30 West 3rd

Very Early Stage Technology Investing

Characteristic of Good Seed Stage Founders

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As early stage deal flow increases across the country entrepreneurs face a more difficult task in breaking through the clutter.  First impressions matter more than ever.  As a founder you are blind to the competitive nature of fund raising because you may only see your company’s pitch. Investors see lots of companies and have the luxury of choice.  While frustrating when raising money, coming to grips with this reality and building a better first impression is critical to getting investors on board.  There are plenty of pitch examples and tips on what to put in your exec summary, etc.  I wanted to take a stab at explaining three things I look for in a good seed stage founder/founding team.  These characteristics will drown out a polished pitch or burnish an unpolished one.

First a note on homework.   Make sure you are even calling on an appropriate source of money.  To simplify managing their deal funnel investors often apply exclusionary criteria which they put on their websites, blogs, etc.  Are you pitching someone who would view your company as stage-appropriate and industry-approrpriate?  Do you meet their geographic preferences?  Are there companies in their portfolios that would suggest your company is a potential fit.  If you can’t qualify me as a prospective investor, you are not going to be efficient in how you go about other tasks.

The first characteristic I look for is a bias for action.  I want to invest in teams that are not afraid of taking on a big market, but also are willing to go directly at the unknowns.  This requires a willingness to get out and interact, make connections, seek feedback and insight from prospective customers and partners.  A seed-stage company, our sweet spot, is really a premise in need of validation.  That is really the essence of a seed stage plan – what must be true for this to work and how can I start knocking down those assumptions.  The DNA of a good founder or founder team is a combination of confidence in the premise and fear of being wrong.  I look for people with their senses turned way up, afraid of what they don’t know.  If you have that sense – and you can’t fake it – that makes a great first impression.  You should present evidence of proactive DNA, a bias for action and no fear of getting in front of people you don’t know, people that can help you.  One friend and successful founder simply asks everyday, “Who can help me move the business forward today?”  He then seeks those people out and asks their help.  Simple, but I’m amazed by how many times a founder is in front of our group with glaring gaps in knowledge and no plan to fill them.  Too often they are asking me to fill that gap for them in some way.  There can be no fear of knocking down the right doors and seeking out the right help.

Another characteristic is a mature understanding of risk and how each stakeholder in an early stage company is exposed to it.  Investors are exposing their money or their LP’s money.  Someone else made that money and someone has the responsibility to manage it.  To put that money in the mix for a seed stage or A round investment indicates an investor with a very high risk tolerance.  But successful early stage investors are trying to minimize capital exposure in the early stages of a business.  They seek very high capital efficiency and a clear path to value creating milestones.  To show that you understand that perspective on risk it is important to have a clear path to remove unknowns and build value in the company.  There is a quantitative element to that, but it is more important to show the qualitative aspects of progress.  It is bad form to simply ask for a year’s worth of funding, for example.  I’m more interested in funding a series of tasks that build to a value inflection point, not some arbitrary date on a calendar.  And be ready to show how you will extend the runway for the company if it takes longer.  Also recognize the risk you as a founder are taking.  Put together a plan that accelerates your awareness of whether this is a good idea or not.  Be passionate, committed, but not blind to negative market feedback.  Build a fact-based business as fast as you can.  Respect your time/effort and other people’s money.

Finally, know your market and be incredibly curious about the world you are seeking to change.  Being curious, by the way, means being open to the chance that you are completely and utterly wrong.  In building a relationship with seed stage investors, founders must be comfortable with admitting what they don’t know.  I am scared by cocksure founders with all the answers.  Rarely will they succeed, and never in a capital efficient way that protects seed stage investors.  Everyone involved in a seed stage company – investors, employees, founders – should be afraid of the one fact or law of the universe that invalidates the premise.  Finding those quickly allows you to stop, pivot and attack the issue head on.  It can be frightening and painful to face a piece of negative feedback about your idea, but you have to get it out on the table.  And you need to find people that can guide you on your journey, help you avoid pitfalls and fatal mistakes.  Know that the biggest investor in your business is you.  Life is short.  Get from darkness to light as quickly as you can.

These three characteristics – bias for action, risk awareness, and curiosity – are the cultural underpinnings of great entrepreneurial cultures.  They must be baked in at birth for a start-up, you can’t really hire it in later.  If you are a founder and feel that you don’t have these in abundance, or need someone to balance out some element of these, find a book-end to work with you on the company.  You won’t be able to fake it.

Written by Mike Venerable

March 4, 2012 at 7:30 pm

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