[zz]How To Judge A Potential Investor
How To Judge A Potential Investor
Pitching your startup to investors is a deeply
More often than not, they –– politely or not ––
call your baby ugly. And that hurts. Good founders, I think, learn to
not take the criticism too personally.
But in the end, it is personal. They are
judging you. And your baby. Thumbs up, or thumbs down.
is life. But how should we, as founders, judge them? Not all investors
are created equal, after all. Once betrothed, the investor –– unlike
the entrepreneur –– is unfirable, a step-father to your newborn startup,
an undivorceable spouse in an epic marriage.
Like any proud
founder, I am extremely protective of my newborn startup. She’s my
motherfucking baby, after all.
Now, I don’t claim to have years
business knowledge or even necessarily have it right –– I’m doing this
for the first time –– but I do have my own formula.
want this guy on my board?" This, above all else, is the
Another way to put it: When the shit hits the fan, do I
want to be accountable to this guy? Do I want this to be the guy who has
my back? Is this guy good enough for my baby?
In good times, it’s
always all smiles. But not all times are good.
In my previous
life, I worked for many years as a paramedic in Harlem and the South
Bronx. Before that, I fought
forest fires on a hotshot crew for the US Forest Service. I have
seen what stress does to men (and women). I have seen people die. Lots
of ’em. Babies too. I have seen how people react, flip out, and lose
their shit entirely. And I’ve seen people fail then recover with grace
despite mortal danger. And in all this, I learned a little bit about
judging the character of men. Quickly. For this, I make no apologies.
it is this experience –– combined with my own listening and study of
the travails of those who have come before me –– that informs what I am
about to say.
It should be
obvious, but I want to be convinced that the investor is a very smart
man. Preferably smarter than me. Steve Young (the 49ers QB with a law
degree & his own private equity firm) once said that he aims to be "the
dumbest guy in the room." Amen to that.
The beauty of hanging
around and dealing with really smart people is that they have a rub
off effect. Really smart people challenge you and force you to think
bigger, harder and, at the risk of sounding completely vague, better.
They pick apart your bad ideas quicker and see through the bullshit that
even you might have convinced yourself to believe.
scoring high on the intelligence test is not a dealmaker. Brains is a
big plus, but brains without self-knowledge or an appropriate level of
humility is just fucking dangerous.
2) Security &
People who are insecure make bad,
irrational decisions. We are all insecure in some way, so really it’s
just a matter of degree. More is worse, less is better.
speaking, being insecure causes you to make decisions based on fear, and
people who are motivated by fear alone cannot embrace a big, disruptive
vision. They end up being fundamentally risk-averse and drive you to be
too. Invariably, this leads to a focus on bullshit, like what other
people are doing.
Even worse, you can’t honestly call bullshit on
people who are insecure without undermining your relationship with them.
For me, this is an instant dealbreaker.
People who are secure, on
the other hand, like to be challenged. They enjoy vigorous debate. The
intellectual swordplay is what they live for.
When someone is
secure in themselves and their position, you can be honest with them.
And I ONLY want to work with people I can be honest with. Life is just
too short and I’m just not that patient.
3) Reverence for
I can see how easy it is for VCs to
think of themselves as masters of the startup universe. As a VC, people
compete for your attention and pitch you constantly. They are the judge
in a never-ending baby beauty contest. It must get tiring. And in their
shoes, I can see how it would be easy to think that the world revolves
But it does not.
At the center of the
entrepreneurial universe is the entrepreneur. And behind the
entrepreneur is the employees, the team, the company. It is they who are
the heroes. It is they who operate unhedged. It is they who take the
In my mind, good
investors get this. They understand their place in the ecosystem as
enablers. They don’t let their celebrity status get to them. Which
brings me to my next point…
4) Humility &
To be humble is to know your strengths and
weaknesses, to be aware of your place place in the world. It does not
mean being non-confrontational or a softie.
