Kenneth Ballenegger, Head of Strategy at Republic, is an active angel investor in over 40 companies and a partner at Oyster Ventures. Below, he shares some of the most important qualities you should look for in a startup’s team before deciding to invest.
I learned about angel investing through trial by fire. When I started, I had no one showing me the ropes—I just threw myself on AngelList and dove in. In a way, this was good. Sure, I made some mistakes. But after investing in over 50 startups and meeting with thousands of founders, I’ve gained invaluable insight on what to look for in a startup before handing over a check.
I’m proud to say that after fumbling my way through the investing process early on, I’ve since graduated to what I would call a “real investor.” Having done so, I enjoy passing along some of the lessons I learned along the way.
On one hand, you can’t really look at angel investing as having hard and fast rules, because there are always exceptions. Still, there are a set of qualities that make some startups more likely to succeed.
One of the most important qualities you want in a startup is a solid team. I can’t emphasize this enough. A startup is only as good as people who build it.
One thing that I think is very important and often overlooked when evaluating founding teams is domain expertise. It’s often the case that a bunch of guys or gals get together and try to start a company, but they actually have no expertise in the field they're trying to solve a problem for. Let’s say they’re trying to solve a problem for 3D food printing—they want to refine the technology while bringing the cost down. They think this will be a fun startup to build, but if the team members haven’t worked for 3D printing companies or used 3D printing in their businesses, they’ll most likely lack the expertise to build something that genuinely solves the problem. You need to have somebody on the founding team who understands deeply the field in which the startup operates.
Take Republic. What we do is so complex legally, we probably couldn’t exist without having a securities attorney as a founder. Because of Ken’s expertise, we’re well-equipped to do the work we do. This isn’t something you can just outsource.
A good indicator of domain expertise is when founders are solving problems for themselves. This means that they really understand the problem, not just the industry. Many of the best companies start out this way. The founders get frustrated about something in their life, some process or product that isn’t working, and they do something about it.
My very first company Chartboost was kind of like that. My two partners and I were working at a company called Tapulous, where we made iPhone games. We monetized those games with ads, in addition to selling songs in the game. The most effective type of ads were those placed at the end of each level. At the end of each level in the game, a full-screen pop-up ad showed up. We built this manually, and our sales team talked to ad buyers to see if they wanted to buy these slots.
They were actually the most effective one of the best ways to monetize our game. No productized version of these kinds of ads existed before we built it. Though we had built it ourselves to solve our own need in the company, we saw that there was actually a huge opportunity to create a business around this product. So, that’s what we did.
At least 50% of startups started with a story like that—the founders deeply understood the problem either because they’ve worked in the industry or because they’ve encountered the problem on a regular basis.
So when you look at the team and you ask them, “Why are you building this? Why are you the right person for this? Why do you understand this?” You want to get a sense that they are the ones best-equipped to solve the problem given their intimacy with the problem and their expertise of the domain. Ideally, it should be a problem only they can solve.
Another thing that’s good to look for is prior experience founding startups. This doesn’t mean that their previous startups should have been acquired by Google or Microsoft. Most startups fail. But when founders have tried to build a business at least once, they inevitably learned how not to do things. By doing things the wrong way, founders get a feel for how to run a company and how to deal with all these problems that always pop up.
This is one reason older entrepreneurs actually do better than younger ones, though many people don’t know this. Because so many have founded businesses before, and because they often have years of industry experience, older founders tend to fare better. A study was actually released this year that found that the average age of high-growth startup founders is 45. This definitely dispels the myth that’s infected Silicon Valley for years—that twenty-somethings who are fresh out of college are most likely to build unicorns.
And yes, some wildly successful companies like Facebook were started by first-time founders. There are always exceptions to these guidelines, which is why honing your intuition is so important. But I’ll get to that in a bit.
The third thing you need is to have a good balance between team members’ skill sets. As I’ve said, you want the founders to have a level of expertise in their domain. At the same time, you don’t want the team to have expertise in only one area--that won’t work either any more than founders with zero expertise in the startup’s industry. If you’ve got three coding whizzes but no one who can handle marketing or business development, you’re going to have a big problem. So, when you’re looking at the founding team, you want to be sure there are multiple people who have complementary skills.
On that note, I should say that it’s very hard to create a successful startup if you’re a solo founder. It happens sometimes—as I’ve said, there are exceptions to all the rules—but the person needs to be absolutely brilliant in one way or another.
But I have invested in a company founded by a single founder. Seven months after I invested it was acquired by one of the largest public tech companies, and I got a nice return. The reason it was successful is that the founder created a great product, and he was one of the few people in the world who had the right level of expertise to work on that problem.
It’s also really important that the founders and team members can make their interpersonal relationship work for the long haul. Oftentimes when companies fail, it’s over founder disputes, so you need to look at how the team works together. According to CB Insights, 23% of startups fail because of team disputes. So, it’s important to ask the team how long they've worked together, how long they’ve known each other, how they met, and what their relationship is like. If they’ve never worked together, that's a bit risky.
It’s a big commitment to become co-founders with someone, and you can never really tell how things will work out when people are put under pressure. So if founders have already been co-founders together, that’s a huge benefit. Or, maybe they’ve worked together at the same company. This is also good, as they’ll understand how each other works. At the very least they should have gone to school together or have been long-term friends.
You can also learn a lot about founders from how they go about fundraising. Are they messy? Are they diligent? Do they respond fast to correspondence? Are they arrogant? There are a lot of arrogant founders these days, and I won’t invest in them. By observing founders’ behavior you can pick up clues as to how well they’ll be able to execute as a founder of a business.
Truthfully, I don’t invest in startups unless I’ve actually met the founders in person, ideally two or three times. Not everyone will do this, but I’ve learned over the years that it’s the best way to get a sense of who the founders are.
Obviously, whether or not you go and meet the founders in person depends on the amount of money you invest. And if you’re only investing $100, it makes no sense to spend money traveling to meet founders. Once you start writing $25k+ checks, then you definitely want to think about hopping on the phone or meeting in person.
If you’re making an investment through Republic, you don’t necessarily have to go out and meet with the founders in person. Instead, you can get to know them through our Digital Demo hours, which we hold regularly, by asking them questions during their live video presentations. And you can certainly contact them on our site.
At the end of the day, you have to use your intuition when evaluating founders. It’s kind of like dating—just because someone looks great on paper or has all the qualities on your checklist doesn’t mean they’re going to be a perfect match. Once you evaluate the opportunity and decide it could be a fit, it’s best to trust your gut in the end.
Hope you enjoyed this deep dive into Team. Want to get an overview of the 4T’s? Watch the recap of our webinar.
This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.
Republic's latest funding round
Republic has announced a $150M Series B round led by Valor Equity Partners. Valor, known for early investments in SpaceX and Tesla, is adding Republic to its portfolio as a bet on the future of private investing and digital assets.
Amber Lewis, The Good Kitchen
If you want to change how people eat: Work hard. Play hard. And never compromise your vision.