A few days ago, a growing VC firm was pitching for additional capital from limited partners, where I was part of the audience. In demonstrating the criteria for early-stage companies they invest in, and they emphasized this characteristic, the “team” is a major factor in determining a target. Details were not broached. Nonetheless, I have observed the following qualities to consider within a startup team that can attract investors.
First, do the senior team members have direct experience with their marketing strategy? Let me demonstrate the opposite example. At a Palo Alto pitch, a Canadian team sought millions to expand internet services at remote geographic locations where the Canadian Telecom carrier did not service. I asked them a simple question: what was their prior entrepreneurial or business experience? Answer: founding and running grocery store chains!
Unfortunately for that team, I have had considerable experience in telecom infrastructure – from fiber optics to satellite dishes. And that experience has taught me that building any network warrants an experienced, telecom team, that is familiar with the engineering requirements and costs to build that infrastructure. A simple bi-directional satellite dish operation costs about $200k. Fiber optic deployment can cost $1 million a mile in Paris, but should be less — although material — in Canada. Then there are the legal administrative headaches to obtain rights of way, tower permissions, etc. Ask yourself, why does Verizon employ thousands of lawyers? Then, I concluded easily that this was the wrong team. Any money would go down the drain with this project.
Are there other ways to handle this experience problem? Yes. One approach is to hire senior operational executives who have that substantive experience. As an example, the Global Crossing founder, Gary Winnick, had zero experience in the submarine cable business. He worked with Mike Milken on Wall Street bonds. With a million-dollar signup fee as a carrot, he hired the former head of AT&T submarine as COO. And that worked. The cable company raised millions, went public.
How about the opposite – a team with no experience in the field that still raises money? That is a recipe for disaster. The best, recent example is the Theranos (Silicon Valley) fiasco. Yes—Elizabeth Holmes raised plus $700 million for her hematology devices and she was even profiled in business trade magazines (https://www.wsj.com/articles/theranos-has-struggled-with-blood-tests-1444881901). The strangest thing, clearly underscored by a major WSJ article, was that the senior members, including board members, had zero experience in healthcare. Guess what? Now this company — after FDA revelations — is worthless. That is the cost of not having the right senior team members! Investors clearly learned from that poorly placed investment.
The second characteristic to look for in a team is the depth and breadth of management experience in the sector. Somehow or another, Silicon Valley believes that programmers are magicians who can write code, start a company, and manage it as well. Since the age of 14, I have met many programmers, and I don’t recall that their major interest, beyond looking at a computer screen, was to manage a company with all the subtle business issues faced every day – from financial to legal. If that were so, many would have attended business school. Yet, that seems to be the misleading perception in Northern California. Take a young programmer, place that person in charge of an operating tech company, and see what happens: Merissa Mayer lost over $1.5 billion for Yahoo. Every decision she made definitely damaged the company. She influenced the Yahoo Board members to keep her in charge, hired incompetent senior managers who were faithful to her. She still was compensated with plus $200 million in salary and options, after Verizon acquired Yahoo. And in spite of the extensive cybersecurity breach. I guess that Silicon Valley never penalizes technical people for incompetence. But Wall Street does. When she was considered as an Uber potential CEO, I was ready to short the stock.
One other quality I also noted in evaluating teams is the academic school attended. A quick review of the http://www.Angel.co histograms reveal what teams raised capital and what schools they attended, there is no dispute as to the heavily weighed schools run from the top tiered Stanford U. to MIT. Given that there are over 2,500 colleges and universities, there is no doubt as to what attracts investors – less than 1% of the colleges and universities. I also suggest that startups look at the General Partners and what universities they attended.
And is there an interesting solution for this problem? I once worked for a crafty and conniving CEO who needed to attract investors quickly for his constantly cash-short telecom company. He knew well that academic impressions mattered to investors. He discovered an unemployed Harvard grad desperately seeking any job in any industry. His prior experience was financial. The strange thing was that he had zero experience in telecom, but that fault or defect did not concern the CEO or the investors. In fact, during a due diligence meeting, I heard the investment analyst asking the Harvard grad why he left his major, publicly traded company (without admitting his involuntary departure) for this telecom startup – suggesting that this startup company was very valuable. So, the Ivy League credential had a favorable impact on investors, even though it was a crappy company. Schools do matter.
So, in summary, what defines a stellar team to attract investors? Subject matter expertise, management experience, and academics.