Your founding team is both your engine and the fuel that will propel your early-stage startup into orbit. At the same time, it is one of the top reasons why early stage startups fail. And that makes the founding team the primary factor that attracts - or repels - investors.
Here are five questions that many investors will ask when assessing a founding team:
Are your basics in place?
Are you a visionary CEO?
Are you complete?
Are you tight?
Are you creative?
Are your basics in place? You can’t do anything without these basics:
You own enough of your cap table. Ideally, founders still hold at least 80% of their equity after the pre-seed round. The exact percentage of dilution depends on many factors: cash-intensive businesses, for example, will result in lower founder ownership. Raising money in a crisis will lead to a similar outcome. According to one analysis by Crunchbase, founder ownership in tech companies at IPO is ~20% on average. Many investors are interested in founders having sufficient equity, particularly during later funding rounds. And: Don't let your startup suffer from the burden of "dead equity" - equity owned by those who are no longer actively involved in the business. While it's reasonable to allot a small percentage of equity to a professor or advisor who contributed to the startup's beginning, allowing more than 10% of your equity to remain in the hands of non-contributing parties can jeopardize the future growth of your company.
You can tell a clear story on the equity split between the founders. If you have a very unequal cap table split where one founder holds twice as much (or more!) as the other founders (e.g. 66% vs. 33%), you need to have a good reason why this is the case. Reasons include having a substantially larger customer network, bringing your own patents to the company or having a history of achieving one or more VC-backed exits. Co-CEOs are a no-go in our opinion - this could indicate that the founders’ ego is more important than the actual success of the company.
You are 100% committed to the company. Some founders start fundraising from within the golden cage, i.e. while still working a full-time job or a previous startup. "Give me money, and I will work full time to build traction on my business idea." This argument will rarely fly with VCs. Investors are looking for risk-seeking entrepreneurs who go all in. Your LinkedIn profile should read that you are working on your idea and your idea alone, and not on various other full-time or part-time commitments. If you need money to sustain yourself, it is great to be transparent about the underlying reason early.
You have a founder vesting in place. What happens when one of your co-founders decides to pack up and move to South America after falling in love shortly after you started the business? It's situations like these where having a founder vesting plan in place becomes crucial. Founder vesting ensures that founders' shares are earned over a specific period of time, rather than receiving them all at once. The standard practice is to have a one-year cliff and a three to four-year vesting period. This means that if a founder departs before completing a full year, they won't receive any shares, and only those who stay for the entire vesting period will own their shares in full. Any strong institutional VC worth their salt will ask you for this before investing, so it is often beneficial to set it up already during the incorporation phase.
Are you a visionary CEO? You have just launched your startup and you feel that assigning a CEO title seems premature? You’re wrong. A CEO is the catalyst that drives the fundraising process. A strong CEO…
…can paint an inspiring picture of a new future. Google’s vision is to “organize the world’s information and make it universally accessible”, while Square aims to empower “everyone to participate and thrive in the economy”. The idea is to not only have an eye-catching sentence of purpose on how to make the world better, but to offer a vivid and detailed image of a different, more promising future. One of our Techstars portfolio company, Telekinesis e.g. envisions the world in which robots are to be taught by following the pidgin-style concept of “Monkey see, monkey do”, meaning to learn by simply watching and imitating a human perform. This is why the team set out to build Europe’s leading visual robot programming platform for manufacturing robots who imitate workers by watching their movements.
…is in the driver’s seat for fundraising. Be aware that the vast majority of investors expect the CEO to do most of the pitching. We have seen cases where CEOs put their team in the pitch spotlight and lose investors as a result.
…is an outlier and has done something special in the past. Examples include studying astrophysics, competing in the Olympics, being raised in a poor neighborhood and fighting their way up the ladder, completing two degrees at the same time, or launching an NGO or entrepreneurial venture while still at school or university.
…has an eye on the money. The CEO should have the ambition to deliver unicorn-level growth and returns. Many unicorn companies generate an annual revenue of more than USD 70-100 million while delivering gross margins of over 50%. Figures of this magnitude often call for a startup to become a category leader. Teams that have the ambition to build a company that is “the leading global visual robot programming platform for manufacturing firms” or “The #1 SaaS platform with embedded customer financing for car sellers in the US” fall into this bracket.
