When it comes to selecting a potentially promising investment opportunity, experienced venture capitalists will agree that there’s more to it than simply seeking out the “best” or most innovative startup ideas – it’s the people involved that can make or break a venture.
In fact, earlier this year, CB Insights reported that one of the top reasons most startups fail was that they did not have “the right team,” noting that a “diverse team with different skill sets” was often cited as a critical component of success.
So how can investors thoroughly vet a startup’s founders and leadership team before making an investment? While every scenario differs, there are a few crucial tells investors should keep in mind when examining a leadership team and their dynamic.
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Recognizing a Winning Leadership Team Before You Invest
Savvy investors know that while a strong CEO is imperative to a startup’s success, the leadership team’s dynamic as a whole is just as significant. Some things to consider during the vetting process:
1. Has the CEO been able to attract “A Players?”
A CEO that is able to recruit a proven team is invaluable. Certainly, we don’t suggest that investors completely write off teams with less experience; however, for investors who are looking to mitigate risk, an experienced leadership team with a track record of success is generally a good sign.
2. Is the founding team well-rounded?
Lacking a diverse team with a variety of complementary skill sets was found to be a key element that failed startups shared, according to CB Insights 2018 report. Teams that succeed tend to have complementary skills and professional abilities within the market. For example, a startup whose founding team is heavy on product development expertise but lacking in operations knowledge will be unprepared.
In addition to varied hard skills, the founding team should have good internal communication lines and mutual respect and understanding of each other’s strengths.
3. Does leadership have a solid plan for investments?
Oftentimes, startups can experience discord after receiving their first round of funding, as interests begin to conflict. This is why the leadership team should have a clearly defined plan for how they intend to use their investor’s money before a raise – this shows that everyone is on the same page.
Additionally, it’s worth noting whether or not the founders have invested their own money into the venture. This can be a good indicator that they’re more likely to establish a sound financial plan for potential future raises.
Questions to Ask Before You Invest
Red Flags that Point Towards a Troubled Team
While there is no way to guarantee that teams that don’t display these traits won’t fail, these are signs investors should be wary of when vetting a startup’s founders and leadership:
1. An absentee CEO
If a CEO is absent from negotiations, it could be indicative of a few things, none of which are positive:
- They don’t have the right skills to lead negotiations.
- The team member who is leading the negotiations doesn’t believe in their ability to perform.
- Or, even worse, the team member who is leading the negotiations is doing so without the CEO’s knowledge.
The negotiation process should give investors a look into what they can expect from the leadership team in the future. If the process is incongruous, take caution.
2. An incomplete founding team
Meeting the founding team should give investors insight into how the team copes during high-pressure situations, how they make decisions together, as well as their interpersonal dynamic. If a CEO seems to be avoiding presenting the entire founding team, there may be something they’re trying to hide.
3. Teams without history
If a startup’s leadership team has never worked together before, investors may be left wondering why it is that the CEO couldn’t find team members with a proven track record of success. Or, if the CEO is coming from a large corporation, why was no one willing to follow?
4. A CEO with a sketchy background
Serial entrepreneurs who have no record of success are always an investment risk. A CEO’s background and their past judgments are always worth scrutinizing – their history can speak volumes about their decision-making skills.
Narrowing Down Your Investment Options
When evaluating an investment opportunity, of course, the product itself and operating market matter. But as CB Insight’s report shows, a good product can’t always make up for a leadership team that lacks the necessary complementary skills, communication, and strategic vision.
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Of course, there are no guarantees in the world of startup investments. However, when weighing your investment options, buying into a team, and not just an idea could help to mitigate potential risk.