(i) one who primarily focuses on the team
(ii) one who feels that product is the most important element for an investment
(iii) one believes that the market supersedes both the product and team
Sajith goes onto say that while one approach is not mutually exclusive to the other, it is just a matter of weightages between the three different factors. His post has encouraged me to write this article and I hope it helps some of the prospective founders to improve their decision making process before / while embarking on one of most adventurous journeys of their lives.
Early in 2019 when Tonmoy and I started investing in early stage startups, we also created a similar weightage sheet across team, market and product. While we started with first principles (and followed the 5 husbands and 1 wife framework – who, why, where, what, when and how), it eventually came to these very same factors, plus one X factor which happens to be our gut feel. Most of the observations and inferences here are empirical and based on our experience – perhaps somebody can do a deeper analysis with the right data to prove / disprove it. Also, it is just a starting point for us and we will keep modifying this model as we learn more from our successes and failures.
“Who and Why”
Before an investment, the most important question that I ask is “Who and Why” – this essentially boils down to the person or persons (team) executing on the ground. Lets analyse the four main components of this question
Credibility and past record of the team
“Is the future in the past?”
Over the years I have seen that its very difficult to change the basic ways in which somebody works. While there are exceptions to this (6 sigma events in one’s life, a strong motivational moment, etc), ‘regression to the mean’ is generally a fact of life especially when it has been moulded over years of habits and way of working.
For example, if one has strongly demonstrated hardwork and persistence, traits that I value more than anything else, chances that it will be demonstrated in future increase significantly. While one can be lucky here and there, what is important is a strong foundational sincerity towards any task that you do. Hence even before the idea and the market, I tend to look for spikes in the team or results that would have needed significant inputs in terms of hardwork and commitment.
I also feel that the biggest risk that the knowledge works have in their careers is that of reputation risk. For example, if I see somebody job hopping more than 3-4 times in a short period of time suddenly raises a flag in my head which I need to clarify with the person – why did it happen, was it because of poor decision making, bad luck, boredom or something else.
Complimentary Skills and Backgrounds / Ability to rough it out together
“Does one plus one equal eleven?”
Sticking on teams, this is another factor that doesn’t get its due attention in the euphoria of investment rush. For a startup to be successful, among other things it has to cross jungles and rivers, jump over deep cliffs and survive in hard cold tempestuous winds. While there can be periods of calm, it is mostly a journey where blind trust between the founders and their respective abilities helps in survival. Each set of challenges that one faces in a young setup requires a unique set of tools and one’s ability to improvise and use them is significantly enhanced if there are people with complimentary background and skills.
While there is no cookie cutter answer, I generally prefer 2 or 3 people founding teams and the primary reason is that each person brings her own perspective and collectively the team is much better placed to solve the problems of the day.
Key motivational reason / Current life stage / Family’s economic condition
I have bunched a few related questions that I have in one bucket here to make it manageable. The key discovery here is to find the “why” of it all – why are you doing what you are doing.
I feel that one gets 2-3 chances in their lives to really give their best shot at starting a company. The first is when you are graduating from college – here you have the best network and can select the best co-founder, nothing to lose in terms of opportunity cost and very low expectations from people around you. The next good time is when you are 4-5 years in the job, some savings and support from your spouse (hopefully). What I feel is that founders that are in the same life stage can perhaps manage and help each other better than when they are in different life stages. A similar financial background might also help solve some of the future inconveniences that might arise when one founder needs more financial support than the other, especially when the company is not doing very well at that point of time. Very different life stages brings about very different priorities among the founders and that’s a risk that is best avoided.
Another factor that I check is the economic condition of the family. Generally speaking, the founders that I come across are fairly smart and they can easily get a cushy job with a good salary. What I have seen is sometimes, inspite of everything else being right – right team, right market and right product, some external factors related to family expectations can derail the whole train. Hence a sufficient enough runway is a must before anyone starts along this journey – I recommend a runway of 24 months at least before you can see any sort of incoming salaries as a reasonable expectation; If one doesn’t have that, one should reconsider.
Equitable distribution of equity among founders
“Lose the small battles to win the war”
In any startup, the most fundamental decision is that of choosing your co-founder; what I have seen is that its one less battle to fight and sort if things are equally distributed – be it equity, salary, perks etc. among the founders. While you can be very creative with respect to differential equity and can reason out the justification for the differential, it has a potential to become a huge issue even if there is a small nagging doubt in anybody’s mind over the inequitable distribution. Also, anything other than equal has a huge issue of “what’s the right level” because it falls in the realm of subjectivity in terms of what one brings to the table.
“Where and What”
Now that we have covered the team aspects, lets focus on the other two. “Where” refers to the market where the startup is working in while “What” refers to what they are building and what problem are they solving with that product.
Market Size / Growth rate of the market
“Is the market big enough”
I think this is self evident; the problem that you are solving should either have a large market today or should be growing so rapidly that it will become a big market in the near future. Here again, triangulation with bottoms-up and top down analysis and questioning even the most basic assumptions should throw sufficient light on the actual and addressable market size.
Product USP / How good is the technology / How good can it become
“What are you doing to solve the problem”
Clearly, this is the product zone – what is the problem, what is one doing to solve the problem, why is their solution the best solution – is it because of a technology innovation, process innovation, business model innovation or something else. A good lens to look at it is to ask “how good can it become in future” and do you see people / companies using their product as a default in future.
View of current customers – why are they loving it
“Where were you till now!!!”
One phrase that I always used to look out was our customers saying “where were you till now”! They have a genuine problem and there was no solution infront of them until I showed up with the Mettl platform 🙂. So its always a great step to check with the first set of customers on their view of the product and to get a first hand experience of it if possible.
X-Factor / Possibility of a home run / Gut call
“Do check with the gut – our second brain”
In the end, while one can do the analysis, there are a few questions that I ask myself – is there a X-factor in the team, is it possible to score a home run here and what’s my gut call. I used to have this criteria whenever I was recruiting people as well and I think I have been right more times than wrong here.
Summing it up…
Each of the above criteria can be given weights and as a starting point, the following is my template today:
I intend to use this as a living document and incorporate any learnings that I have along the way.