How to read Pitch Deck. Human Factor
The ability to understand the team and specific people will help foresee both the future success and failure of a startup. In practice, it often resembles a real detective story.
We have already twice pointed out the team's influence on the startup's fate, which is not surprising. It is difficult to overestimate their connection and impact on each other. Not cars win the races, but drivers. The same analogy can be made now. Business is not created by products, but by people. Whether a product fires depends directly on the individuals who do it. Venture investors resort to several interesting techniques in their work to learn as much as possible about the team. The more data we get, the better our chance of avoiding a questionable deal. Today's story is about how the human factor ruins deals and how investors dig into founders.
Appreciations to venture detectives Pawel Schapiro and Elya Checheneva of TA Ventures for the real-life stories from their practice, which have nevertheless undergone an artistic treatment.
What does a Founder consist of?
They say it's mostly out of water because he or she is human, but that's not the case for an investor. We are interested in soft skills, hard skills, and LinkedIn. Hard skills answer the question of how competent the founder is at running a startup. Soft skills will tell you how well he can manage people. LinkedIn, on the other hand, will help with the previous two points.
Let's start with the simple – hard skills. First, the founder must know the business. You can find this out by checking the education and experience in other companies. It is a good sign if there is a relevant higher education in the management or the startup's field of activity. If you studied Arabic language philology for a long time and then hit BioTech, there is a logical question: how do you know that? The reputation of the institution also plays a role. A high level of university automatically raises the grade of the founder, so do not be shy to show your diploma and other certificates of advanced training. Investors like not only lovely people, but also smart ones.
Experience in managing a company and creating a product is the second important point of hard skills. Startup founders do not appear out of nowhere, but go a certain way before daring to write to VC. As a rule, entrepreneurs start at a young age, get bumped, and repeat, but only better. If a person has spent his whole life as a subordinate clerk and suddenly decided to create a startup, then the chances of success are low. There are possible exceptions if we are talking, for example, about deep tech startups. In such cases, the founder may work for a long time in other companies to understand the subject deeply. Such projects are often science-intensive, and the benefit of the technology may be disproportionate to management skills. Investors need to know that the startup is in good hands and the boss knows what to do.
But soft skills are more complicated, because there is nothing more mysterious than the human soul. The founder needs such skills to get along with people and attract talent. This includes the team, clients, partners, and investors. The founder has a lot of introductions to make to turn an idea into a working and successful business. And since this is the case, you should work on yourself. Few people want to deal with the toxic and unpleasant type, around whom even the air is electrifying. More than that, he asks for money, too.
To begin with, you require reliable co-founders who will take on the key areas of the company's development. How many co-founders are required? In our opinion, three is the optimal number. As a rule, investors don't like solo founders. It's a risky investment option, since there's no backup, and the company's fate is sealed on one person. This issue is especially critical in startups at an early stage. In our practice, there was just such a case.
The founder of startup #266 (the name underwent the exact artistic treatment) was an exemplary entrepreneur with an excellent background. He had founded many companies, was highly active, and liked to generate a million new ideas, jumping from one to the next. This was the reason for our rejection in the end. We feared he would quickly lose interest in a new project and abandon it.
After finding business partners, the founder is busy forming a team and looking for the first clients. Once these stages are completed, he comes to us, where the detective begins. Investors are curious about the relationship between the co-founders and the startup team. We like stability, when there is a favorable atmosphere in the team. This increases productivity. Employees shouldn't quit because their bosses are jerks. An early-stage startup doesn't have much time to throw personnel around and clarify who is right and wrong. So how do you test this in practice? There are several techniques that we use.
Number one is a general call with the co-founders. Or a face-to-face meeting, if possible. During the conversation, we closely monitor the coherence of their answers. We should be concerned if the speakers constantly interrupt and contradict each other, and sometimes even roll their eyes. It is also a wrong signal if only one person continuously talks, and the others are silent. Investors don't like know-it-alls. First, it is impossible to know everything. Secondly, you need partners to help you with their expertise in different areas. This is not a crowd for investors.
Number two, visiting the startup office after 6:00 pm. In this case, we check the enthusiasm of the team. Startups are well known for the speed and tenacity with which the team gets things done in a short time frame. To get a product to market, a startup must work hard and often for little money. When we come into the office in the evening and see busy work, it's a good sign. Note if the team is voluntarily in the workplace at such late hours or forced to do so.
A startup does not work without enthusiasm, faith in its product, and a sincere desire to finish the job. We once encountered a young company whose founder demanded that the team come to work at 9 a.m. sharp. The deal went through, but we noted that as a disadvantage.
Co-founders also deserve the attention of investors after 6 p.m. They need to stay calm and not look at their watch, waiting for the meeting to end so they can run home. We want to see them open and ready to meet anywhere, anytime. It shows commitment to the company and interest in the partners, which is us.
Usually, investors scan only the management top of a startup, without addressing the entire team. There is insufficient time for that, so don't try to interview the last juniors. However, there is an exception at the pre-seed stage. And while we're on the subject of scanning.
LinkedIn is the most famous and necessary social network for startups and investors. Thanks to this tool, we research founders and make inquiries about the company. If you still don't have LinkedIn, start one right away. It will come in handy, we promise. Let's start with some insights useful for startups.
