By Matthew Cushen
It’s become clichéd – investors talking about the team being the most important criteria when making an investment. This is usually true, but what are investors looking for in a founder or a founding team?
Within Worth Capital we assign a rough 30% weighting of our investment criteria to the founder or founders – which is indeed our most important consideration. Right from an initial piece of paper, through every e-mail, phone call or meeting, we are relentless in looking for clues across six areas:
1. Battle scars
We value experience in the market space the business is targeting and expertise in the areas needed to make the business model work. For example, when building a new food or beverage brand there are three aspects of the business that are critical: developing a product people will love and want to buy repeatedly; being able to create and nurture a compelling brand and being able to sell into retailers and distributors.
When this type of business is looking for even their earliest investment they will have the product and at least an early incarnation of the brand – enough for an investor to agree or not with the potential. The punt the investor has to take is on the negotiating skills and extreme tenacity needed to deal with retail and wholesale buyers. Proof of being able to do so is hugely valuable, even more so with an existing network of contacts.
Worth Capital has just invested in Outfox – a range of alcohol-free wines, ciders and beers. The founder, Jess Hook, has been Vita Coco’s head of sales for the last five years, through their explosive growth. This is strong proof of effective dealing with supermarket buyers and ability to get a product onto the shelves. She has also just run the bonkers (ultra-) Marathon Des Sables – an extra illustration of tenacity and determination.
We are usually impressed by a founder with a track record of growing a business. Going from start-up to scale-up has many challenges, so anyone with the battle scars of doing this before will naturally be better able to anticipate challenges and avoid the same mistakes. The previous business does not necessarily have to be successful, as long as the entrepreneur is able to show they have analysed and learnt from the problems and mistakes. Someone that has successfully built and exited a business is hugely attractive, enough so to command a premium on the valuation of their new venture.
2. Ears to the ground
The most important behaviours are for listening, analysing and responding. Myself and my partner Paul have been investing for years, have lots of brand, marketing, retail and innovation experience and are just about arrogant enough to believe our opinion might be useful for a new business. So it’s disappointing if a team is not up for listening to our perspective. But more importantly, if a team doesn’t listen to a potential investor it suggests they are unlikely to listen to their customers and the market. It illustrates an entrepreneur is so blinkered by their idea that they will refuse to learn more and adapt as they try to build their business.
We are just about to invest in The Reach; they entered one of our competitions with a business selling pyjamas, including some with a cooling fabric for a better night’s sleep. They didn’t make the final stages of the competition. We gave them feedback including that we liked their insight about sleep and people wanting more of it, but that pyjamas were too niche for us. The next month they re-entered the competition with a whole new business – a knowledge rich marketplace around sleep. They had already tested out whether people would be interested and from a short social media campaign had gathered 1,500 emails of interested potential customers and 200 potential suppliers. Of course we were pleased that they had listened to feedback, much more so that they had decided to respond decisively and quickly.
Passion is an overused term, but it is hard to get excited about an investment if the founder(s) doesn’t have it. We like it when a founder has a connection to the idea they have chosen to pursue. For example, Chris Grunwell from Itsy is a health conscious foodie with a young child. His idea for a portable food processor for mums & dads of weaning babies came directly from his experience. His empathy with his target market will help him market the product and his passion for his mission of feeding babies better will energise him through some tough challenges. This passion and hunger can be missing with those entrepreneurs that set themselves the objective of setting up their own business and then desperately search around for the idea to pursue.
4. Compelling communication
A pre-requisite for any entrepreneur is to be able to articulate clearly and excite people. Whether this is their proposition to customers or a clear strategy, priorities and decisions for a team. Although an investment case might be made before a super strong brand has been developed, it should still be able to describe the proposition and bring to life why customers would care and what would excite them.
Our investment in Not Dogs was hugely influenced by the brand’s chutzpah and infectious enthusiasm of founders Katie McDermott and Jane Yates. From a brilliant name through to a #sausageselfie Instagram tag, we weren’t surprised when we found out that the two of them have been running social media campaigns for some very large businesses. They are natural communicators and desperate to spread the word about their product.
No individual has fully realised their potential and no founding team covers all the bases. We like to see awareness, openness and honesty about gaps in the team’s experience or expertise and a plan to bridge the gaps.
We are naturally biased towards businesses with a team rather than one individual. However talented an individual may be, they will not have all the skills necessary to build a business and it can be a lonely task. It is much easier to maintain motivation and momentum with two or three people. However, more than that can start to get unwieldly and is unattractive to investors as share ownership is already diluted between co-founders.
A team should recognise, be clear about and celebrate their differences and understand what each of them brings to the equation. The best functioning teams will have mechanisms in place to give each other feedback and not shirk difficult conversations – e.g. about who is and isn’t pulling their weight.
All the previous five areas can be demonstrated – on paper and even more so in person – when meeting investors. This last area is more difficult to anticipate. But most investors, and definitely those like us who get involved in helping build the business, won’t invest in someone where there isn’t that intangible spark of chemistry.
Investors are the ones with the money, they generally don’t have to invest and definitely won’t if they think it is going to be a chore. At a consulting business I used to work at we had the flight delay test: would you be OK spending 10 hours at an airport with someone if your flight was delayed? Given that Worth Capital actively help the businesses we invest in, we ask ourselves if we do want to hang out with an entrepreneur, and if we’d be motivated to put in the effort. If we are fighting over who will be investor director we take it as a good sign.