How to Evaluate Great Founders When Investing

  •  Apr 26, 2018
How to Evaluate Great Founders When Investing

I often am asked by individuals considering investing in startups for the first time, how to evaluate investment opportunities when there is so little financial data to go off of. Obviously there are items like market size, product-market fit, differentiation, and so on, but arguably the most important item to evaluate when considering an investment in a startup is the founders.


At the end of the day, the success of the company will largely fall on the founders ability to execute on the idea in front of them. No matter how great the product may be, without strong leadership the business will never get off the ground.


That’s why I sat down with Alisa Cohn. She is a former startup CFO - she calls herself a “recovering CPA” -  and seasoned executive coach. With 16 years experience working with everyone from startup founders scaling businesses from 10 to 500 employees to Fortune 100 C-Suite execs, Alisa is uniquely positioned to understand the qualities to look for in great founders.


More than anyone I have met, Alisa understands the unique challenges faced by startup founders and what ultimately enables some to prevail through the early days of building a business. Check out her thoughts on the the qualities you should be looking for when considering investing in a startup founder, and what red flags to watch out for. The answers may surprise you...


Alisa, What Are The Key Qualities of Great Founders...


With Strong Management Capability...


AC: I have found those with strong management potential  have an openness to learn, empathy and an emotional intelligence / control that enables them to connect and understand that different people have different needs.


Of course, like all natural managers they also get a kick out of others succeeding. Founders are often young and haven't had much management experience from their past. That’s why having that openness to learn and wanting others to succeed around you is key to helping them grow as leaders, in conjunction with scaling the business.


In many ways the journey of developing as a leader is akin to the journey of developing and growing as a person.


With The Power To Influence & Inspire...


AC:  I think you can tell from how they interact with and treat people. When they are speaking about the business you look for their delivery to determine whether or not they believe in their message. The really great ones also know how to tailor their message to the room and have a strong executive presence.


Much of it is about knowing how to listen, not just speak so that you can build a rapport quickly and a sense of trust over time. When you build trust, and do what you say you will do, you build allies who will have your back no matter what.


With Effective Decision Making Skills...


AC:  The most important trait is to be  willing to make decisions and not to put off decisions. That doesn't mean that you are impulsive and don’t ask enough questions. Instead, you ask others around you, gather the data in a timely manner, and make a decision that you stick by.


At the same time great leaders will recognize that as they move forward new information may come to light, and it’s okay to course correct as they go. Often quick decisions are required, so having the confidence and wherewithal to make a decision is key.


With Adaptability to Scaling A Business...


AC:  Having an intuitive sense of where things need to go is important, but it really all comes down to having an ability to learn with velocity, and take in feedback in a constructive way. That’s the only way to grow with the business rather than fall behind on the learning curve.  


Not to use a bunch of cliches, but I will say that founders who show an ability to scale a business also all have a tenacity, grit, and sense of optimism. These traits positions them well to succeed no matter the circumstances they are in.


What Sets The Best Founders Apart From The Rest...


AC:  In addition to that drive, persistence, and grit I was talking about, the best ones all have a special sauce or super power. Examples that I’ve seen are an incredibly beautiful sense of design, a genius at experimentation, an amazing ability to raise money, and a charisma and charm that could get people to follow you anywhere.


Cautionary Tales When Evaluating Founders…


Qualities That Raise Red Flags...


AC:  I was recently approached and asked to work with a founder and I asked what this person needed to work on. They started with the usual characteristics, which are they need to transition into a stronger leader, and learn to deliver a clear message to different people. But then it was mentioned that this person needed to improve his integrity.  


Anytime someone is already tarnished with poor integrity, that is a big red flag. You also don’t want an arrogant know-it-all who doesn’t take feedback well, and has an inability to learn. These are good markers that it won’t work. The other major red flag is a leader that rules by fear. Any behavior that leads to a toxic work environment is not sustainable.


I think many founders may show up without textbook drive and persistence, but over time you can develop that. Someone who has already got to the point of being a founder, has brought people onto the team, and raised money can be coached and developed from there. But lack of integrity, and an inability to learn and work with others are things you can’t coach around.


Can The Technical Founder Go It Alone...


AC:  Absolutely they can. I've met lots of technical founders who have plenty of charisma. One time I met with a CTO co-founder and I asked, “What is your main job at the company,” and he said, “to build the culture.” That is not something you expect, but he had no problem understanding his role was managing people.


Another CTO I still coach at a blockchain company is very charismatic and his employees consider him to be the spiritual leader in many ways. While I’ve also met CEOs who aren’t technical and in fact are not that “charismatic.”


The key above all else, charismatic or not, is to never, ever give up, and to build trust and credibility in you because those are the traits that are forever.


In Summary…


Backing great founders is all about finding high integrity, fast learners who are willing to adapt and flex as much as a startup has to in order to be successful. Just remember that when you are investing in an early stage startup, often the product, the team and the financials are not there yet, but they all have a potential to get there with a great founder or set of founders.


That is key above all else, which is why in the early days when you are providing seed capital to startups, evaluating the founders is probably one of the most important things you can do. Don’t forget it and be sure to keep your eye out for the traits and red flags we have discussed here…


Happy investing!!!