Investing in a startup takes a lot of twists and turns. It’s a massive learning process. Getting down the learning curve can be extremely expensive. Bob Okabe, a friend of mine, has said when he asks startup investors if they have made or lost money, most of them lose. Then he asks, “How many investments have you made?” If they answer, “Two or Three”, he says they just didn’t invest enough.
People do diligence on companies in various ways. I have found you can look at a company through lots of different prisms, hold it to the light at different angles, look at verticals, growth rates, the idea and compile reams of statistics about why this or why that.
In the end, if it’s a good idea, you know what it depends on?
Companies that make it are lead by great people. If the team isn’t good-don’t invest. If you are unsure of the CEO, or have a ping of doubt, don’t invest. CEO’s create the culture and recruit the team. If they can’t do it, the great idea isn’t enough.
One way I evaluate a company is to put myself into the shoes of the employee that would work there. Would I want that CEO to be my boss? Simple as that. If I don’t like their management style, I won’t invest. We don’t have to be buddy/buddy and best friends. But, we have to have a relationship.
Some CEO’s get that. It’s not just about the money for them. First meetings aren’t about check writing. They are just getting to know one another. The reverse is also true by the way. The CEO should be picky about whom they let in their deal. They are going to be joined at the hip for at least 5-7 years.
It’s rare to find a CEO that will take a company from start to finish. Usually, the initial person is replaced in subsequent rounds of funding. Good startup CEOs know their strengths and weaknesses. Many of them don’t have the desire to run companies larger than 100 people. It’s a gut wrenching decision to step aside. But the great ones have a sixth sense about the timing, and they worry more about their company than their title.
There are lots of critical aspects to companies-but the CEO is the most critical piece. Without a great one, they don’t go down the path.