups need to do the impossible. They do things that bigger, more successful companies with tons of cash aren’t able to do. They do this by being more resourceful. The best founders come up with all kinds of creative hacks pretty much on a daily basis. You'll see them come up with a new way to find an early user growth channel that nobody else would have thought of – it won’t scale but could get you the first batch of users you need over the next 3 months. You'll see them being able to figure out a way to hire a way more senior person for a particular role than the startup really deserves at that point in time. You'll see them stretch out a tiny amount of money for a remarkably long period of time. You'll see them figure out how to import desperately needed expertise into the business through advisers or some other method when there isn't the time, money or opportunity to bring someone in full time. You'll see them react to an existential crisis that appears that it will certainly kill the business but the next week everything is back to being fine again.
VC keywords
Prioritize and focus
The best founders and executives are relentless about focus. Creative types will come up with tons of new ideas every day and that's fantastic. At the same time, you have to have the discipline to stick most of these ideas on to a list and keep yourself focused on the things that are really going to make the startup win. You can't change direction every single day.? At the same time you also need to have the intuition about when you are seeing information from customers and from the market that you need to pivot. You need to understand what the highest priority work is for derisking the business, and be a meticulous project manager to keep the team focused on winning and not getting sidetracked on nice-to-haves that can be dealt with later.
VC keywords
Mission driven
Mission driven. Great founders can make much more on a risk-adjusted basis working at Google. A powerful mission and will to win keeps them at it when moving forward seems pointless or impossible. Whether it's raising capital from investors, hiring a team, bringing in customers, or motivating other business partners, it's always way easier when you have a positive mission that everyone can identify with. Great founders are primarily focused on this mission through meeting the needs of their customers. There are many better and faster and more energy efficient ways to generate wealth that have higher likelihood of actually working. Founders are primarily focused on achieving mission, and secondarily on other aspects of the outcome.
VC keywords
Raw horsepower
Pulling off such a long shot is part luck and we can’t control luck. One thing we can control is selecting for raw horsepower. Great founding teams are smart, fast, and skilled.? There's just no way around the reality that startups are pulling off miracles. The velocity of execution and the quality of what your building has to be extraordinary compared to the number of people around and how long they have to do the work. This means that the people have to be orders of magnitude better, smarter, faster, creative, and more persistent than other teams.? This apolitical truth says that not everybody should be a startup founder, as there’s a certain amount of raw aptitude required. That said, not everyone has to have a genius level IQ. There are many different kinds of start up aptitude and horsepower. I will say that I think folks need to have a very high baseline energy level just because of the volume and velocity of work it takes special people to avoid burning out.
VC keywords
Customer Obsession
The best founders are obsessed with creating value for users. They are constantly talking to users, running surveys and eliciting feedback, trying to figure out both simple novel ways to make users happy. Jeff Bezos talks about this all the time. One of my favorite Bezons mantras is that you can be obsessed about your competitors or obsessed about your customers and you need to choose one. You can see customer obsession in how founders talk about their business and how they spend their time. They'll casually reference something they learned on a customer interview call recently or something they see from looking at the metrics. They also understand their market very well; its size, how it's growing, what is and is not successful in meeting customer needs in their market. You don’t see them knocking on competitors and overly focusing on defensibility and claims of superior technology.
VC keywords
Ability to fundraise
It's Interesting because people often say that CEOs job is to not let the company run out of money, yet this was the least listed among top three attributes of founding teams. I think that VC's understand what's actually required for the start up to be able to raise capital, and they are focused on the attributes that will allow that, rather than just naming the ability to raise capital itself as one of the most important attributes.? This makes a lot of sense because the things which allow a startup to raise capital are also the things which allow it to operate and be successful in many other ways,? such as selling a compelling vision, having a customer obsession, showing grit, and having an unfair advantage in their Market.
VC keywords