It Starts with the Team – The Formula Series (Part 2)

EDITORS NOTE:  The second of a four part series on the funding formula for startups. Read part 1 of The Formula Series here.

The formula for gaining investor conviction in your business is simple: combine a solid team, market opportunity and customer validation to create confidence in your business. But first, as a founder, you should realize it all starts with you and your team.

THE TEAM

In early stages of a startup, it’s all about the team. Well, mostly. Therefore, this one category could get you to about 80% conviction (and in some cases, even 100%).

To understand where one stands in gaining that team conviction, let’s break this down into the three main components: credibility, relevance and passion. Note: we know there are other factors like hustle, ability to execute, adaptability, EQ, etc, which also informs how you evaluate investment conviction, but for the sake of this formula, we try to focus on objective metrics. 

1. Credibility

If you have done something that gives people (other than your mom) the confidence that you’ll be able to see the road to success despite the unknowns and uncertainties, you have credibility.

For example, when Jim Goetz of Sequoia met Jan Koum of WhatsApp, he recognized his drive stemmed from more than just a vision, but a life of choices to increase his own credentials to be taken seriously. Jan had taught himself computer programming at the age of 18, joined hacker groups well before it was a Silicon Valley norm and even squirreled his way into the servers of Silicon Graphics to chat with Napster co-founder Sean Fanning.

“Both Jan and Brian were very driven, just not by financials and not by economic outcome,” said Goetz. “That came, from their lives and frustrations from working at Yahoo and seeing what happened when the company shifted its focus to advertising and away from the user.”

His credibility to hustle and find solutions was never in doubt.

Here are a few examples of accolades that increase one’s credibility:

• Graduate from well respected schools
• Work at reputed companies
• Win awards or competitions
• Found a business (the more successful the business, the higher the credibility, but you also get credit for learning from failures — unless YOU completely screwed it up)
• Do something that most people don’t do (i.e. started coding at 14 and dropped out of school to build a drone OS)

Measuring credibility:

Since there is nothing objective about investing decisions, we are sharing some guidance on how to guesstimate the various indicators. Use your best judgment when applying these measures:

• 30% for highly credible teams – co-founders meet two or more of the above indicators
  • E.g., Worked at reputed companies AND studied at top universities
• 20% for moderately credible teams – co-founders meet one of the above criteria
  • E.g., Worked at reputed companies OR studied at top universities
• 10% for low credibility – cofounders don’t meet any of the above criteria but have some experience/education
  • E.g., Neither reputed companies, nor top schools
• Less than 10% if there is no work experience or higher education

2. Relevance

Relevance (in market and with technology) is directly reflected in the speed of execution. A team with relevant knowledge will move much faster because of a shorter learning curve. They have usually gone through the trial-error and made mistakes in past experiences, which makes them very efficient and effective in the current venture. Relevance to the market/technology also gives them a network, which usually makes it easier to approach the right people as customers, advisors, mentors, etc.

Let’s look at theSkimm founders Carly Zakin and Danielle Weisberg who quit their jobs at NBC to create theSkimm. With their background in media, it wasn’t difficult to convince investors that they have an understanding of the domain and can execute on their innovative approach to news consumption.

Measuring relevance:

• 25% for a highly relevant team
  • E.g., Worked in the industry before AND has relevant education in industry
• 10%-15% for moderately relevant team
  • E.g., Worked in the industry before OR has relevant education in industry
• 0% for a team with no history in the domain

Be careful not to give yourself credit for “credibility” in “relevance”. Example, being a lead engineer for network analytics at LinkedIn gives you credibility, but not relevance in construction software.

3. Passion

There is no absolute way to measure passion. When talking to an entrepreneur, generally investors can tell if he or she is passionate about their venture or not, but it’s tough to make it objective.

A great example is Elizabeth Holmes, founder and CEO of Theranos. Her father spent a career working in humanitarian assistance with USAID, she grew up seeing the realities of the most disadvantaged. As a result, she wanted to make diagnosing a more proactive process.

Holmes dropped out of Stanford in 2003 at age 19 to start Theranos.

“What do you want for your children?” says her father. “You want them to do something they’re passionate about. To follow their dream. To help people. To change the world. So we said, ‘Of course. Go do this.’”

Since then, for 10 years, Holmes patiently raised money and refined her technology.

Here are some questions to assess passion in an entrepreneur:

• How did you come up with the idea?
  • Founders solving a problem they’ve personally faced have a high degree of passion versus founders who were looking for ideas and found an idea. In between would be founders who saw the opportunity while working on something related or tangential. Essentially, it can be something you can see yourself having fun doing for the next 7-10 years (see: Elizabeth Holmes)
• Are you working on anything else?
  • This question is not about your worker self, but about your entrepreneurial self. It’s ok to be working a day-job during early ideation / validation / team building stages. Working on multiple concepts at the same time indicates lower passion for each.
• What if you are not able to raise capital for this venture?
  • A passionate team will not give up because they can’t secure funding – they’ll either figure out what’s missing and address that, or find an alternative way to continue on their journey.
• What would you give up to build this solution?
  • This response can be very vague or very thoughtful. Either way, the insight is useful.

Measuring passion:

Here’s how the metrics work:

• 25% for highly passionate team
  • E.g., solved a problem they personally faced
• 10-15% for moderately passionate team
  • E.g., saw the opportunity to make lives better while doing something else in a related field
• 0% for others
  • E.g., was looking for something to do with drones and came up with this

A combination of the 3 elements above can give you a score as high as 80% on the team alone. That’s what “kick-ass team” means!

Let’s look at a few examples of how credibility, relevance and passion play together. For this, we’ll use four of Unshackled’s portfolio teams Pluto, Shortlist, Sporple and Geospago.

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And there’s plenty more to come in the investment  conviction formula. Throughout the next two posts, we’ll dive into each element to improve your business and explore the market opportunity and what every early stage investors want. Plus how to measure and gain the validation to succeed.

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Pluto Search, Shortlist, Sporple, Geospago