How do Investors Pick Teams

This week’s tip: how investors pick you and your team

Investors are looking for conviction when deciding whether to invest, which means they are trying to find something within your company that has tangible data.

The only tangible thing they have is your company's team, which is why it is the most important aspect to get right during your fundraise. You can get funding without a superior product or in a smaller market, but you will never get funding with a bad or dodgy team.

There are two main reasons for this:

Firstly, pivots are common.

StationF did some research in 2020 and found that 80% of startups will pivot in some way. For example, Airbnb used to be for conference attendees, and YouTube was a video-dating site before it became the mammoth it is now. Investors don't know what a startup will pivot to (or if it will be the product itself or the market), but they can pick teams that would be agile to change and have a greater chance of success if it is needed.

Secondly, the future is uncertain in this space. The last few years regarding the big "C" word are a great example of this!

Investors (or the founder) don't know what will happen in the next 10 years, whether it's new technologies taking away market share, major changes in regulations, life events of founders changing ambition/ability, or the fund itself. These are all uncontrollable.

For example, at my previous VC fund, Octopus Ventures, we invested in a company called Kabbee. It was an app that allowed consumers to book minicabs in London and Europe. At the time of investment, we thought it was destined to do well, but little did we know a smallish startup called Uber was around the corner!

They completely decimated Kabbee and the rest of the market. Could the founders have pivoted when they saw a new opportunity? Potentially, yes. Did their success depend on them as founders? Yes.

If the founders were better maybe Kabbee would still be around.

While there is no one-size-fits-all approach to presenting your team, I have split this into three green flags and three red flags that investors generally look for when picking teams:

1. You build things and sell things

 The ability to "build things and sell things" is at the core of being a founder. If founders can explain the "why" behind their product, such as why now, why them, and why this product, it adds weight to the situation.

A concise one-liner that can be easily understood and repeated is extremely valuable and worth spending time to perfect. Investors seek out founders who are able to clearly articulate and sell the competitive edge of their product. A good CEO is always selling, and how can you sell if you can't effectively communicate your value?

As a founder, you possess much more knowledge about your product and market than an investor does. Investors are often coming in cold to the situation or only know about it from a high-level perspective. Simplicity and clearly communicating the return on investment is crucial. Technical founders in particular may struggle with this, but it's important to know you could ‘explain your company to a five-year-old’.

On the 'build things' part, your pace of execution is how you show you are the best type of founder. Investors place a premium on quick email responses and a hunger to schedule a meeting as soon as possible, rather than next month. This demonstrates a willingness to get things done quickly.

Show you are an executor.

2. You are a domain-expert and mission-driven

A fundamental part of successfully fundraising is how you credentialize yourself.

You have to show why you have domain expertise and have hired the right experienced team to pursue this. I've seen founders shy away from their expertise due to not wanting to seem arrogant. Be confident in your expertise and your ability to change the market for the better.

This also relates to advisory boards and other members of your team. The best founders can make senior, experienced and highly paid people join their tiny little start-ups. This will always be a recipe for success. Not only does this give you valuable insights into your market, but it also shows investors that the right people are interested in you.

Like we talked about last week, being mission-led can help you successfully fundraise - its a big thing investors look for when deciding on a founder.

What is the mission of your company?

How do you define success?

This is a proxy for ambition and work ethic going forward. The start-up journey is not an easy one, and there will be massive peaks and troughs at points. Are you mission-led enough where this won't matter?

At Octopus, we call this the Entrepreneur's "north star." It means always keeping your long-term goals in mind, even when things get tough.

3. You are building a successful culture

To succeed as your company grows, you need to build a good culture. This is often ignored at the start, but it's one of the main reasons why companies fail after Series A.

Investors want founders who focus on team building, set goals, review performance well, and care about their future employees.

Here are some questions to see if you're building your team well:

• Does everyone support your mission?
• Have you hired people with clear roles?
• Is your mission important in hiring?
• Is your onboarding process based on your mission?

Founders don't always think enough about their team, but the team decides if the company will do well later.

If a company can't keep its employees or has bad reviews on Glassdoor, investors won't like it.

Finally, about culture building: you should be looking to uderstand the VC fund you're working with - learn about the VC and how it fits your culture, and how the VC business works.

This can affect your business. You need to know who you'll talk to at the VC.

• Is it just the deal leader or the whole team?
• What if the leader leaves? Will your company get no help?
• What else does the VC do to help the company?
• How often will the company report to the rest of the team?
• Can you work with the deal leader and the rest of the VC team?

Asking these kinds of questions shows you care about your company's culture and not just taking any investor. This will show you care deeply about your culture and want to stay in business for a long time.

1. You are more 'I' than 'We'

Building a venture-capital-backed business can take more than 10 years, but it's important to show that you're a team player and not just in it for the money. This is especially important when dealing with early-stage investors.

To succeed, you need to build relationships and engage in small talk with the investment team. This can make all the difference in securing an investment.

When raising funds, focus on building a connection with the investors. Mention mutual connections, show that you know about the fund or person, and explain how you can be helpful beyond just fundraising for yourself.

It’s about bringing your investors on your journey together: when they want that, they will always invest.

2. You are un-coachable

The path to success is a struggle and can be a bumpy road. As a CEO, you will have to wear many hats, and unless you are a seasoned CEO, there is no place to learn how to be one apart from doing it.

This means there will be mistakes, and a VC can lend their advice given their experience with multiple CEOs throughout their careers. For example, one company that Octopus invested in was meeting with insolvency practitioners nine months after Series A. However, the entrepreneurs were open to challenges and were able to fix the situation, and now the company is doing well.

When going into a VC meeting, think of VC funding as a relationship rather than just an investment. Investors are always looking to make sure they can work with the founders openly, and trust goes both ways. Being able to show that you may not know everything but are eager to learn and want people who can help you achieve your goals is an easy way to get past this red flag.

At Octopus, we encountered many companies that we didn't invest in purely because the CEO/founders were un-coachable.

3. You are (perceived) to be unable to hire well

Being a CEO means finding a balance between not hiring too many people and getting overloaded, and hiring too fast and then having to cut back on staff.

Some CEOs are afraid to give responsibilities to other team members and end up doing tasks that they are not good at. While this may work for companies in their early stages, investors are looking for CEOs who can hire well and attract top talent.

Investors are not impressed by founders who struggle to attract the best talent. They want to see if the CEO can recruit better people than themselves and if there are great people in the management team. At Octopus, we've seen many companies where we were not necessarily convinced by the CEO, but their ability to hire great people below them made us willing to invest in the company.

And if they don't think you will hire well, they won't believe you will succeed in making your vision a reality.