4 Indicators of Potential Success in a Pre-Seed Startup Team
When we talk about investing in a startup, everybody thinks about growth signals. Another way to put this is that growth, especially growth rate, drives most investors to bet on a team, even in the earliest stages.
After six years as a venture capitalist in this market, I have severe doubts about this approach.
Is that really what we should pursue?
We at Lombardstreet Ventures invest in companies raising capital at the pre-seed and seed stage, partnering with companies that incorporated maybe 6–9 months ago. In the pre-seed stage, specifically, the company might have just a few weeks of life, so “growth” is not what we actually look for. If numbers steeply increase in the first five weeks after launch, having spent eight weeks building the product, that’s an encouraging sign but definitely not something that can lead to saying, “I’m in.”
Investing early in a company cycle involves finding the right founders who inspire long-term excitement in working with them.
What does that mean? What qualities or skills should we be looking for when funding a team?
When it comes to successful founders, there are four key characteristics that stand out as vital components of their success. These traits are crucial in driving their ventures forward and achieving their goals.
1 They can find effective ways to put something in the user’s hands to prove their hunch is correct — and they can do it embarrassingly fast. They are good at building something to test their assumptions.
They build, release, talk to users, and iterate. Then repeat.
Those, above all, are the vital signals we look for in a founder, and when we find them, we invest within hours from the first call. The unhappy reality is that finding individuals with such a mindset is difficult as these indicators are not common, and you may need to speak with thousands of founders before discovering one. That’s why, even if we prefer to invest in dev tools or open-source software, being entirely agnostic is our best strategy.
Founders always come first in the pre-seed environment because they are the only invariable asset for the whole company's lifetime.
People who can make it are uncommon entrepreneurs. They are resourceful and ingenious in finding ways to prove their assumptions; they understand the value of constantly talking to users, iterate rapidly, and show us why now is the perfect time for their solution.
It’s easier to see those signs in companies that have become successful and have left some crumbles behind in the early days. Those cases are excellent learning opportunities, like, for example, this video Doordash founders submitted for the Y Combinator interview:
The growth of the key metrics in the first weeks after launching the product is just another sign of how resourceful the founders are. These are the team's initial experiments on the market. They may not be the right ones, so consider them a bullet point on your list.
Sometimes we see companies with glorious traction in the first weeks; a year later, they are precisely at the same point. No growth at all. How has it happened? My thesis is their initial achievements were overhyped in their presentation to investors. They knew that but were riding the wave, aiming to get the best possible valuation to limit their dilution. That’s why customers' reactions are the only facts that are hard to fake.
Another early indicator we always look for in pre-seed teams is how they approach the market. Most of the time, especially for very technical founders, the goal is to find someone who can sell the product for them.
Even if you consider selling tedious, please be the one who places the product in the hands of customers until the sales playbook is complete.
2 Great founders make their own sales and wait to hire reps until they understand how to sell the product they created.
Would you outsource the engineering of your software product? Of course not, so why would you do it with the most critical part of building a company that is supposed to grow fast?
Understanding how to sell your product is easier than learning other skills because — especially in the early days — people love to get the product demoed by its creator. Besides, as a chief in charge of the company, this is the perfect way to meet users, and knowing what users want is the only way to succeed.
I know: technical people, like myself, hate to do sales. Period. They want to stay focused on the product and improve it night and day. But how can you make it better if you don’t know what people want? Sure, you can delegate and let others tell you what your users want, but:
- It's risky to rely on a third party to translate an experience into words
- You won't feel it as strongly since it isn't based on your direct experience.
Trust me, nobody knows how to sell a new product.
Everyone has to learn it from scratch until someday, after tens or hundreds of sales, the playbook will be clear. That is when you should start hiring salespeople, not before.
And that brings us to the next step. Once you know how to sell the product, then it’s time to get into customer support.
3 Great founders spend a gigantic amount of time talking to users, and the best way to do it is to be a customer support operator in your company.
Craig Newmark — founder of Craigslist — is probably the best example I know at this job. Unfortunately, in all these years, I couldn't find a book about him, but this short paragraph from his website tells all you need to know:
Doing direct customer service for 32 years, helping maybe 100 million people get a job and a place to live, has really changed me. If anyone starts off with any shred of elitism, customer service is a massive dose of empathy and compassion. I started off as an old-school nerd, sharp elbows and rough edges, but nowadays, not so much.
Empathy and compassion? Yes! To understand what your customers want, you should be for once in their shoes. And customer service is the key. Craig can help us again here:
I feel that all company leaders, CEOs, maybe anyone in the C-suite should do some customer service. It can remind people of what’s real, and to recover empathy that might’ve been lost, climbing that corporate ladder.
And finally, we come to the fourth and last trait that makes a founder unique.
4 Humility is a rare and essential skill distinguishing people who can learn from failure and success and make better decisions.
Failure and success are part of life; there’s no way to say that success will lead to more successful projects. On the other hand, the same is true for failure. We often hear “fail fast” as if it would be the ultimate recipe for later success. Well, that’s not true: failure and success are both teachable lessons if we understand that they are both part of life and that “there’s no way to graduate from that.” We can teach ourselves how to deal with failure and success without identifying too much our level of accomplishment in life based on those outcomes.
Skills, persistence, and hard work matter, but they don’t avoid failure.
I’m not sure we can really develop resilience apart from failure — it’s learning how to respond to the inevitable setbacks, challenges and disappointments of life that cultivates resilience.
— Rob Kunzman, professor at Indiana University
The only thing we can control in our journey is to learn how to learn, and a good dose of humility helps with that.
The greatest entrepreneurs are the ones who are humble and hungry enough to keep learning.
— Reid Hoffman, Co-founder of LinkedIn
Humility is a crucial skill to master to get the most out of success and failure in business — as in life.
This process's ultimate goal is not to avoid failure in the future but to learn how to make good decisions.
Robert Kunzman, a professor at Indiana University, gave an inspiring TED speech about this ability early this year. Kunzman questioned whether students were given enough “permission to fail” while learning and if they were taught how to analyze those mistakes to grow and improve.
He said:
… a perspective of humility in the face of failure or success will help us to make better decisions based on more than dumb luck on the long run.
Business is no different from education, and in the startup business, learning fast is essential.
One must embrace humility over arrogance and turn it into an art form to get the most out of the startup founder job. Most of the time, that is not what you learn from business schools or people when they tell you how they got to succeed. But there are role models to follow; they are just in the shadows.
They are humble people who rarely think they can teach us anything. Again, a good example is looking at how Craig Newmark dealt with the success of Craigslist:
He ascribes any success to accidentally being in the right place at the right time, making him the Forrest Gump of the Internet.
