Why Early Stage Investors Should Focus on the Team Over the Idea

Early stage investors spend a lot of time talking about and considering the idea a startup is bringing to the market. In my years of raising capital for new businesses like Fundify and investing in startups, I’ve seen this as a continual, main focus.

Of course the idea matters -- and it matters a lot -- but the team that’s bringing that idea to market matters more. When I’ve prioritized team over idea, I’ve achieved better returns. Allow me to explain my rationale.?

1. Execution. For every idea a team has, there are likely a dozen other teams elsewhere on this planet looking to tackle a similar challenge, perhaps in very similar ways. Seriously, there are so many good ideas out there; and if success boils down to one thing, it’s execution. You have to ask: Why is this team uniquely positioned to execute on this idea better than anyone else?

Do they have top-caliber people in the key roles that are necessary to build the business they’re envisioning? Can this team work cohesively to execute day in and day out through all of the challenges ahead?

Can they build solutions that are 10x or even 100x better than anything else available today while simultaneously managing the intricacies of building that business with limited budget?

It’s difficult to balance a fast-paced, growing business. I learned that firsthand while?scaling Art.com from an idea in my parent’s basement into Inc. Magazine’s second-fastest growing company on their annual Inc. 500/5000 list years ago. You’re spinning plates, and everyone -- and I mean everyone -- has too many plates in the air. In fact, the better the idea, the more plates each person is usually spinning. Many of those plates are quite important, and this is demanding.

When investing in a startup, ask yourself: Is this team capable of thriving in that environment to build the business they envision?

2. Entrepreneurial skill set. Early stage investing is very different from investing in a more mature, publicly traded company. As companies get larger, employees’ roles are more about the processes and finding ways to make incremental improvements to the business.

But in a startup, it’s about figuring out how to solve a problem -- entirely -- and building something from nothing to do exactly this. The founding team has to figure out how to build the idea, take it to market and then drive growth. That’s a very different role than making incremental improvements in an established environment.

3. Open to feedback. Chances are good that a startup will need to refine the business model or elements of their offering -- if not pivot entirely at some point along their journey. You need a team that’s willing to listen to market feedback and then adjust accordingly, if needed.

When I share this point with other investors, some ask why I might invest in a company while expecting the model to change. And this is an important point for startup investors to understand.

Startup teams are trying to solve big problems. They have an idea of how to fix it in a new way, but they’re not masters of this space or solution. They couldn’t be -- it’s new. In Malcolm Gladwell’s book “Outliers” , he talks about the 10,000 hour rule, explaining that it takes 10,000 hours of practice and work in an area in order to achieve mastery of the subject. So when you’re working in a new space, there’s much you don’t know -- and won’t know -- until you’ve spent more time with it. There’s simply no way of getting around the time that’s necessary to make this happen.

As startup teams build their solution, they have to dig deep into the space, research thoroughly, listen to feedback and adapt their solution to the market. Wash. Rinse. Repeat.

Be sure you’re investing in a team that’s willing and able to listen to feedback, analyze it well and adapt as needed.

4. Intellect matters. I believe the biggest problems will be solved by smart people who enter the market well before they know the actual solution. Let’s think about that for a moment.

Startup teams need to be visionary to develop novel approaches that can change a market. As they build out the vision, it takes intelligent teams to bring out the details that eventually turn into the execution plan.

“I believe the biggest problems will be solved by smart people who enter the market before they know the actual solution.”

You don’t need to find an all Mensa-member team, but you do need to find a group with a solid base of intelligence that’ll enable them to create innovative solutions that fit the market need.

Warren Buffet famously said that an IQ of 130 is a sweet spot for people, giving them the mental framework to make good decisions, but he noted that IQ beyond this level isn’t what moves the needle (source: CNBC ). He points to this baseline of intelligence combined with emotional stability as key factors for success.

I’m not suggesting that you ask founders to take IQ tests, but getting a sense for baseline intelligence from the materials they share, the things they say and the way they respond to you makes perfect sense to me.

5. Commitment matters even more. Intelligence is important but it’s worthless unless paired with strong commitment. Entrepreneurship is hard and is usually a long road; the team must be fully engaged in the idea and its execution. So how do you assess a team’s commitment?

First, they need to be working the business full time. It’s difficult enough to create innovative solutions and bring them to market. If I’m investing my hard-earned money into an idea, I want a team that’s entirely focused on thinking about the problem and how to solve it. It simply can’t be a side gig.

Look at it this way: If you’re trying to catch two rabbits, good luck! It’s hard enough catching one. Focus.

That analogy is spot on for business builders. It’s hard enough to build one successful business. I invest in teams that are focused on catching their rabbit.

“If you’re trying to catch two rabbits, good luck! It’s hard enough catching one.”

Second, full time matters, but you also need to look for a team that’s committed for the long term. With startups, the greatest value creation comes in the later years as the business scales and grows. You can’t get to that point if you’re not fully committed for the long haul.?

Entrepreneurship is not for everybody. It requires a lot of sacrifices and thick skin. You’ll be told no, you’ll run into difficult circumstances, you’ll work long hours, you’ll face competition, you’ll have to execute fast and at high levels even when you’re exhausted. No doubt there will be times when it’d be easier to quit. It takes a different breed of person and team to build a business out of nothing.

The best ideas are formed over a long period of time -- just like the best teams are. Look at sports teams that have played together for years. You see them working more as a unit and more efficiently over time. It’s the same in the office (in person or remote). Your interactions become more cohesive and efficient with longevity. So look for teams that stick together.

6. Responsiveness is vital. Consider how responsive a startup team is to its investors. Does the founder respond immediately to investors or get to it when it’s convenient? Having an engaged group of investors can be highly beneficial to startups, and you only maintain that engagement with responsiveness.

At Fundify, we see this with equity crowdfunding where startups can build a broad base of brand ambassadors by opening funding rounds to the masses. That enthusiasm of someone who now owns a stake in your business is maintained with the founding team’s open communication and responsiveness. Engaged investors can help with introductions, resources, advice, feedback, additional funding and so many vital elements.

Look for teams that value their investors as evidenced by their responsiveness.

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I’m a serial entrepreneur and got my start as cofounder of Art.com. Since then, I’ve invested in dozens of startups -- some with much success and some complete failures. This has led me to found Fundify to give greater access to startup investment opportunities and to simplify startup funding altogether.

I invite you to look at the teams that have opened their funding rounds to the U.S. public on Fundify. Deals like these were once reserved only for the wealthy, but new laws give almost anyone access.?

I’ve found that most people don’t know that they can invest in startups. They’ve heard stories about people who got in early with Uber, Facebook or Airbnb but don’t know that they can now look for their own startup investment success story. Of course, this type of investing is high risk, and I’ll be publishing more articles to help startup investors learn how to evaluate startup investment opportunities.?

I encourage you to sign up for free at fundify.com to access deals and our newsletter that’ll give you more insights into this type of investing. As you invest in startups, remember to evaluate the team. To me, it's the most important factor.