I was recently developing financial projections with a client and was reminded of the mantra my financial modeling professor at UCLA would open his class with: “the only thing we know about financial projections is that they’re wrong.”
His words were met with a chuckle but they succinctly captured a key challenge present in any business: uncertainty. This is especially true in startups. The market is unpredictable enough for an established business. Doing something new only layers on the uncertainties and amplifies the number of “unknown unknowns.” It’s why startups pivot and why entrepreneurs are told to fail fast. Like financial projections, every idea looks great on paper. But as Mike Tyson reminded us all, everyone has a plan until they are punched in the face, and every startup is a great idea until it goes to market.
So what tells an investor which founder can handle the uncertainty of taking a startup to market? A track record with previous ventures certainly imply a founder can handle the rollercoaster ride of a startup, but whether they are a first-time entrepreneur or a seasoned one, it is the character of founders that is the best indicator of potential in an unpredictable and chaotic environment.
Which character traits should you look for in a founder? Resilience and grit are obvious ones, but there are others that will reveal whether a founder can lead a company through its tumultuous early stages. Commitment to the vision of the company is important, but equally essential is commitment to the employees. Will the founder stand by the very people who are helping bring the company to life? Such commitment to people is reciprocated through loyalty to the company and a willingness of employees to take below market salaries. A commitment to the company’s vision and the company’s staff reveals a commitment to driving the success of the company and by extension a commitment to the investment in the company.
Integrity is also essential. There are an inordinate number of hard decisions a founder must make, and more than a few come with moral ambiguity and the temptation to compromise core values. A founder’s integrity can tell you whether your investment in the startup will be honored or squandered. A founder’s integrity can also mitigate any legal or regulatory entanglements or obstacles. Founders who honor their commitments are less likely to get sued.
These traits and more signal whether a company’s founders will shepherd the company, and along with the company its invested capital, through the rough seas of an early stage venture. If you’re considering investing in a seed round, Series A, or whether you are a part of the friends and family round, be sure to interview the founders pitching you. Ask them about their experiences facing a tough challenge and then push them for details. Interview people from their professional circles and get a sense of their reputation. The founders who do right by their partners and teams are founders who will do right with your money.