THE BLOG
01/28/2016 03:21 pm ET Updated Jan 28, 2017

Insider Reveals What Investors Look for in Startups

These Questions originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.

Answers by Josh Kopelman, Managing Director, First Round Capital, on Quora.

Q: What do you look for in a founding team?

A: There have been dozens of amazing blog posts and Quora answers about evaluating founding teams. And, of course, I look for the typical stuff (intelligence, drive, credibility, integrity, market understanding, learning curve, etc). There are also a few things I look for that I haven't seen many people write about, and I thought I'd share a few:
1. Deferred Gratification
Being a founder is an exercise in extreme deferred gratification. Successful founders typically need to endure years of sacrifice and struggle. They make extreme work-life balance tradeoffs. So I try to look for indicators that show that they've been willing to make these tradeoffs earlier in their life. Did they skip Spring Break in college to pursue a long-term goal? Did they hold down a job while they were in school?
2. The ability to say "I don't know"
Early in my venture career, I had two back-to-back (but distinctly different) meetings with entrepreneurs. They both were successful serial entrepreneurs. Both were exceptionally smart. Both had good ideas.
The first entrepreneur, however, thought that they were expected to know the answer to every question. There wasn't a question I asked that he didn't have a definitive answer to. He knew what their pricing model would be. He knew why Google would never compete with them. He knew what their consumer churn would be three years out (despite the fact that they hadn't launched yet). Whenever I tried to discuss the different risks in the business, he told me why they didn't exist.
The second entrepreneur, had a different approach. He definitively stated answers when he had them, but when he didn't know he said so. When asked about his pricing model, he said "well, we're considering a few different options depending on the outcome of some tests we're running..." When asked about cost of customer acquisition, he said "well we don't know what our numbers will be...but here's our model based on other comparable companies." When asked about risks, he identified several -- and then we discussed how to reduce/eliminate them.
I believe that a key investment criteria is founder credibility. And, I think the second entrepreneur was far more credible. No one expects a pre-launch company to have all the answers. (In fact, we get scared if you think you have them). Rather than have an entrepreneur sell me on why they are 100% correct, I'd much rather understand how they are attacking the different risks facing the business.
3. Can they deliver a compelling narrative
Starting a company requires salesmanship. I've found that successful founders are often great storytellers. (Ideally, telling non-fiction stories. They need to be able to sell against the status quo. Founders need to create a compelling narrative to attract employees. (How else are you going to attract talent in this competitive marketplace?). They need to weave a compelling narrative when talking to the media. They need to weave a compelling narrative when it comes to fundraising. And most importantly, they need to weave a compelling narrative when it comes to acquiring customers. If a founder can't tell a good story, it will be hard for them to attract employees, press, money and customers.

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Q: What 3 things do you look for in a early stage start up to gauge potential?

A: We are seed-stage investors -- and typically invest before a company has any real metrics (ie, before a product is in the market). So most of our analysis is focused on the founder, the idea, and the market they are targeting. That said here are four specific things we look for:
1. An initial, compelling and unique insight. We want to understand what about your thesis is contrarian (ie, why do you think the existing players are wrong) -- and why you think a startup (and yours specifically) will win.
2. If there is a product in a market, a small group of passionate early customers that love the product is a strong indicator. Several years ago we started to hear First Round founders talking about an amazing new tool called Looker. After we heard about it for the third time in a few weeks, we reached out to the company -- and invested.
3. We think that founder-market fit is very important. I've lost a ton of money investing in founders with years of enterprise experience who now wanted to pursue a consumer idea -- and vice versa.
4. Too many times founders spend a ton of time innovating on their product -- but not enough time innovating in their go-to-market. We try to avoid Domino Rally Business Models.
5. Finally, we spend time thinking about the market they founder is pursuing. Specifically, if they end up winning their market, is it a prize worth winning? The market frequently disparately rewards different types of companies. SaaS companies are valued diferently than on-premises software. First-party branded retailers are valued differently than third-party ecommerce sites. Just like real estate has massively different values, so do market segments. To mix a metaphor, before a founder starts building their "house", it is important to make sure they picked the right parcel of land to build on top of.

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Q: What is the earliest moment to pitch an investor? Would a business plan and a team be enough or do you already need a well designed prototype?

A: I think that this answer will be very different depending on the stage of your company -- and the stage of the investor. My fund is called "First Round Capital" for a reason. We are a seed-stage venture fund -- and we want to be a startup's first call when they are looking for funding. We typically fund pre-revenue companies with incomplete products, incomplete teams and incomplete business models. Obviously, this is very different then later-stage funds.
We never receive business plans these days. Instead we typically review a slide deck/ overview of the concept. I think it's really important for you to have a clear description of your vision, product, team - and why you think you will win. You often do only have one change to make a first impression, so I would invest time to prepare. (You'd be surprised how many people try to "wing" their fundraising meetings) I also think that your team composition can often affect how early you can raise seed funding. Whether it's right or wrong, a team of "first time founders" often needs to "show more (a more developed product, data, etc) than a team of startup veterans.
Finally, a mentor of mine once gave me some great fundraising advice. He said, "nothing fucks up a good story like numbers". Specifically, when it comes to fundraising I think that investors tend to place too much emphasis on early numbers (and often draw false conclusions). Given that, I think founds should be thoughtful about the timing of their experiments. (For example, turning on monetization three weeks before fundraising is very risky - as chances are that your early efforts will require iteration and tweaking...and you don't want investors to extrapolate from poor data). Selling the dream (in seed rounds) is often more powerful than selling the numbers.

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