VC Voodoo — Diligence Tips
“How one does anything is how one does everything”
I have a particular love for this coaching generalization because (time and time again) I can so quickly predict precisely how a founder will later struggle and succeed.
First of all, the biggest startup failures I’ve had visibility into over the years didn’t fail because of what they were creating but because of how they went about creating it. That “how” starts with the strengths and blindspots of the founders, and I can learn to pick up on these blindspots by tracking subtle ways founders conduct themselves in even the most innocuous situations. Suddenly the smallest details become intriguing little windows into how a founder actually executes versus how they say they execute.
Let’s start with an example so mundane it can be easy to overlook. Consider a CEO I am meeting for the first time who flounders last minute finding chairs for our team. This doesn’t necessarily mean the CEO fails to prepare for important moments. It’s unfair to extrapolate like that without a conversation, plus we’re talking about chairs people! That said it actually does mean they might not prepare well, that I might be getting a first clue into ways they fail to execute, the moment I set foot on-site.
There is one thing I do feel certain of: whether I am nitpicking at an irrelevant moment or honing in on one pregnant with insight, an extraordinary CEO effortlessly enjoys checking it out with me. As long as I challenge them on it in the right way…
Step #1 Humility — remember this might’ve been a special circumstance, or maybe they do often forget simple logistics yet otherwise prepare masterfully, they had an embarrassing experience with a folding chair in kindergarten or something even more entertaining I haven’t thought to consider yet…
Step #2 Appreciation — I always start by noticing one thing I appreciate about the moment I’m challenging them on. In this case, I might acknowledge how fun it is to meet an inspiring company so early on that they barely have chairs yet! I certainly respect founding teams that focus on results more than appearances and formalities to impress an investor.
Step #3 Integrity — I describe the moment and how it caught my attention, and admit I thought it would’ve been more effective to have had the room prepared before an investor team arrived, and ask them sincerely how they see that moment and whether they see it any differently.
If I follow some version of these steps, my favorite CEOs will either curiously explore the topic yet clarify why they wouldn’t do things differently OR excitedly realize I am poking at a subtle opportunity for growth. Often these moments at least highlight chances for more explicit communication next time, and good leaders go out of their way to find micro-improvements when they show up. The CEO who responds dismissively, obviously easy to do when I choose something so mundane, is very likely to respond to many challenges with similar disdain. As an investor, I get to decide whether that’s a growth opportunity I am happy to attempt supporting!
One more example:
The CEO finally wraps up the board meeting an hour over schedule…not unheard of, yet all the various investors around the table feel agitated as we huddle up afterwards. If you’re a founder reading this, not the mood you want to leave VCs feeling!
I watch as several members succumb to the temptation for snark, “We can discuss whatever anyone wants but I wouldn’t invest another dime if their shares were at $5”, this followed by that laughter that at least relaxes the tension in a room. But for me, the way they ran that board meeting was a masterclass in how we might salvage an investment and better do our job to actually mentor these brilliant and passionate yet extremely inexperienced founders.
Insight #1 — The context they’d set was to get guidance and advice from their investors, a pretty standard soundbite for a board meeting yet they asked us literally zero questions the entire meeting. If the purpose of a meeting is to update us so they can pitch us for a likely bridge round, owning that is their goal upfront with integrity is intense for a moment but prevents that backlog of annoyance two hours later.
Insight #2 — They didn’t stop to acknowledge they were going over time until they already were, and this reminds me of their issues with engineering deadlines for almost a year…the biggest waste came not from being late but avoiding communicating about it until it was already happening!
Insight #3 — Little picture: they just spent the majority of their board’s time geeking out on exciting advances in their technology at the expense of getting our help focusing on their financials. Big picture they’ve created world class tech while having existential runway issues…
By paying attention to these micro-moments, not allowing them to implicitly remain background annoyances by explicitly speaking up about them, you can get far ahead of the arc for these companies. They sometimes highlight reasons not to invest, even if they’re set to succeed they may not click well with your particular firm and catching this early allows you to help them by pointing them to a better fit elsewhere. They almost always highlight opportunities to get to know a founder at a much deeper level, a level that allows you to advocate and mentor them.
Hopefully this is another perspective, maybe just a helpful reminder, about how investors can truly foster extraordinary entrepreneurship in the world.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in seed-stage companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation and computing
