Our Head of Talent Alex Lewis shares insights, with collaboration with Felix Martinez and Kate McGinn from our team, on what Seedcamp’s high-level due-diligence process is for vetting and assessing founding teams. In this blog post, he lays out five traits we look out for when speaking with founders.
“ In real estate, the three biggest criteria are ‘location, location and location.’ The venture capital axiom is people, people and people.”
When I told my friends I was joining VC, it began an amusing dialogue of how they believe this current climate sees little in regards to investor due diligence, with £XXm valuations for ideas, unicorns emerging at a rate of knots, and now talks of dragons. For outsiders looking in, it’s a mind-boggling spectacle more akin to a Lord of the Rings novel than an ecosystem.
Admittedly, when I came to Seedcamp, other than a couple of YouTube videos, I had very little understanding of what metrics VCs use to evaluate early-stage startups. I began to ponder on how important founders and founding teams were to investors and risk-mitigation, especially in early-stage investing.
My role at Seedcamp involves advising pre- and post-raise start-ups on all things hiring and talent. Inexperienced founders seeking to raise their first round, seem to think investors value product fit, strategy and revenue, rather than founder fit, are the key indicators for early stage investing.
I had an insightful conversation with our Associate, Felix Martinez and newest member of our Investment Team, Kate McGinn, to understand what the high-level due diligence process involves when assessing a founding team’s suitability for investment. As a disclaimer, there are a lot of traits founders need to have that won’t necessarily be obvious during the investment process, such as grit and hustle; however, it boiled down to a few key factors:
1. Clear Communication
Investors are not necessarily deep experts in the industries they invest in, so if a deep tech start-up comes to us with a complex solution, we need to be able to understand it quickly. Someone that is able to break down complex concepts into simple, easily digestible language is going to do well. This also comes back to an old favourite: first impressions count. If you are excellent at communicating your passion, you’re more likely going to be a person that people want to work for and consequently attract top talent, which is a great de-risker. Communication is key.
2. Product or Mission-Obsession
Depending on the business, we want to see founders show a clear obsession with either their product or company mission. When the founder of one of our notable unicorns came to pitch, he was able to tell you exactly how the product was going to be built in minute detail, as well as how it was going to iterate over time and why. We want to be able to see that you have really thought about how your product should function if possible based on customer or prospective customer feedback.
3. Founder Market Fit
What is it about you as a founder that makes you uniquely positioned to go after the problem you are trying to solve? Is it industry expertise, your contacts in the industries you target? Or are you self-aware enough to know that you would need to use the capital you are raising to hire those individuals who will give you that competitive advantage?
4. Founder/Founding Team Relationship
Founders are the bedrock upon which a company is built, so having sturdy foundations are going to be key to any investor looking in. You can tell quite quickly from asking a few simple questions about how the founders met, how long they have been working together, and how they came up with the idea to get them talking, but a curveball of who is CEO can bring to the surface some uncertainties and observations on a power dynamic issue between the team. There should be a clear alignment on who is responsible for what but also small things like interrupting each other and contradicting each other is a big flag. We had a company pitch us a couple of weeks ago that were debating their strategy whilst on the call with us. This didn’t give a strong impression of alignment and ultimately led us to walk away.
It goes without saying, but we are looking for founders who have an unshakeable ambition to change the world with the product they are building. We want people that are seeking to build the next unicorn or decacorn, and then some.
I hope this was helpful and like always, if you have any additions or further thoughts please feel free to reach out to me: email@example.com! If you’re looking for funding, please head to https://seedcamp.com/looking-for-funding/