What Really Matters for Early Stage Startups

After publishing the Angel Investments vs. Stocks article, I got a few founders asking how to get investments from angel investors. I couldn’t speak for others but I would like to offer more specific details on how I evaluate the founding team. Again, people have different opinions on this. I am offering my opinion here based on what I learned in the past decade. But it’s by no means the only way. So, take my opinion with a grain of salt.

Before we get to the evaluation process, I want to start with what really matters for early stage startups. In my opinion, there are really only 3 things that matter:

• Product: Startups exist to solve important business problems. To make it happen, the product actually has to exist. It is essential for the team to build a functional product, iterate and improve the product in rapid cycles and deliver value to their users and customers. Without a product, a startup is just an idea with a corporate shell and a bunch of talking heads.
• (User/Revenue) Growth: It’s not uncommon for product oriented founders to successfully build a great product but fail to find enough users/customers to use the product and ultimate get paid for it. Getting people to use and pay for the product is as important (if not more important) as having a good product. It’s not uncommon to see mediocre products beating out competition because they are great at getting the words out and getting people to try and pay for the products. Have you ever made any purchases on the home shopping network in the middle of the night sitting in front of the TV? (I am sorry if you are too young to understand what I am talking about.) Most of the products I bought there were not great but these people knew how to sell them to the customers!!
• Runway: It would be unfortunate for a company to have the product and growth but to not have the runway to sustain them through positive cash flows or IPOs. It’s essential for the founding team to have the basic financial skills to not run out of money. In tech boom times like right now (2021), it might be unfathomable for startups who have product and market fit to believe they will have a hard time raising money. But always prepare for the worst. In the past, when the market cycles went down, they went down precipitously (2001–2002, 2009–2010). You never know a year from now if you can raise the same amount with the same valuation. Bullet proof your startup’s finance is always the ideal way to go.

So now back to the startup founder evaluation, I want to figure out if the founding team has the right priorities. In other words, I want to know everything they are doing is to improve product, growth or runway. Context is important here. If it’s a consumer product, media exposure is a good way to build the brand and lower CAC. Focusing on PR makes a lot of sense. But if a startup is building an enterprise SaaS product that is still 18 months away from being launched, what is the point of getting that media attention beside personal gains while the founder should be focusing on building the product?

Some other examples that raise red flags: Renting a fancy office and hiring a company chef when company has no traction. Redesigning the company logo and rebranding multiple times for no compelling reasons. Hiring a PR firm for no compelling reasons. Socializing with fancy people and bragging about it on social media all the time for no compelling reasons.

When I meet a founding team, I like to see they focus on execution and show me at least a prototype with core functions. It showed me they can execute. My next follow-up question will be how long it took to build the prototype and how much they spent to get to where they are. I love scrappy founders who get a lot done before raising any money and who show commitment and dedication for the product they are building.

Over the past decade of investing, I also observed that a differentiated product at early stage had higher chance for success. It’s that famous Peter Thiel question of

“What secret do you know that the rest of the world doesn’t?”

When everyone is chasing the hot ideas of the year, founders who focus on overlooked markets, cutting edge technology or have novel insights of the future can win by being years ahead of their competitors. Many top companies in my portfolio fall into this category: MatterPort in 3D spaces (2012), Volta Industries in free EV charging (2013), HealthSherpa(2012) in Obamacare and Binti in child services (2013). When I meet innovative founders who have a unique world view and strong execution, I feel very fortunate to be part of their journey.

I want to answer some burning questions people might have about priorities outside product, growth and runway:

Q: What about building a great team or hiring the best people?

There’s actually very little conflict between hiring/building a great team and focusing on product/growth. But the reason a company hiring and building a great team should be to fulfill the company goal of building and distributing the product. When a company is tiny and lacks resources, hiring might actual be a bad idea though. Getting things done with founders’ sweat equity to a fundable milestone should be a higher priority than hiring.

Q: What about diversity and inclusion?

When I invest in a company, I want to identify the founders who strive to have a fair culture. In a small team environment, people mostly know who is pulling their weight and who is not. If people who are not pulling their weight are getting better treatment, other employees are not going to put in their 100% and the execution will definitely slow down. Under this environment and the pressure to execute, I actually think women and underrepresented minorities could thrive better in early stage startups than their corporate counterparts. Over 60% of companies I invested have women or BIPOC founders. I don’t really try hard to only invest in women or BIPOC but they are often looked by other traditional investors. I invest in them and they naturally build a diverse team that kicks ass.

I don’t want to overlook the fact that there are definitely challenges to support DEI initiatives due to the lack of fat bank balances. For example, generous parental leave will be very hard to achieve for early stage startups. But I will also argue parental leave should be part of the public policy. The burden shouldn’t really fall on the companies.

Q: Doesn’t the founder have to be a great storyteller?

I don’t believe the founder/CEO has to be a great storyteller. The founder has to be an effective communicator and can speak logically. I believe it’s far more important for the founder to lead by example by showing the company how they can execute and move fast than to be a great story teller. In fact, a lot of engineering oriented founders are not great presenters. I would argue Elon Musk is not a great presenter. His speech has a lot of substance but is a bit flat and has too many technical details. But he is no doubt the greatest innovator of our time. I invested in many nerdy people and they are doing extremely well. Were they great story tellers when I met them? I don’t think so. But they surely got the job done much better than many smooth talking story tellers.

Conclusion

Great early stage startup founders are founders who can execute and have their singular focus on product, growth and runway. They often have novel insights for the future and build differentiated products. I am very fortunate to be part of their journey and I look forward to invest in more people like them.