Are you complete? Investors consider founding teams to be complete when they have everything they need to get their initial product into the hands of their customers:
You have domain expertise (“Founder Market Fit”). If your founding team has assembled domain knowledge with experience of a problem first hand, you are at a huge advantage over your competition. This "founder-market fit" is critical to B2B deep tech (e.g. biotech, new space, robotics), of considerable importance in non deep tech B2B businesses (e.g. enterprise SaaS), and of moderate relevance in many B2C markets (e.g. neobanks). The German company BioNTech, which invented one of the first Covid vaccines, is a good example. The two founders, Uğur Şahin and Özlem Türeci, both hold medical PhDs and founded BioBTech after amassing 15 years of work experience. According to Ali Tamaseb, these two represent the rule rather than the exception in the biotech and healthcare industry. In his book Super Founders, he shows that 75% of billion-dollar company founders in biotech and healthcare have gained experience in a relevant domain before founding their companies. By contrast, many B2C founders do not work in the industries that they then seek to disrupt Brian Chesky, Nathan Blecharczyk, and Joe Gebbia of Airbnb and Travis Kalanick of Uber are prime examples here.
You have sufficient technical expertise. You need to have enough technical expertise to get your initial product into the hands of your prospective customers. Technical expertise refers to the ability to build an MVP in-house and recruit technical talent. This could be software development expertise for a software company or a robotics PhD with patents for a deep tech robotics company. Often, this person will be the Chief Technical Officer or Chief Product Officer in your founding team. If you don't have enough technical expertise, it is essential to hire a technical lead or technical mentor before you engage in fundraising.
Are you tight? Investors view teams as tight knit if:
You are in a stable co-founder relationship. Investors seek tight-knit teams with stable co-founder relationships, working together for at least nine to twelve months, preferably in a previous company or faced challenges together. According to Noam Wasserman, working with people with whom you have a previous track record tend to result in the most stable teams, while “relational teams” such as spouses, siblings, friends are more volatile.
You have the right amount of co-founders. Many VCs will not invest in solo founders. After all, what would happen if that founder happened to be run over by a bus? Instead, two or three co-founders with complementary skills are often viewed as optimal. However, having four or more founders is a red flag, as the equity starts to become too diluted across the growth phases and your odds of fundraising success will decrease.
Are you creative? Startups are temporary organizations looking for a repeatable and scalable business model, says Connor Murphy, the CEO of Bridge. The faster you can iterate towards product-market fit, the higher the velocity of your learning curves the higher the chance that an investor will be there to hand you a check. This often calls for:
You creatively test one solution after the next. The ability to creatively iterate towards product market-fit is one of the most critical success factors demonstrated by a founding team. We have seen brilliant founding teams - with strong sales and good technical skills - crash and burn simply because they weren’t willing to adapt their business idea fast enough. They were in love with their current solution rather than focusing on a problem to solve. Most unicorn companies are built based on pivots. N26 started out as a company building a credit card to youths, but has since flourished into a fully-fledged retail FinTech. Twitter began as a network where people could find and subscribe to podcasts. How about Instagram? It started as Burbn, a gaming app that included elements from Mafia Wars and a photo tool. The ability to creatively iterate towards product market-fit is one of the most critical success factors demonstrated by a founding team.
You show perseverance and grit during the investment process. Investors want to see progress from the first to the third call. That means building traction, launching a product, gaining more customers and learning from it. Some typical proxies that investors look for include replying to emails within hours, incorporating feedback from one touchpoint to the next, and building up traction over a period of weeks.
Thanks to the following friends and colleagues from our network for their relevant input to this article: Andres Barreto (Managing Director Techstars Miami, Founder Socialatom Group, Founder & General Partner Firstrock Capital, Founder & Board Member Coderise), Gloria Bäuerlein (B2B Angel Investor, former Index Venture Principle), Eamonn Carey (General Partner Tera Ventures), Isaac Kato (Former Managing Director Techstars Seattle ), Matt Kozlov (Managing Director Techstars Los Angeles), Jens Lapinski (Founding Partner & CEO Angel Invest)
And special thanks to Ties van der Linden & Rozsa Simon from the Techstars Berlin team for their research, writing and graphics efforts for this article.
Martin Schilling is the Managing Director of the Techstars Berlin Accelerator. As an angel investor, startup builder and scale-up executive, Martin co-founded and scaled up five companies over the past 15 years. These companies include Orphoz (a subsidiary for McKinsey & Company), a public company in Saudi Arabia, the MARA foundation in Argentina, and the fintech N26. Martin is a co-author of the book, “The Builder’s Guide to the Tech Galaxy – 99 Practices to Scale Startups into Unicorn Companies” and is passionate about seeking out and enabling the next generation of European Entrepreneurs building high-growth businesses.
Brian Daly is a serial entrepreneur and Investment Principal with a huge motivation for creating connections and solving social and economical issues through startups. He founded Pitchify among others, a successful networking event in Dublin that brought together the city’s startup community and helped him secure jobs at Web Summit as one of the first employees and Techstars. Using his experience, Brian now invests in pre/seed startups through Techstars Berlin and Brian’s mission-driven approach has made him a respected figure in the startup community and an inspiration to many aspiring entrepreneurs.