Every successful startup has a team of individuals at its core, and their dynamics can determine the fate of the venture. In our previous blog, "Why the Founding Team Takes Centre Stage for Angels.", we talked about why founding teams are crucial for angel investors, and how they play a significant role in deciding whether to invest in a startup. Angel investors understand that investing in a startup is not only about a great idea but also about the people driving that idea forward. They know that a startup's success often depends on the founders' capabilities and the cohesion of their team. Evaluating a startup team is both an art and a science, and it involves looking beyond resumes, understanding collaboration intricacies, and appreciating the stories that shape founders' visions.
This blog takes it a step further, exploring the qualities that make startup founders and their teams appealing to angel investors. We'll also touch on various tools and frameworks that angel investors can use to evaluate seed-stage startup teams.
When investing in seed-stage startups, angel investors should tailor the due diligence process. Here are some key considerations for assessing the founders, their team, and their HR systems.
Founder and Team Background:
For angel investors, getting to know the team behind a startup before making any investment decisions is crucial. Angels should consider the team's educational and professional background, skills, and experiences, and how they align with the startup's specific industry and market. Understanding the team's strengths and how they can contribute to the startup's success is vital in deciding whether to invest.
Another critical factor to consider is the founders' entrepreneurial experience and track record in their previous ventures. Investors should examine their successes, failures, and the lessons learned. Having the experience of running a successful business is obviously ideal because they understand the path to scaling and exiting a business. However, building a business that ultimately fails is still extremely valuable because many important lessons are learned along the way.
Platforms such as LinkedIn, AngelList, and Crunchbase offer valuable insights, while reference checks from previous employers and industry contacts provide a deeper understanding of the team's work ethic and leadership qualities. Investors can browse through individual profiles to gain insights into their expertise, previous roles, and the strength of their professional networks.
Roles and Responsibilities:
Team Dynamics play a significant role in achieving success. The best teams have a collaborative spirit and each member contributes unique skills to the shared vision. Examining how team members complement each other in terms of skills and responsibilities is essential. As Helen Keller once said, "Alone, we can do so little; together, we can do so much." Seeking out such teams will only increase the likelihood of successfully executing the company vision. Therefore, investors should assess not only individual competencies but also how well the team works together as a collaborative unit.
Investors can use Team Assessment Frameworks like Belbin Team Role theory or Tuckman's Stages of Group Development to assess team dynamics, identify roles within the team, and evaluate how well the team collaborates and resolves conflicts. It’s also a great idea to visit the team’s physical office or factory and speak with some of the other leaders and long-standing employees if they have a physical location.
Adaptability and Learning Ability:
In the dynamic world of startups, adaptability, and learning ability set successful teams apart from those that fall behind. So assessing the team's ability to adapt to changing circumstances and market conditions is essential. A team that embraces challenges as learning opportunities is better equipped to navigate the uncertainties of entrepreneurship. Learning orientation and resilience are also crucial for a startup team. They are like the silent engine that propels a startup through challenges. Angel investors should seek founders who view setbacks, not as roadblocks, but as opportunities to learn, adapt and emerge stronger. In the words of Winston Churchill, "Success is not final, failure is not fatal: It is the courage to continue that counts." It is essential to determine how quickly the team can learn from mistakes and iterate on their strategies. The hallmark of a growth-oriented team is the ability to learn from past failures. Investors should be inclined to work with founders who openly discuss their past mistakes, demonstrate an ability to overcome challenges, and are committed to continuous improvement. As Thomas Edison once said, "I have not failed. I've just found 10,000 ways that won't work."
To test a startup team's adaptability and learning ability, angels can provide feedback during due diligence and observe how the team responds to a new perspective. Additionally, they can ask the team about instances where they had to pivot or iterate on their business model to assess their openness to change. In both cases, angels are looking for founders and teams that have humility.
Network and Relationships:
When assessing a startup company, one of the most important factors to consider is the team's industry connections, advisors, and mentors. It's crucial to evaluate how well they can leverage their network for the benefit of the business. Additionally, the quality and relevance of the advisors or mentors associated with the team should be taken into account. Starting a business can be a challenging journey, but it's easier when supported by experienced mentors who can guide the startup through key milestones. For angel investors, it's important to find founders who are open to feedback and are willing to learn. Being coachable is crucial, indicating that the team can set their egos aside and adjust their strategy accordingly with new information and advice. Milestones are not just accomplishments; they are also indicators of progress and their capability to hit future milestones.
Investors should scrutinize the decision-making process when assessing a team's leadership styles. They evaluate the decisions made and the thought processes and strategic thinking underpinning them. To understand this process, it's important to know the decision-making structure within the team and how major decisions are reached. Assessing the team's risk tolerance and ability to make informed and calculated decisions is vital.
Scenario analysis is a powerful tool for due diligence, allowing investors to test a team's problem-solving abilities and strategic thinking. By presenting hypothetical scenarios, it's possible to gauge how the team would navigate the unpredictable twists and turns of the business landscape. Investors can also look to the financial model to see how different scenarios play out and should discuss the various contingency plans the team has in place.
Commitment and Passion:
Investors should assess the level of commitment and passion that the founder(s) and team have for the problem they are solving. The intangible yet powerful qualities of commitment and passion anchor a team's journey. Full-time involvement, personal investment, and a profound understanding of the target customer showcase a mindset crucial for success. A team that goes beyond surface-level analysis and dives deep into market insights should be highly valued by investors. As Steve Jobs noted, "Get closer than ever to your customers. So close that you tell them what they need well before they realize it themselves." Investors should not just look for a great product; they should look for a great market. A team that understands its target market's size, potential, and nuances demonstrates a strategic mindset crucial for sustainable growth.
When conducting due diligence on startup teams, it is crucial to explore beyond surface-level information. This involves delving into intangible factors that contribute to a team's success. Angel investors who possess the skills for team due diligence not only make sound investments but also have a better chance of nurturing successful and long-lasting relationships with the founders.
Raymond To, who is an award-winning recruiter, HR advisor, angel investor, and passionate supporter of startups with 32 years of experience, advises that engaging in open and transparent communication with the founders and the team is the key to diving deeper into a company. He is an active member of eFund and has invested in companies like INETCO, lifebooster, and Netskrt. Here are a few approaches that Raymond recommends for assessing teams:
When evaluating a company, approach it like a hiring process. It could be a friendly chat where you interview the founders and the team. Don't worry if you're not an expert interviewer. You can always ask other experts for help or develop good questions and ask yourself, "What are the good answers I expect?". Remember, nobody's perfect, so it's not about finding the perfect team but finding a team whose flaws you can live with.
Using assessment tools or asking the founders how they build their team and develop their people can help you uncover any blind spots. This is a great way to learn more about the company and how it operates.
Finally, don't worry too much about the HR and recruitment systems. Knowing that the company has those systems in place is a great start. The most important thing is understanding how the team uses those systems and how they align with the business objectives. This way, you can see if they fit your needs well.