Talent Investing at Seed
Photo by Jonny Caspari on Unsplash
I cut my venture teeth at Entrepreneur First (EF), the pre-seed fund commonly referred to as a company builder. That term never felt quite right because it failed to capture the unique investment strategy that EF was built on: finding exceptional individuals that we thought should be founders and investing in them pre-team, pre-company and pre-idea. This novel approach required a novel name and such is the origin of Talent Investor.
Since joining Fly Ventures I’ve thought a lot about how Talent Investing changes at the seed stage. At EF I asked myself “can this team be great?” and found conviction based on nothing but their past and potential. But at seed, a company is formed and a thesis generated. While traction may be limited, external factors of market size, go-to-market approach, competition, etc. come into the picture and alter the decision framework. At seed I now ask “can this team be great at this?”
Over the past several months I’ve tried to adapt the Talent Investing framework into a seed stage context. My current iteration is a collection of heuristics that I apply to every founder team I meet. This isn’t a checklist activity but rather a scoring system of sorts. Rarely will a founder team shine in all of these attributes; in fact it’s common to be somewhat deficient in some. But a team worth backing should be exceptional in at least a couple of these to warrant an investment. In other words, at least a couple keys need to turn.
Customer Obsession: Deep fascination for solving specific problems for niche groups strongly correlates with startup success. Obsession provides richer understanding of pain points (+product), preferences (+design), constraints (+go-to-market) and priorities (+sales tactics). This attribute is, in my view, the single most important one from this list. Without it you’re a technology looking for a problem.
Magnetism: Are people naturally drawn to you? Are you able to win people over with relatively little effort? Do people want to work with you because they think you’re a winner? This can go by many names (charisma, distortion field, leadership) and it’s hard to define but you know it when you see it. Strong magnetism is a leading indicator of hiring, sales and fundraising success.
Systems Thinking: Victory in startups, especially in the enterprise space, means navigating competing interests, budgets, internal politics and (sometimes) regulatory barriers. A founding team should have a deep understanding of the market being addressed, the players involved and the variables ahead. My favorite framework that captures this beautifully is Chris Dixon’s The Idea Maze. You (founder) should think of everything before I (investor) think of anything.
Forward Progress: At EF we used to say “traction is productivity for teams”. Traction can take a lot of forms but it should demonstrate meaningful progress against your thesis given your time, cost and market constraints. Many founders overthink its importance because they’re competitive and metrics oriented, but a founder should remember to anchor their metrics. Seed investing isn’t about testing spreadsheets and calculating margins. It is, however, important to identify some productivity because it serves as a proxy for team effectiveness, product excellence or organic market pull.
Differentiated Assets: I used to think about a founding team’s “right to win”, but I grew to see this as a dressed up way of saying badges (good school, fancy degree, years at X company). Past accomplishments may signal that you’re smart but it alone doesn’t arm you for entrepreneurship. Instead I now look for special assets like a unique network, secret market insights, activated communities, etc. that provide a founder an unfair advantage over what lies ahead.
Resilience: The most obvious one but that doesn’t make it less true. The path of a founder is challenging and painful, requiring a particular type of emotional strength. A founder that can persevere through unknown adversity is a good bet to make. This is a challenging heuristic to assess in a fundraising context given the brief timeline so I usually need to call on references for this, but the best founders tend to have this narrative prebuilt.
I’m certain that this list will evolve over time but so far this collection feels right. I should note that demonstrating strength in these areas is not sufficient for investment. Venture capital is a unique asset class that demands a certain level of market size, growth, margins, etc. A common framework for evaluation is Market, Product, Team and other funds may further segment. But I’m guessing if you’ve gotten this far in the post you already know that.