The early days of a startup can be grueling, chaotic, and exciting. It is this formative period that sets the foundation for the company to grow on. Mistakes and missteps will happen; there will always be things founders look back on and regret doing or not doing. But one thing that can make or break a company right out of the gate is having the right founding team.
Why is the founding team so important?
There is no shortage of innovative business ideas. But when it comes to assessing a potential investment opportunity, many successful venture capitalists will agree that it’s not just about finding the “best” or most groundbreaking startup ideas–it’s who is behind the wheel.
While every situation is unique, investors can use a few key criteria to gauge how effective a startup’s founding team may be before investing in their business opportunity.
Key indicators of a strong founding team
Varied skills and expertise
There are varying statistics out there on the “ideal” size for a founding team. Good teams can come in all sizes; what’s more important is the skills and expertise each member brings to the table. Ideally, a startup should have a diverse team with different, complementary skill sets reflective of the business’s needs in its infancy. This could be two founders, or it could be five; it all depends. The aim here is to divide and conquer.
Strong track record
This study on serial entrepreneurs has some interesting implications on the predicted success rate of entrepreneurs. It found that entrepreneurs with a “track record of success have a predicted success rate of 30.6%. Entrepreneurs who failed in a previous venture had a predicted success rate of 22.1%, and first-time entrepreneurs had a predicted success rate of 20.9%. These findings suggest that having entrepreneurial experience, not necessarily success, can increase the likelihood that an entrepreneur will succeed. This isn’t to say that green founders should be counted out. However, a team that has demonstrated experience, particularly in their proposed market, is always a huge plus.
For a startup to go the distance, the founders need to have a guiding purpose behind the business–what is their “why?” This “why” can be simple, but it’s very important. It drives the direction of the company and unifies the team around a shared goal. When times get tough, this “why” can also be a powerful motivator to persevere.
Good working relationship
Often, you’ll find that founding teams have a history together, and this is a good thing. This indicates that they like each other well enough to work together again and are confident in each other’s ability to get the job done. Running a startup is challenging and can place immense stress on the team’s working relationship. For a team to make it out on the other side, they must be able to work well together under pressure.
Ability to adapt
Big egos, inflexibility, and unwillingness to adapt can quickly kill a startup. The business may need to pivot, adjust to new market conditions, or go in an entirely new direction. Founders who are flexible and willing to embrace change are far better positioned to succeed than those who are not.
Fair equity split
Equity split can become a huge point of contention, especially when a company begins to raise money. There isn’t necessarily one “right” way to split equity between founders, but it should be sensible and fair. Getting this wrong can spell significant trouble down the road.
Boiled down, you’re not just investing in the business idea, you’re also investing in the team. Before making a financial commitment, investors should feel confident that the founding team has:
- The skills and experience necessary to execute on their business plan
- A healthy, sustainable dynamic
- The fortitude to handle the inevitable challenges of building a company
For more on assessing a startup before investing, check out our recent blogs on interpreting a startup’s historical financials and evaluating traction. Also, don’t forget to check out our startup investment opportunities on the offerings page.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.