Part 1.
In the early stages, when there is a lot of uncertainty in the startup, the most important criterion for deciding whether to invest money in a startup is its team. Over the years as a venture investor, I have developed my system for evaluating a startup team. It combines existing methodologies and my personal experience.
The professionalism of team members.
The first thing I recommend paying attention to is the professionalism of all team members. Each of them must be a skilled specialist and have a good understanding of their field.
The next criterion is experience. All team members should have at least minimal experience in the field in which the startup is being launched or in their profession. It is even better if they have experience specifically in launching startups rather than just working as employees. If team members have already launched projects, they understand what it is like, they are imbued with the spirit of entrepreneurship, and it will be easier for them to start a new business. It’s even better when all team members have had both positive and negative experiences in previous startups. Experience in launching a failed startup is more of a plus than a minus. Having failed and closed startups in the team’s resume means that the team has already experienced stress and knows how to deal with it.
Distribution of psychological roles.
Another aspect is the distribution of roles, specifically psychological roles within the team. Perhaps the best guidance for understanding this issue is Itzhak Adizes’ book “Ideal Leader: Why They Can’t Become One and What Comes of It.” It describes roles such as entrepreneur, producer, organizer, and communicator. If there are people in the team who perform all four of these functions, it is a good sign. Most likely, the team is psychologically stable and balanced.
Distribution of Professional Roles.
Next is the distribution of professional roles within the team. It often happens that to start a startup, friends who are classmates from the same university department come together. The danger lies in the fact that, as colleagues and specialists in the same field, they start performing the same professional role in the team. For example, all three founders are programmers or all three are marketers, and so on, and they all rush to do the same job without distributing roles among themselves. This is a failing situation.
There should be a clear division of roles in the team, and each member should excel in their part of the work. I identify the following minimal set of competencies in a startup team: marketer, product manager, and financier. I give the leading role in the team to a marketer or salesperson who can identify customer needs and sell them the idea, and later the product. Next in the team should be a product manager or product architect. If it’s an IT company, it should be a programmer or architect, someone who can practically create or oversee the product development process that ideally meets consumer requirements and expectations.
In turn, the market brings a request to the team, so it all starts with marketing. Finally, the third person who should be present in the startup is a financier who can turn an idea into a business, meaning calculate expenses, revenues, profits, CAC, LTV, and unit economics, and determine whether the idea will be profitable. This competence is often lacking in startups. The team may create an excellent product, but the inability to calculate finances can ruin any dream.
Distribution of Shares in the Company.
Another criterion for assessing the maturity and readiness of a startup team for a bright future is the distribution of shares in the company. Experienced investors know that an unclear or suspiciously equal distribution of shares in the team means that there has not yet been an open discussion and negotiation within the team on this topic.
Most likely, team members still live in romantic illusions about some kind of brotherhood, and equality, thinking that they will always be like one big family. In real life, this model doesn’t last long. Most likely, the conflict is just postponed to the future. With the undefined, intuitive distribution of shares, there will be mutual dissatisfaction in the future, which will escalate into conflict.
People do not have the same level of energy and motivation, so some will always invest more time and effort into the project, while others will invest less. The feeling that with unequal efforts, all team members receive equal shares will breed that conflict. To avoid this, it’s important to agree upfront on what contribution to expect from each team member and what share each will have accordingly. Ideally, apply vesting.
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