A great business idea can only go so far without the right people behind it. A recent report from CB Insights lists the top 20 reasons startups fail. “Not the right team” was the number 3 reason for startup failure, and “Disharmony among team/investors” was number 12. (“Not serving a market need” and “Running out of cash” were the top two reasons for failure.)
When you’re thinking of investing in a startup, it’s important to look at more than just the numbers. Seasoned investors frequently say they’d prefer to work with a second-rate idea that’s backed by a first-rate team than vice versa.
But how do you determine whether the founding team of a startup are the real deal or if they’re just extremely well-versed in giving all the right answers?
Here are some ways to assess a founding team before you invest in a startup.
Look at the plan for how a company will use your money
Things can turn ugly fast when a group of founders gets their hands on investment money. There could be four founders with four very different ideas of how investment money will get used, leading to tensions among the team and disharmony among investors. (Sound familiar?)
Avoid this by getting a sense for how aligned the founders are on how your investment will be used. A founding team with a cohesive plan for the company’s future will be able to give you a good idea of how the company will use your money. Once they’re in agreement, and you as an investor are satisfied that your funds will be used in the best way to move the company forward, you can feel more comfortable making the investment.
Establish what each member of the leadership team brings to the table
There can only be one CEO, one COO, one CTO, you get the picture. The problem is, often startups are the brainchild of a group of people who have very similar interests and skills. A strong founding team will each bring different strengths and skills to the table. They’ll complement each other, not compete with each other. A stable founding startup team will be able to lead the company cohesively, embodying as a unit the qualities of a manager, including being able to forecast for the long- and short-term. They’ll also have the necessary technical skills to start building their product and will be able to recognize what hires they need to make.
Pay close attention to how the CEO works with the team
A CEO who insists on meeting with investors alone, without the founding team, could be someone who either doesn’t consult with his founding team members for decision making or doesn’t believe in their ability to handle investment negotiations. While the CEO should definitely be involved in investment negotiations (in fact, consider it a major red flag if s/he isn’t), they shouldn’t be the only member of the founding team that you meet with.
If you do meet with the CEO and the rest of the founding team, look for synergies between team members. There should be mutual respect and an acknowledgment of each other’s strengths and weakness. Be wary of any CEO who constantly cuts off team members or jumps in to “clarify” what someone else is saying. Egos can be big in CEOs, and that can cause major problems down the road for investors.
What other things do you assess when you’re considering investing in a startup? We’d love to know for an upcoming podcast! Send an email to email@example.com and give us your advice! In the meantime, make sure to check out how to become a member of Capital Raising Club.