How do early-stage VCs assess founders?

Over the past 2 years, the rigour with which investors assess investment opportunities has reached new heights. We just need to look at how deal numbers have fallen over this period to get a sense of the how much the bar has risen.

Coupled with soaring deal sizes and record valuations, startups are experiencing closer scrutiny than ever before - right from the first approach through to final due diligence.

VCs often say that early-stage investing is ‘more art than science’ – and for good reason: there is typically very little data available to evaluate in comparison to a growth-stage business. That's why early-stage investors heavily discount financial projections and dig much more deeply into the less tangible predictors of success.

This means conversations with founders usually revolve around the underlying problem/solution thesis, the journey to product/market fit, the go to market plan, and the business model. But through these interactions, investors are also quietly building a detailed picture of the founder(s) themselves.

Investors rarely talk about how they assess the founding team. But, as revealed in a recent study by Alpaca VC, the majority of investors have a set process and framework for evaluating founders. This assessment is a crucial part of the 'investor scorecard' that is ultimately discussed at investment committee (IC) meetings.

Here we highlight the findings of this recent research and contrast it with our own study of serial founder behaviour. Taken together these insights should provide founders with a deeper understanding of what investors look for in the people they are backing.

Study findings

Alpaca VC's recent survey garnered 67 responses from Seed and Series A investors. This included top level investors from well-respected firms such as Bessemer, Bonfire, Flybridge, Footwork, Founder Collective, Hustle Fund, Inspired Capital, Lightspeed, Menlo Ventures, M13, Northzone, Redpoint, Shasta Ventures, Union Square Ventures, and many more.

Investors were asked to rank 10 key qualities or attributes of founders. They asked respondents to rank each from 1 through 10, with 1 being the most important and 10 being the least. Then they aggregated the scores.

Here is the ranking of attributes, together with the scores shown in parentheses. Note: a lower score indicates a higher importance ranking.

1. (4.67) Personal Characteristics (grit, resilience, curiosity, integrity)
2. (4.90) Storytelling (ability to inspire)
3. (5.30) Domain Expertise
4. (5.40) Network Strength
5. (5.45) Startup Experience
6. (5.46) Founder Experience
7. (5.54) Coachability/EQ (emotional intelligence)
8. (5.64) Raw Intellectual Horsepower
9. (6.07) References
10. (6.57) Hyper Successful at something non-work related

Interestingly, the top two most important attributes from an investor perspective are about the founders themselves as individuals. They are not related to what they are building. This supports the theory that ‘great entrepreneurs are great entrepreneurs’, which surpasses - yet also complements - the ‘Founder-Market fit’ theory that is so often spoken about.

A closer look at the average scores for each attribute reveals a narrower spread of variance than one might expect. In other words, you won't find 1 or 2 killer attributes that massively trump all others. Even so, the ranking does draw attention to some key attributes that founders may not have previously considered important, such as coachability/EQ, which we discussed in our earlier piece, Emotional Intelligence is now a critical founder skill.

Deeper insights

Just as fascinating as the ranking are the additional comments made in the various VC submissions. These provide a deeper sense of where the common ground lies.

Here are 4 extracts that reflect some powerful consensus views:

Important: able to articulate the catalyst, the why now, the unique earned insight. Understand their business inside-out. Show that they can be magnets for talent. Combo of hungry and humble. Red flags / unimportant: you don’t have to be able to answer every question — it’s okay to say “I don’t know and here’s why,” or “Let me think through this with you,” vs. to give some BS answer.  -  Nikhil Basu Trivedi, Footwork VC

My top attributes: (1) Clock Speed (both raw horsepower and decision-making speed); (2) Pied Piper (magnetic ability to draw people around them; sales / storytelling); (3) Exceptional at something (i.e., they must spike in some critical attribute, recognizing they can hire for others); and (4) Authentic (founder-market fit, high integrity, earnest, passionate about the work/problem). — Jeff Bussgang, Flybridge

Definitely focus on founder-market-fit (unique insight/expertise), try to avoid sole founders unless they’re very credible (like having a technical co-founder on team), teams that can move quickly and want to go down venture path is important. Red flag would be someone who isn’t coachable, unable to articulate clearly the problem/solution and struggles with storytelling/painting a compelling vision. — Andrew Hippert, Techstars

The best founders I know will break through any obstacles they encounter, they are just undefeatable. They will also be thoughtful to data that changes their original assumptions and adjust to that. They will be data driven in their approach to markets. And they are able to convince me that they are the best person in the world to accomplish this business plan, and they can demonstrate that early success by showing third party validating signals like early product tests, customer feedback, strong advisory board and references, etc. — Anonymous SaaS Investor

Serial Founder Behaviour

Our own study was undertaken back in October 2023. We used a particular database of findings from one of our core services, 'Investment Analysis'. This is an investment preparation project that examines, amongst other things, the strength of the investment proposition.

One of the main outputs is a scorecard, very similar to what VC funds use in Investment Committee meetings when debating investment decisions. This grades 12 critical elements of the investment proposition. This was the first time we had undertaken a comparative analysis of these historic scorecard results.

The findings were clear: Serial founders consistently delivered higher ranking scorecards (compared to first-time founders). They were in a more advanced state of readiness for each funding round. We were keen to discover if serial founders possessed common attributes that gave them this edge.

We discovered 3 areas where serial founders seem to most effectively leverage their experience throughout each fundraising cycle:

Clear Vision - possess a strong vision of the economic outcome they are seeking, both for the company and themselves personally. They operate with a much clearer mental roadmap of the major milestones that will get them there.

Value Creation - focus relentlessly on how the business model will maximise enterprise value creation, not just how it will delight customers. They align the business model with the major milestones of value creation to create irresistible funding propositions at intervals along the way.

Investor Relationships - they demonstrate a deeper understanding of what investors really care about, the shape of deals they seek, and how this varies by investor type, industry, and market conditions.

Data-driven approach

These 2 studies approach the topic of founder attributes from very different perspectives. Even so, they underline the vital importance of a compelling vision based on a unique insight. Then the ability to articulate that vision; to tell a story and to excite all those around them, not just investors.

But they also reveal a further important insight that was not obvious when we undertook our own analysis. It's a behaviour of successful founders that is hidden in plain sight. They are data driven in their approach to markets.

How have we observed this?

The first stage of Investment Analysis is a deep dive into the startup's sector; we call it a 'Peer Group Analysis'. Just as an investor would assess a prospective market, we use our investment research platform to build a picture of the emerging space the startup is targeting. This includes all companies operating in and around that space by industry, vertical, and sector.

The result is an interactive 'market map'. This allows deep interrogation of the funding pathways and strategies of similar companies by stage, all related deals, deal trends (e.g. deal sizes, valuations), investors, and more.

With the backdrop of rapidly evolving markets and more discerning investors, many founders immediately sense the increasing significance of this type of data. They pour over it and drill down for deeper understanding.

Now they have quantifiable insights into the market. They use this to challenge and validate their core assumptions. They see more clearly where their business fits in the market and the staged funding journey that they must now plot.

This is important evidence they need to build their funding strategy, develop a compelling investment proposition, and get the buy-in of their boards.

And when grilled by investors, they are now able to tell their story with much greater confidence.

Let's talk!