Professional investors cite ‘team’ as the single most important criterion that influences the investment decision. Yet, there are no precise metrics that guide the evaluation of the team. The assessment is often fuzzy, vague, and based on how the investor ‘feels’ about the team. This episode presents three tips that early stage investors should keep in mind when evaluating team:
1. Early stage investing is subject to behavioral bias. Be aware of your biases.
2. Separate fact from opinion and focus on the facts when evaluating team.
3. Ask questions to cross check facts. E.g., who is really on the payroll vs. an advisor at large.
This is Propel(x) podcast, discussion on investing in all things startups. Startup investing is highly risky. Please listen carefully to the disclosures at the end of this podcast.
Andy Reed: Hey Swati. So I wanted to follow up on some of the conversations that we had. I think last time that we met for the podcast, which was around team. We’ve often talked about it as one of the most critical areas of investment consideration. And there’s a lot of big thoughts around how people should think about team. So the first thing is, why is team such an important part of rotation of that?
Swati Chaturvedi: Yeah, it is. And as any early stage investor will tell you, it’s probably the single most important thing that they base their decision on. The entire company rests on one or two key people, and because there’s going to be ups and downs, there’s going to be times when you’re running out of money or things are not really going well, it’s important that those one or two people or the team management have the ability to take the stress, to keep moving, to continue no matter what. I think Kiki in her interview, she mentioned the idea of grit. There have been books written about it.
Grit certainly is important, but there’s also analytical aspects. You have to be able to see the big trends, you have to be able to see the forest for the trees; one moment, you have to be this big picture person, but you also have to have the ability to drill down into details in order to execute, because initially there’s just a small team. And so yes, it is important for those reasons. And many times, you know..companies survive because it’s the leaders that take them through it. I mean, take Steve Jobs; you know..he conjured things out of nothing. He came close to bankruptcy, survived and went on to build great things. That’s why team is important.
Andy Reed: So, I mean, that’s a kind of interesting example. He’s obviously very famous. When you’re evaluating team, how do you screen for something like that? How do you tell a good team person?
Swati Chaturvedi: You can’t and that is what baffles me. We keep saying team, team, team, and there are really no objective metrics. People call it pattern matching: professional investors call it pattern matching. And to be honest, I’ve asked a lot of people about what is that pattern that you’re looking for? Are you able to look deep into their eyes and say, this is the entrepreneur? Are you going to be able to trust your own judgment for that? Isn’t it subjective? And I press investors, how do you tell? Give me examples, give me some objective criteria. So far I haven’t really received objective criteria. People continue to talk about pattern matching, which is a very vague term. And because it is vague, it really bothers me because you can see the patterns that are being matched. Women and minorities get the least of the financing, and that’s one of my separate topics for discussion, but it is a pet peeve. So I feel like the patterns are not being matched correctly. I feel people should be looking for different criteria, something which is more objective.
Andy Reed: One of the things I always think about when I’m looking at this is, that this is probably different in different markets, right? One aspect of it is we mostly work in hard science companies, so there is an aspect not much with pattern matching, but it’s this person’s experience that does need to match what they’re doing. But you’re saying outside of that, people also look for non-tangible or almost self-made up criteria.
Swati Chaturvedi: Hard to quantify subjective data. Most of the time early stage investors invest because they like that person, because they identify with that person, reminds them of themselves when they were younger or something like that—which is not a very good metric, it’s not a metric. It’s not a good indicator of anything to be honest. That’s why I feel early stage investing, especially venture capital in general – most of the private investing overall is subject to a lot of behavioral bias. Now behavioral biases are well-studied field when it comes to public market investing because there is data. But behavioral bias by far is not well-studied when it comes to private market investing, and venture capital in particular is subject to this because of these reasons. So the one thing I would warn investors, this whole podcast is really about warning people. Its not, it is…of course we want to identify the two or three criteria, like you said; the experience that goes with it, but it is very much about warning people. Be careful about your own biases. You do have them. All of us have them. I have my own. We need to be aware and be very careful about our own biases when making these investment decisions. That’s what I wanted to really talk about today.
Andy Reed: Sure, that makes sense. Be careful of your own biases. What do you look at? How do you deal with that? What are the things that you’re looking for when you make investments, so that you’re not biased? I don’t know your biases but when looking for Swati Jr.?
Swati Chaturvedi: I would hope not. I would really hope not, but what i would say there are only a few things which are objective. I think in my first grade, I was learning to differentiate fact from opinion, I think we should always keep that in mind. What’s the fact, and what’s the opinion? Whether this person has a PhD in this area and has expertise in that, is a fact. Whether this person you think will be able to execute is an opinion. If this person has in fact had a successful exit, that’s a fact that you can base this on. What they will do in the future, is your opinion. So let’s separate out the facts from the opinions and focus on the facts. Previous successful exits, expertise in doing things, track record of having successfully executed on specific areas, and having held jobs in these areas. And because this sets things a little bit against the first time founder (obviously the first time founder has not had that exit), but the first time founder surely has had jobs. If they haven’t had jobs, let’s say they’re fresh out of college, the first time founder at minimum can be professional, which is the timeliness of your followups, the diligence of your followups, your persistence in the followup. Those are things that are facts. They’re indicators of something. That’s what I can only say. I’m not saying… this is by no means gospel. Once again, these are highly risky investments. There is no exact science to judging these. Team is an important criterion. While this has been a lot about warning you against your own behavioral biases, there are some positive indicators that you could look to. It could be past experiences, track record, and professionalism—which is very little to go on, actually.
Andy Reed: I actually have some comments on this. So I think those are all really good points, but there’s actually some kind of tactical advice or suggestions that I would add to this conversation. It really comes from the type of diligence that we do on the platform. So one of the things that’s been striking to me is: Trying to really make sure that you understand who is on the team when you’re making the investment and what that actually means. So we look at the contracts that people have with people, we look at the cap table, we look at all these things. We actually run that after checks on the management of a team and that’s probably a bit extreme for an individual angel obviously. Institutional investors are going to do something similar to that. So founders are used to it and should be expecting it. But I do want to put in a plug for asking point blank about who is actually on the team right now and trying to understand who’s committed, who’s a contractor, who’s an advisor what are the roles these people are taking? because, especially in the first couple of years of the business, as you said, it’s going to get down to who is bearing the weight of growth, who’s actually figuring out, who’s in the trenches doing these things? That’s something that, if you looked at someone’s LinkedIn page, you might see 10 people on the team. And interestingly, sometimes if you look at a startup’s LinkedIn page, you might see that someone who’s on the team is actually full-time employed somewhere else. So there’s a lot of wrinkles to get through when you understand the team. I think we talked today, mostly about management, but I just want to kind of plug this last tactical perspective, which is to actually just ask them, “Who is actually on the team? Who’s on your payroll? Who’s the contractor? What is your plan for growth? Who’s your next hire?” Those shed a lot of light on where the company is and its corporate development and how the team thinks about things.
Swati Chaturvedi: Yeah. I think that’s a really great point. I agree with you. Asking is a good idea. Part of your diligence is to just ask point blank. I think surprisingly, so many people overlook that simple tactic. But that’s all that I have on the team.
Andy Reed: All right, everyone. It’s a wrap for the day. We’ll see you next time. Till then, this is Andy.
Swati Chaturvedi: And this is Swati. Bye Bye.
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