Investors and founders are really looking for the same thing: money. Founders want money from investors to help build a business and investors want to see a return on that capital. It’s a high-risk proposition for investors because many founders fail and their businesses never generate a return. Understandably, investors are extremely thorough when it comes to vetting both a founder and a product. For investors preparing to hear a pitch from a founder, here are seven things to think about before deciding whether or not to give them money.
Are your missions aligned?
“We invest in missionaries, not mercenaries,” says Shauntel Garvey, co-founder and general partner at Reach Capital. “We’re looking for impact alignment. Making sure that you’re doing this to also have an impact in the world and won’t be making those potential trade-offs to make a buck.”
For Isabelle Hau, a partner at Imaginable Futures, the early questions she asks a founder are probing for that culture fit. “We do ask a lot of questions around impact and alignment with what we aspire to see,” says Hau. “If there is not alignment, there is not a good fit.”
Both Reach Capital and Imaginable Futures are VC funds that focus on learning and education, so mission alignment is critical. Not all funds and investors are impact-focused, but alignment still matters to investors—even if that’s a purely capitalist alignment on making maximum profit.
What’s your why?
“What I’m interested in is the founder’s motivation in doing this in the first place,” says Austin Clements, managing partner of OPV and managing director of Grid 110, South LA. “Chances are, if I’m sitting across from someone who is really impressive, ambitious, and smart, they could get a very well-paying job at a company. So I want to understand what’s making them say ‘I want to put that aside and make this trade and go for it.’”
Part of the reason Garvey asks for a founder’s “why” is to determine if a founder is fully committed to the company he or she is starting. For her, there’s a big difference between a side project and feeling like you’ve been thinking about this so much and for so long that you can’t sleep.
How well do you truly understand the market and the problem?
Once they’ve demonstrated their “why,” it’s time for a founder to prove how well they understand the market and the problem their company is trying to solve.
Clements points out that you don’t have to be an insider with an extensive history working in a particular field to understand the market and the pain point. However, if you’re an outsider, it’s going to be a bigger burden to demonstrate that your perspective is a competitive edge and that you deeply understand the problem for which you’re trying to solve.
Just be careful not to get flippant about how easily you can solve the problem. Ashley Beckner, a venture partner at Imaginable Futures, counts it as a red flag when a founder frames a difficult problem as one with an easy solution and ends with a line like “all kids will be learning perfectly next year.”
Can you demonstrate progress?
You’ve probably seen at least one episode of Shark Tank where a shark says, “wait, you haven’t actually sold any of this product?!” and that generally leads to all of them saying, “I’m out.” Well, you don’t necessarily need sales data, but you do have to demonstrate some sort of progress to investors, which could also include filing for a patent.
“We want them to have some amount of traction,” says Angela Lee, founder of 37 Angels and a professor and Columbia Business School. “Whether it’s a minimum viable product, beta clients, some early customers—we need some amount of data to say this works and people care about what you built and are willing to pay for what you built.”
What is your ability to attract and manage talent?
“When we do diligence, we do a lot of reference calls,” says Clements, who points out that these calls can go back to people you worked with a decade or more ago. “We want to know how people who have worked with them feel about them.”
This isn’t just to try to unearth your deep, dark workplace secrets or to see if you once embarrassed yourself at a holiday party. Investors are trying to find out if you’ll be able to both attract and manage talent as your business scales.
The founding team is also under a microscope. “Is there a credible, technical founding team that can actually accomplish the vision?” asks Sara Deshpande, a partner at Maven. This team needs to be able to build the product, fundraise and recruit new talent.
Do you have intelligence, humility, and resilience?
There is a special combination of skills an investor wants to see and very few founders land in the middle of the Venn diagram—largely due to ego.
When asked what he wants to see in a founder, Clements responds with: “raw intellectual horsepower.” But it’s not just that he wants intelligence, but that it’s deployed to be resilient. “The best founders I know refuse to lose and change to survive and level up, usually against long odds,” says Clements.
For Hau, that ability to pivot needs to be coupled with humility. “You need to be able to adapt and adapt quickly,” says Hau. “Someone who doesn’t have the ability to be humble and sticks to the existing model will fail.”
There’s one big, final factor: Price
“Does the valuation seem to be fair?” asks Lee. It’s a simple question, but the answer can be a make or break for an investor—especially in seed or early-stage funding. A bloated valuation can be bad for investors and founders alike if it means you struggle to raise capital again in future rounds.