My favorite people are
those who will push hard and argue vociferously on behalf of an idea
but then freely admit that it’s possible their assumptions are wrong.
They test you, but acknowledge the limits of their own knowledge. Or
maybe they really do know something about your corner of the universe.
The important part is that they are acutely aware of when they do know
something and when they don’t.
The other thing that’s great about
people who possess a high-level of humility and self-knowledge is that
they are not afraid of being challenged. Because they don’t have huge
egos, they are constantly listening to the people around them and
learning new things, which in turn makes them amazingly capable as
teachers. And god knows I need teachers in my life.
he understand what it means to be an operator?
investors that scare me most are those who posses a low-level of
humility in combination with a non-operational background.
I met a 20-something year old VC from a supposedly top-tier firm who
served on the board of several companies. I had looked him up on
LinkedIn prior to our meeting and noticed lots of board seats but little
other experience beyond a graduate degree from a very prestigious
university. He was obviously very intelligent, but after several minutes
of opining to me about my industry, I decided to turn the tables a bit
"I noticed that you sit on the board of several
companies. Tell me a little bit about your background and experience
building companies that qualifies you for this role. What companies have
you founded? As a board member, I’d report to you and you’d have the
ability to fire me. In essence, you become my boss. Why should I entrust
you with this power?"
Part of me actually wondered if this guy
had had some previous experience that I didn’t know about. He squirmed.
"Well….ahh," he stuttered. "You know, board members are there to, ahh,
give…intelligent feedback and, ahh, be there….ahh….as a sounding
board…for the entrepreneur, you know."
What amazed me was not
the vacuity of his response but that multiple CEOs had allowed this guy
to take a board seat and a position of responsibility caring for their
As far as I can tell, there’s good VCs out there who
haven’t really been operators. But they tend to have grey hair and not
be involved in super-early, seed-stage investing. As a first time
founder, I want people around me who can understand and help me manage
the extreme uncertainty of company building at the ground floor.
Does he want me to lie to him?
One of the red
flags I look for is seed investors that want me to make things up and
lie to them. This typically manifests itself in the form of long-term
financial projections. "What will your sales be 5 years from now?"
have no fucking clue, and if you’re asking me that question, neither do
I am a first-time founder in an immature, rapidly growing
market. Pricing, exact business model––these things are all up in the
air. My task now is to go out and prove certain assumptions about the
product and the market in a way that we matched the two up and achieve
the magical paradise that is product-market
fit. Before I’ve done that, don’t ask me for financial projections
other than my expenses, because what you’re really doing is asking me to
lie to you, and I hate that.
7) Does he teach me things?
of my favorite investors are those who, regardless of whether they’ve
said yes or no, teach me something about my industry, product, market,
team, etc. Even if they say no, they’re the ones I’m gonna go back to
down the road and try to lure them into the yes column.
reasoning is this: If in the course of a single 30-minute meeting this
person has added value to my company and my life, just imagine how much
this person would contribute if he/she sat on my board! MUST HAVE THIS
PERSON ON MY TEAM.
8) Is he a happy person?
world is full of extremely intelligent and yet unhappy people. These
people are like poison. Their unhappiness rubs off on you, and
invariably, they attempt to punish you and take out their frustrations
with their own lot in life on you, potentially derailing your company
and your life.
Again, I don’t want you to confuse being happy with
being soft. One can be both happy and hard-nosed at the same time. In
fact, I like to consider myself a happy warrior. I love life and relish
in the entrepreneurial adventure, but yet I am (or try to be) ruthless
in how I judge and execute that which is important around me and my
At the end of the day, happy people are optimists. And when
the world is going to hell, as startups seem wont to do (not to mention
life more generally), you need happy, optimistic people around you to
stay focused and productive amidst the storm and cataclysm.
yeah, and life is just too short to surround yourself with unhappy
people. They suck on your soul, and leave it empty.