VC Diligence 101: Determining the Right Jockey to Win a Unicorn Derby

Venture capitalists look at many factors when determining whether they will invest in a company, but for early-stage investors, two factors stand out: the jockey (team) and the horse (market). This is not a blog discussing which one is more important (there are great blogs arguing for both sides and even a great article about how entrepreneurs are surfers not jockeys). Regardless of your ultimate conclusion, both the management team and the market matter.

While investors assess markets by talking with subject matter experts, reviewing market reports, and staying up-to-date on the insights from industry experts, assessing a management team or a founder is much harder.

How do you evaluate a person and determine if they have the grit, tenacity, confidence, and skills to create a $1B business?

On the flip side, how do you evaluate a person and determine if they have the moral and ethical code that will prevent you from reading about their downfall in the New York Times, as many investors did with Elizabeth Holmes, Sam Bankman Fried, Charlie Javice, and Rishi Shah?

In Malcolm Gladwell’s book, “Talking to Strangers,” Gladwell argues that we have forgotten how to communicate with strangers, and this miscommunication has led to both amusing, lighthearted stories and terrible catastrophes. As humans, we tend to take what people share with us at face value. Gladwell calls this “defaulting to truth.” When I asked a friend who was leaving her role at another firm what she learned from the experience, she mentioned that she quickly learned not to believe everything the founders told her. In other words, she learned not to default to truth.

Yet, venture capital is an industry based on trust. If an investor doesn’t trust a founder, they won’t invest. If an investor trusts another co-investor, they take a closer look at a deal that they might have initially passed on. Because the industry relies on trust, investors pay close attention to how founders answer questions in conversations and if the data they provide matches their response. For co-investors, we observe how other investors respond and react to founders in board meetings or the terms they prioritize when negotiating term sheets. Good interactions with founders and investors spread just as quickly as bad ones.

So, when evaluating a team, should we start by trusting them and risk losing that trust? Or should we start with skepticism and build trust as we learn more? And how do you determine if a founder is (or will be) trustworthy in a short, 30-minute introductory call? By the way, this is a two-way street for founders to learn if investors are trustworthy and if they will be value-added investors or not.

Right now, I’m on a journey to figure out the best way to determine if someone is trustworthy. But, I think trust evolves from a hundred small signals. It starts with your first impression, which is probably why there are numerous blogs on how to craft a stellar cold email. Within the first seven to twenty-seven seconds of meeting someone, you have already formed your first impression, which could explain why a16z fines their employees for being late to a founder meeting. We make assumptions based on quick interactions and rely on our biases to quickly assess founders (which also contributes to why a larger number of white, male founders receive investment compared to any other demographic, see more here).

Luckily first impressions aren’t the end all, be all. Trust grows and changes over time. At Grand Ventures our diligence process involves consistent communication with founders and learning how they think about their business, both today and in the future. We talk to their friends, advisors, and other investors, but history has proved our most successful portfolio companies have honest and consistent founders with grit and tenacity.

What ways do you quickly build trust? What questions do you ask? Or let us know what you think is more important: the jockey or the horse at info@grandvcp.com. And if you’re interested in learning more about our portfolio CEOs, check out our new “Founder Spotlight” series — the first one was with Paccurate’s James Malley.