I’ve often argued that doing good deals outside the established venture capital hubs is often about manufacturing them more than finding them. Good early-stage venture investors “between the coasts” need two skills their coastal counterparts can usually get by without: (i) the ability to pick out entrepreneurial diamonds in the rough, and (ii) the ability to cut and polish those rough diamonds into investment quality stones – before investing real money. Today, recognizing entrepreneurs in the rough.
Two things distinguish a rough startup diamond from the worthless rock it is embedded in. First, the innate quality of the entrepreneur themselves; and second, the latent quality of the entrepreneur’s core idea. You need both to manufacture an investable deal, though now and again if you have the first without the second, you might earmark the entrepreneur for consideration in a different deal setting.
Spotting quality startup ideas is the easy part, so let’s start there. Is the entrepreneur’s central vision rooted in relevant knowledge and experience, or is it just fantasy? It’s a blush test at this stage, and flunking it tells you that the idea is fatally flawed – at least in terms of your ability to get behind it.
By way of example, over the years I’ve seen a handful of entrepreneurs pedaling ideas that violate the second law of thermodynamics. I’ve yet to see one where the entrepreneur was an internationally renowned physicist with a hundred or more peer-reviewed and widely cited papers in print. (If I had, I would have taken more than a cursory look at the deal.) We’re talking fantasy, here.
This is perhaps an extreme example. Like most skills, though, qualifying raw entrepreneurial vision is something that starts with the easy cases. If playing the piano is your dream, you don’t start with Beethoven’s Moonlight Sonata. Stick to entrepreneurs with visions that your own experience and knowledge gives some reasonable basis for blush testing it.
At the same time, don’t confuse the blush test of the idea with the presentation of the idea. That’s a business model question, which is a cutting and polishing exercise, not a spotting exercise.
Beyond the blush test re the entrepreneur’s idea, there’s the quality of the entrepreneur as entrepreneur. What traits do successful entrepreneurs share, and how can you evaluate those traits in a raw entrepreneur?
For me, there are three binary “go/no-go” entrepreneurial traits: fire-in-the-belly commitment; a dedication to winning the game over and above personal aggrandizement; and integrity. All are variously hard to find; when you find someone that possesses all three, you should go the extra mile to get behind that entrepreneur. If not in the deal on-hand, then in some other deal.
I’ve written about fire-in-the-belly before, see my previous article "Look Before You Leap." It’s a commitment to the entrepreneurial vision that is all consuming. Most folks think about life as a balancing act, conventionally in terms of work/life balance. I’ve never known a top-flight entrepreneur, in the act of being a top-flight entrepreneur, who didn’t prioritize achieving their entrepreneurial dream over everything else. Some may say they do – but actions speak louder than words.
Now, if some entrepreneur tells you that work/life balance is important to them, don’t necessarily take their word for it. There is a fair amount of pressure these days for folks to conform to the social norms, stressing work/life balance. So, look behind the “easy answer” and judge for yourself. If you conclude that a particular entrepreneur really values aspects of their life more than achieving their startup dream, pass.
At the same time, there is a difference between commitment to a vision, and commitment to being the center of attention in that vision. No matter how impressive a rookie entrepreneur may be, you just can’t tell how their role in the unfolding drama of their startup will evolve over time. You do know, though, that most startups that make it all the way to a solid exit are, at the time of said exit, captained by someone other than the founding entrepreneur. Smart investors push unproven entrepreneurs early and hard on whether they are more committed to seeing their vision achieved, or their leadership vindicated. If the later, pass.
Finally, integrity. Startup venture investors are partners, not passive investors. Partnering with people of low integrity usually makes for a nasty, brutish, and short relationship. So don’t do it. As to testing for integrity, I’ll confess: short of the glaringly obvious issues, I’ve never (in the sense of never getting a false positive) found a reliable test. The best I can offer is ask hard questions – questions that might not have good answers or any answers – and see if you get straight responses or, instead, defensive, disingenuous, or obscure answers. If the later, pass.
If an entrepreneur makes it this far, it’s time to dig in and find out whether the vision that passed the blush test, and the entrepreneur that survived the commitment and integrity screens, really has an investable deal. Next time.