VCs often ignore cold pitches. Instead, funds prefer to find out about interesting startups from people they know, or in other words, network. Instead of general fund mail, try to reach out to a particular venture partner. Except that getting through to one is usually difficult. For that, the founder will need a familiar acquaintance who can introduce him or her. And if that is the case, the investor has a lead. For example, Pawel Schapiro, a venture partner at TA Ventures, has several thousand connections on LinkedIn. If the startup is outside that community, it's likely to be overlooked, and the message will go unread.
If a founder gets on our radar, we start scanning it on LinkedIn. The social network helps to sort out the hard & soft skills we talked about in the previous section. How do investors do this in practice? A well-designed profile with detailed information about education, skills, and experience is a good start. This way, investors will get material for further work. We will contact previous jobs and former colleagues for references. We also look for common acquaintances to ask about the founder's profile. In addition, we are interested in the company's technology and product.
We often asked how venture investors understand all the innovations offered by startups. The answer is simple: we don't. We don't know about all the technologies, products, and business models in the world. If we encounter something unknown, we turn to our own network, advisors, and other startups for advice. Maybe the founder is offering fiction, or perhaps he is just a scam artist. We had such a case in our practice.
Once, we were interested in startup #782, which offered a service for businesses to open accounts in a country in Africa. The first concern was the team members who were not getting in touch. However, negotiations went far, and the founder seemed trustworthy. Everything would have ended with the investment if not for the persistence of one of our venture partners. Roman (a name is fictional) mistrusted and did not stop poking around in the suspect's LinkedIn. As a result, he uncovered a clue about the founder's connection with a fraudster from Great Britain. They’ve done together a similar scam before.
It's hard to cover up all the tracks on the Internet, which means investors can find many intriguing things through simple internet surfing. Usually, we limit ourselves to founders and co-founders. Still, if a startup is at the pre-seed stage, we are generally interested in the whole team without exception. Even if there are a few dozen people, we will look at all the profiles.
To summarize the chapter, we again draw startups' attention to their social media pages. Beware because VCs may be calling your friends while you are asleep.
The Lovers
If you want to see a real debate between VCs, ask them about investing in startups where the co-founders are a man and a woman in a relationship. We have an ironclad rule against investing in such companies. The fact is that statistically, marriages last less than a startup is supposed to. Domestic problems of the co-founders will jeopardize the company, resulting in headaches for investors. If the couple quarrels, it will worsen management decisions. The worst-case scenario is a divorce. Then a division of the business will begin. To avoid such issues, the co-founders shouldn't look up each other's skirts and stay in business relations. There have been three cases in our practice where we have come up against such a situation.
We once invested in an online store for adult goods from Southern Europe. The co-founders were, you guessed it, a romantic couple. However, neither sex toys nor shared money saved the marriage. There was a divorce, but the company somehow survived and continued working. We are fortunate that the couple found the strength to keep their relationship as friends and continue to do business as they should. But readers have no idea how nervous we were.
Next time we decided not to let the previous situation happen. We got an interesting deal with an Eastern European startup, #997, which offered a product from the deep tech sphere. The co-founders were a young couple, not yet married. We liked the business, plus the other investors were credible. Should we make an exception? No! The iron rule should stay ironclad. We pulled out of the deal, and our main argument was the company's threat of shattering apart because of the relationship's breakup. And guess what? The startup is running smoothly. It's ironic.
The third attempt was intriguing to us, not even from the business point of view, but luck. We invested in startup #113 from Western Europe, which works in MedTech. The co-founders are husband and wife. Today they are performing one of the best in our portfolio. So have a debate after that.
The Golden Generation
It is not uncommon for investors to encounter cases where the founder of a startup comes from a wealthy family. Intuitively, one does not want to participate in such deals due to insufficient motivation. For such a founder, a startup may be just fun to do in his free time. We would prefer the middle class, such as an educated immigrant who knows the value of money and wants to succeed. At the same time, we recognize that the world has seen many successful businesses founded by wealthy people. Our portfolio also includes such a case.
We are actively looking at companies from the States and have encountered startup #512 from e-commerce. The founder of the startup, Julie, is a manager's benchmark. Her hard & soft skills were at such a high level that they left us no chance to be picky. But there was one catch: Julie came from a wealthy family. Our team openly discussed this nuance. Despite all the company's advantages, we were ready to turn down the investment. The main worry was that the founder would not fight for the startup and would abandon it if the slightest struggles arose. The arguments outweighed, the deal has concluded, Julie lived up to expectations, and the startup performed well.
We recommend that such deals not be thrown out at once, and that each case be considered separately.
Hard Landing
Imagine that you opened two profiles of different founders. The first one regularly discusses industry news, participates in profile events, and wears a jacket. The second founder is covered in photos of beaches, parties, and champagne fountains. Which one of them do you choose to invest in? The question is rhetorical. The founder doesn't have to be an ascetic to be liked by investors. However, no one has canceled the influence of image on our attitude.
A long time ago, our venture partner Taisia (name made up again) visited the States to meet the team of startup #752. The meeting went well, and we decided to invest. Taisia was already on the plane on her way home, and a poignant situation happened. The very co-founders of the startup were in the business class with her. She noticed this and informed them that she was out of the deal upon landing. The moral is that a startup shouldn't waste money, especially in the early stages.
We'll close our article with an anecdotal thought. We liked one startup's product, but the three co-founders were stumbling blocks. The thing is, they looked too much like each other. Same nationality, similar education, and social background. I think they even lived close to each other. Would you be embarrassed by that detail, or should we take a vacation and a little break from pitch decks?