Why early-stage VCs should focus on founders over business models
Published on February 23, 2023
Written by Adrian Li, Founder & Managing Partner at AC Ventures
The complicated world of tech investing becomes more cut and dry when dealing with companies that VCs call ‘mature.’ Think of predictable sales, profits, and relatively stable cash flow resulting from a clear product-market fit.
For early-stage startups, however, it is usually more challenging. Primarily due to a lack of observable performance in the market, the risk is almost always higher.
When considering an early-stage deal, VCs tend to look at a few things. They try to spot strong management traits, an implicitly large market opportunity, a novel product with a competitive edge, early signs of product-market fit, and other factors.
But in my experience, I find that there’s an aspect that many VCs haven’t quite paid enough attention to – which is taking time to get to know founder personalities.
Companies and models can be changed, pivoted, or adapted over time. For early-stage companies, these are not the elements set in stone. A founding team, however, is usually the most permanent and important fixture.
When it comes to early-stage investing, where the risk of failure is the highest, I’d like you to consider spending more time evaluating founders rather than focusing on the nuts and bolts of their companies.
Every VC looks for strong founders, but what exactly is a ‘strong’ founder? There are no proper studies on the topic, no universal definition, or a set of criteria. So most wisdom on this front can be arbitrary and open to debate.
In my opinion, there are certain characteristics most VCs look for, such as age, education, humility, drive, ambition, leadership potential, and domain expertise.
These make sense, but let’s go a bit deeper to examine what mix of personality traits tends to result in success.
Bucking conventional wisdom
Bassiset recently studied 61 startup founders across all stages, where 70% ran enterprise-focused companies and 30% were consumer-focused.
For context, founders were said to be doing well if they: conducted an IPO, raised a substantial amount of funding, or had their company acquires for large amounts.
Meanwhile, founders who were not doing well saw their companies shut down, experienced stagnant growth, or got acquired for a small amount of money.
VCs were asked 28 questions about demographics, attitude traits, and the experience of their portfolio founders. Through hierarchical cluster analysis, the study found that there were similar archetypes for founders, both successful and unsuccessful. Interestingly, the results went against conventional wisdom. Having technical leaders did not have an effect on company success, and founders of all ages can be successful. However, having a complementary co-founder, usually a technical one, does show a correlation with success.
The point here is that you shouldn’t be too concerned with whether the founder has the required technical expertise or not – there are other more important aspects that influence success.
There are six founder archetypes. Those studied were rated on nine traits: agile thinking, confidence, day-to-day effectiveness, founder-market fit, humility, results-driven, quick learner, scrappy (resourceful), and storytelling.
Three archetypes of successful founders cluster around certain characteristics, namely:
- Humble operator (disciplined, humble, focused, resilient, ambitious, diligent, modest)
- Agile visionary (multi-faceted, driven, brilliant, deliberate, problem-solver, intuitive)
- Seasoned executive (great communicator, mature, thoughtful, high confidence, knows the business well)
Now contrast this with three archetypes of founders that are unsuccessful:
- Passionate outsider (earnest, young, driven, risk-averse)
- Overconfident storyteller (arrogant, condescending, bad manager, visionary, lacks focus)
- Stubborn individualist (slow to adapt, stubborn, poor listener, robotic)
Notice how founders in the three successful archetypes aren’t full of the rah-rah traits we often see in the media? Things like visionary thinking, agile, charismatic, compelling, young? To my way of thinking, the value of these traits is over-amplified.
It’s tempting to focus on exceptional, unconventional traits, despite rarely being successful – they make great headline fodder.
Startup success is actually surprisingly simple
There is really only one aspect that consistently correlates to success: good execution. This should really come as no surprise.
This is seen across all archetypes – the day-to-day effectiveness of the company’s operations and whether the founder can learn and adapt quickly are the traits most tied to success. This is supported by more than one study.
Also, unsurprisingly, having a results-driven attitude bodes well. VCs should look out for founders who seek to explore many solutions to quickly find the best one that delivers results (especially as they’ll need to deal with a limited runway to hit their next milestone).
Be wary of founders who get too caught up with the process over results – this often comes at the expense of moving fast enough to find product-market fit.
Of course, the other traits are not without merit. They do matter, and they do have their place. But it’s just that they aren’t as crucial to success as having a founder who can execute well and is results-driven.
For founders, first ensure that your pitch meets the basic requirements of a VC (concept, product-market fit, etc.). Then focus on telling not just the story of the company but really unpacking your own personal journey, highlighting why you are the best person to solve the problem at hand.
There are many traits that are desirable and, in the right combination, are likely to give VCs the best value for your investment. That said – this form of founder evaluation is not prescriptive. It’s not the be-all and end-all, and like every other resource out there, it should just serve to inform your decision-making.
VCs still need to build their own in-house formulas and frameworks for founder evaluation. While business models and traction are always compelling and warrant analysis, early-stage deals should never move forward if investors have doubts about the founding team’s ‘superpowers.’