So, what really makes a fantastic founder?
Three core traits characterizing the few investable entrepreneurs
A lot of people have been asking as I keep insisting that the founders themselves are almost, if not, everything that determines chance of success for a company. What actually makes one founder better than another or the rest of the herd, and how do investors make an assessment within limited time?
In this post I will try to answer the questions above by looking back at five years to date where I consider myself to have spent a substantial amount of time working (not just chatting) with many founders from all sorts of background. When I think about those very few top founders who have made my experience so memorable, it simply comes to three common qualities.
The Core Traits
Above is a simplified Venn diagram and three non-fancy terms for a concise overview of the idea — Domain Expertise, Leadership and Integrity.
Two important points I would like to share here are (1) non-integrity is obviously a no-go zone, not only for investment but literally any working relationship and (2) all education and work credentials in a person’s whole career contribute only one of the three factors (i.e., domain expertise), while the other two are rather about the deeper personal ethics and core values.
1) Domain Expertise
Because you can’t win the war without wisdom.
Domain expertise means a thorough understanding of the market to win the clients and necessary functional skills to create durable competitive advantages to win the competition. Passion can also be considered part of the reasons why certain founders are so good at what they do relative to their peers in the industry.
Sample Questions:
- Is the founder solving their own pain point? If not, why is the problem so important to them?
- Does the founder have a clear and logical view of what to do (lead) rather than checking all the time what are their competitors doing?
- Is the founder among top-of-mind names regarded by other practitioners?
- Do their clients either love or respect them?
- Does the founder know what exactly are the key success factors and their sustainable competitive advantages?
2) Leadership
Because you can’t grow a company without followers.
Since leadership has a relatively wide implication, I would define it in this context as being able to attract and retain great people, not just talents. In order to achieve that the founders need to have the ability to constantly improve themselves in the era where every market is rapidly changing than ever.
Sample Questions:
- How's the community’s perception on the founder as a person? (note: community here is a trusted network, not how many Likes a founder gets on his social posts)
- Does the founder have the ability to delegate and build middle management once the company scale up?
- How’s the employee morale towards the company, and how many early employees are staying to date?
- How often does the founder talk about their employees, or is everything always their credit?
- Has the founder demonstrated the ability to use limited resources effectively?
3) Integrity
Because it’s the bottom line of everything.
People with integrity do the right thing, even when no one is watching. This is the only one among the three which has no such grey area — just black and white, and inarguably the toughest one to determine. Life-long reputation among the trusted network is extremely important because in the end it’s a small world, and people of the same type will find their way to each other.
Sample Questions:
- How upfront and reasonable is the founder on the difficult questions?
- Does the founder respect their shareholders? Do they act and make decision with the shareholders’ benefits in mind all the time?
- Does the founder give a salary raise to themselves after their employees?
- Is the founder 100% committed and focused on the company, or doing multiple things all the time?
- How does the founder treat other people’s sensitive information?
The Types of Founders
Now turning the focus to the founders with at least two core traits and my thoughts from an investor perspective.
The No-go Types:
- The Pirates are founders who got every chance to win the war but you simply cannot do business with. Being a good venture investor is a mentally draining occupation and everyone has had enough things to worry about. Honestly speaking, I would only make bets in which I know I won’t regret later.
- The Visionaries are good founders with outstanding leadership qualities but inadequate abilities to execute — which is relatively difficult to build up, because investors like us could not influence much on the development of such first-hand skills or industry experience. I usually prefer to avoid visionary-type founders as many should understand — ideas without execution are essentially nothing. The markets are only shifting faster and people who can’t lead by examples and aren’t distinctly among the top of the game are utterly prone to fall before others.
The Investable Types:
- The Specialists are good founders with strong domain expertise but do not possess sufficient leadership at the moment, subsequently likely to suffer from various risks which will knock on the door as the company (ideally) scales up at pace. Considering the extreme rarity of the last type, the specialist-type founders are still a relatively good bet if they possess empathy (being lovable) and humility (being learnable) which, to me, are the most critical assets for a person’s leadership development.
- And here’s the Captains which is the reason you keep hearing stories about the best founders failing in the wrong space or from bad timing will always get a second chance from adoring investors. What’s so unique about captain-type founders is that they give us the extraordinary comfort that even if we gonna fail, we would fail with the best people. It is important to emphasize again that backing this rare type of founders does not guarantee success. After all, the team is just one success factor among many when you assess a company although the most important.
The Bottom Line
Nobody is perfect, founders and investors alike, but integrity is everything. If there’s one thing I learned from my experience so far, it’s that founders who have just enough of the remaining two traits won’t be alone along the journey for long. Finding the rare type of founders and helping them building meaningful businesses is clearly not an easy task but the most rewarding part of a VC’s job, or at least for me.
This post is a part of my Venture Fundraising Basics series where I will try to share the fundamentals of raising venture capital for entrepreneurs and some local perspectives from my experience in Southeast Asia. For the complete outline and links to other posts, please visit here.
Note: All contents and opinions expressed in this story are humbly of my own and do not represent those of any of my current or previous employers.
