Becoming an Angel Investor? Make sure you know what qualities to look for (and avoid) in founders you are evaluating.
When founders raise capital from angels, they are generally at an early stage. This may mean they have no finished product, or even customers they can show you, which is why the founding team is prioritized. By evaluating the founders you can get an insight into their ability to execute, suitability to develop the solution they propose, and if they are motivated to work on their vision.
Angel Hacks is a series which focuses on one key startup topic that new Angel Investors need to know, in under 5 minutes. You can read the first two “Angel Hacks” posts here:
Founder Stages: Angel Hacks: Founder Stages
Deal Flow: Angel Hacks: Deal Flow
Founders are the only part of a company which will stay the same, as investors will change, they may pivot, and their market may change. You need them to be skilled, dedicated, and also very likeable.
This article will cover some key qualities founders should have before you invest in them. Most of your evaluation of a founder will be based on your knowledge and experience with people, however these qualities should help you reinforce your decision and mitigate risk:
- The founders have a unique perspective on the issue they are solving. Whether they have experienced the issue they are trying to resolve first hand, or they have been working on developing solutions for the problem for months, having knowledge about an issue that you can’t acquire simply by reading about it helps a lot.
- The founders should have a special skill. They may be a great fundraiser, or great at product development. Perhaps they are good at recruiting and managing engineering teams. Perhaps they have experience building AI solutions for web applications.
- There is at least one technical founder in the startup. Ideally you would have one founder as a business person and another as a technical person. This means that you are covered on all bases when starting your company. If you don’t have any business dev or engineering founders then you need to outsource which is a red flag in itself.
- They are passionate about their vision. The founders should be passionate about the problem their solving and the solution they are developing. Dedicated employees will do anything possible to develop a solution which is something you want to see in your founders.
- The founders can tell you how much money they are raising, what milestones it will help them to achieve, and when they will run out of capital. This gets harder as the business matures but at an early-stage it’s easy to work out and great to know as an investor so you can visualize exactly what your capital will buy.
- The founders are courteous, honest, and respectful when talking with you. You should work with founders who you know respect you for more than a check, and are willing to tell you exactly what’s going wrong.
- They are willing to take on feedback in order to improve their product. Founders should be adaptable, and listen to the expert advice that you give them. If you invest in a founder that has a specific vision for the company that they won’t let you disturb, then you may be forced to remove them at some point if you even decide to invest.
- The founders can identify their competitors or if they are creating a new industry, identify any potential and/or indirect competitors. All startups have competitors in some way, and if the founders have not done competitive research, then their product may lag behind their peers.
- The founders accept accountability for failure and don’t let it get them down. After a failure, the founders should be able to step up to build a solution and take full responsibility for their actions.
- The founders are quick thinkers and have the ability to execute. They should be able to provide quick solutions to problems, and also be able to show they can build the product they are developing.
- The founders are personally likable. Essentially you should trust them to build the business responsibly, respect them, and like their personality. You don’t have to grab drinks with the founders every week (although that would help you develop a better personal relationship with them), but you should make sure you are happy working with them.
- The founders have deep subject-matter experience. They should be experts in the industry their product is in. For example, if your company is developing a code review service, having experience using GitHub and meeting code review standards is a must, and having experience developing APIs and strong web applications is also needed. If they are developing a B2B solution, the founders should be able to quickly start selling the product and develop a sales routine.
- They look after themselves. Starting a company is very difficult work and requires everything you have to make sure you don’t fail. Make sure that your founders are in a healthy routine and aren’t pitching to you badly because they didn’t fall asleep the previous night due to a code sprint.
- They are responsive and respond to your emails within a day or so, and provide new data or materials to you as requested in a timely manner. This allows you to judge if you are going to be able to contact the founder in case anything goes wrong and will help you evaluate the communication skills of the founders.
All of the aforementioned characteristics are essential for founders to have. The above checklist was designed to help you ensure that you are always investing in the right people.
Red Flags
Pretty much all red flags are the opposite of the last points, but I thought it would be good to list them in the name of clarification:
- They are dishonest regarding their company’s progress. this means they will try to make problems look small and successes look massive, meaning it’s difficult for you to help them and may destroy your relationship when you find out they have been lying to you.
- They are dishonest regarding metrics, fundraising stage, et cetera. For example, “we are in talks with many different investors”, or “we are about to secure four major clients this month”, when in actuality they are not.
- They are not working full-time on their venture.
- They don’t respond to feedback or constructive criticism well, and are not open to changing their product based on your advice.
- They inherit any negative characteristics like rudeness, sexism, racism, or consistent lying.
- They are in it for the money and fame.
- They are not invested in their vision.
- They don’t update you frequently regarding the startup and send generic emails, if they do at all.
- They act like they have no competition or are not aware of their competitors.
- They’re founding team does not include technical staff, and they are focusing on positions like Chief Marketing Officer, and Chief Information Officer when they are not necessary yet.
- They are raising too little money, which shows that they don’t actually understand the capital it will take to build their business.
- They have a peculiar cap table makeup and may have family members holding significant and unjustified stages.
- They have been fundraising for a long time without an investment.
- You hear negative perspectives on the founder from your friends or one of their listed references.
- They are negotiating ridiculous valuations which is nowhere near what it should be. If the founders are negotiating a low valuation they may not know how to fundraise. This may also mean that you take too much ownership which means that you are not leaving enough equity for the founders to give to future investors or employees.
- The founders have no experience in the field they are developing a product in.
- They seem incompatible with either yourself, or your VC firm and you don’t trust that they are a good team.
I hope this article has provided you an insight into how you can evaluate founders when considering investing in their company. This article should not be considered a comprehensive checklist, and you should always go with your gut feeling. However, this article should be used as a set of guidelines when evaluating founders to ensure that you are investing in people who will add value to the company.
I hope you enjoyed reading this article and that it helped you learn what makes a great founding team. If you have any questions, tweet me @jamesstewartvc or shoot me an email at [email protected] and i’ll get back to you soon.