The Jeff Pulver Blog: Part I: Investing in Early Stage Startups

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August 25, 2008

Part I: Investing in Early Stage Startups - It’s the Team that Matters

This week while I am in Israel I will be meeting with and will be pitched by a number of hi-tech startups with dreams. Many times during these meetings I feel like I’m a technology scout looking for the “next big thing.” I look forward to attending these meetings as it is one of the ways I am able to keep track of the latest trends and fashions inside of the Israeli hi-tech startup space which I find particularly fertile for some reason. It is through the process of being pitched and pitching that I am exposed to both innovation and opportunity. And after hosting 25-30 often back to back full days of such meetings during a visit, I usually find myself unusually inspired about the future of the future and I especially enjoy the opportunity to meet some pretty amazing dreamers and doers people along the way.

While there are a number of things I take into consideration when making a decision about whether I should invest in an early-stage startup, one of the key components of any startup are the people, sometimes better known as “The Team.”

The Team is what will make or break a startup. As a serial entrepreneur who dreams and as an investor, I have an appreciation for what makes a great team. Some of the startups I tried to raise money for and failed in raising money for was due as much as to The Team that I had as much any other external factors. When building a team for a startup it is as close to gut check time as one gets.

Relevance Matters, Sometimes

My advise in pitching a startup team is that if for example you have a great idea that will transform the advertising industry, you might want to have someone on your team has advertising experience, at least from a business development perspective. If you are going to transform the end user experience for selling widgets, make sure someone on your team is an expert about widgets or at least has experience working in the widget industry. The point here is that there are times where it is helpful in having someone with relevant experience in the industry your startup is trying to disrupt.

This said, when I am the one responsible for building a team, there are times where I am also going to be the one to contradict my own suggestion about relevance because also believe in trying to do the impossible. Sometimes when I am working on a startup, I look for people who have NO experience in the field we are targeting because I believe in the power of one is more then the power of none and that the power of No! and Cant can over power the blind ambition (also known as passion, obsession, intensity etc) of people who don’t know they can't do something. In many cases these are the people who change the world as we know it - its not the technology that changes the world its the people who use it. So there is blind ambition factor to think about too.

So when I do my own startups, I look to get the best possible team together that I can. I look for people who are smart, focused and driven. I look for people who are both smarter then me and passionate. People who understand both their own strengths and their weakness and people who mesh well together. And I look for people whose dreams and vision for the startup is on par with my own. When building a startup the role I generally end up with is Chairman but I am willing to assume any that role whenever necessary in order to launch the company.

Check Your Ego at the Door

When you pitch a startup to investors, be prepared to check your ego at the door not your passion. Prospective investors have a habit of being critical of everything that is said and it needs to be understood that sometimes prospective investors will share with you something which turns out to be the best advice for the future. It is sometimes hard to take it in because if they are talking about you and your team it is a natural reaction to become immediately defensive. A friend of mine is fond of saying "we are real good at seeing other people but when they see us we think they are talking about somebody else.” But if you can get past that, be prepared to be a good listener - you know what you know, you don't know what you don't know so you might as well listen and then ask questions regarding their advice and you may learn better ways to pitch your vision and for other people who they know who you might want to consider reaching out to join YOUR team.

There are times when you will pitch your company looking to raise money and the person you pitched ends up giving you some pretty good advice. And there are other times when you ask someone for advise and you end up getting their money for your startup. I have experienced both on my own.

What I look for in a Founding Team:

These days when Im making a decision about a early-stage startup opportunity to invest in, I put the people first, consider their vision and then weigh-in on my take on their ability to be a disruptive force in their chosen market space. I look to connect with the founders and find out the inspiration behind the company they are creating. I try to understand the problem they are solving and the opportunity they are seeing. And I ask them about their exit strategy.

I look to see how as a team everyone gets along, work off each other and I try to get a feel of their creative energies. I look for teams where each member is watching each others back and a core team whom I feel will be together for the long term. I look for people who are both smart and creative who can be focused when necessary and whose personality allow themselves to be open to change directions and re-map themselves when needed. They need to be prepared to make mistakes, hopefully good mistakes, and understand that the business they are starting may morph itself several times before being the business which is the one they end up doing. This means I avoid people who come across being too structured. If the founders are not malleable, chances are I will take a pass. In the end I find myself investing in people first, and their ideas second. Invention is often something you discover when working on something else so I always keep an eye out for what I am missing - and its sometimes the obvious that i don't see.

Out of Sight - Out of Mind

As an investor, I am sometimes an internal advisor to the company whether the founders realize it or not. As such, I try to only get involved in companies where I feel I have something positive to contribute. I have learned a hard lesson of just investing in companies who wanted money, but otherwise had no interest in me. Over time, those investments have become my out of sight investments. And the lesson learned was that I have to be out of my mind to let such investments be out of my sight. So these days I look to only invest in companies whose mission is something I can relate to from the start. And if the team isn’t open to hearing my suggestions / ideas, they are not going to be getting my attention or my investment.

A Team of One

In my case, it is possible for the team to be one person. But when it is just one person, I am looking for a real superstar. Someone who has the ability to lead, the ability to code, the ability to express themselves and the ability to raise money, while simultaneously being able to juggle and about a dozen other responsibilities. And while I have been fortunate to discover superstars everyone once in a while, most of the other times when I am meeting with someone who has the vision for the business but is not the person who is able to implement it, I suggest they add such a person to their team. I have met my share of genius developer who I don’t feel would be a great leader and is not the person who will be able to connect with investors. In these cases I strongly suggest the person look to find a co-founder or two of equal standing.

Getting Funded - Both an Art and a Science

Personally I feel more comfortable investing in someone who has been successful in the past and whose passion and vision is strong for the opportunity presented is strong. But I have also invested in my share of unknowns who turned out to be pretty amazing people once they were given the opportunity.

Getting your startup funded is as much an art as it a science. It is hard to really understand all the elements that are necessary in order to get funded. But when you are the one making the investment decision, sometimes you just know three to five minutes into the pitch that this is the company you want to get involved with. You resonate with what is being said and you want to be part of this opportunity and look forward to helping to grow the company over time.

Please don’t be discouraged if I or someone else takes a pass on your startup, All it means is that someone isn’t interested at that moment but chances are you are one step closer to getting funded. And should your vision for the opportunity morph, you can always contact prospective investors again.

I'm Jeff Pulver and I am looking forward to being pitched. :)

Tags: Tel Aviv, startup, Israel, Jeff Pulver

Posted by jeff on August 25, 2008 07:40 PM | Permalink

Additional resources: #140conf events | Watch the Jeff Pulver Show | Jeff's Qik Videos

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Re. having a team with actual experience in the industry - I find it shocking how many startups in enterprise software do not have a single core team member that actually understands the enterprise sales process. Your point about intentionally seeking team members with *different* perspectives and experience makes a lot of sense. But any startup needs to have at least one person with firsthand experience going through the entire sales process with the target customer. They need to understand precisely which doors they should be knocking on, what motivates the buyer, what the evaluation process looks like, etc. It sounds so obvious, but my experience has been that fewer than 10% of the IT vendors that I've worked with have a single sales exec on their team that fits the bill. The great sales guy / gal is in fact such a tough hire that I would think the existence of one on a team that is pitching you would / should earn them some special consideration points. Thanks for the insights.

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Jeff, your suggestions are right for dealing with true VCs, real professionals of the venture capital world. Entrepreneurs that allow other entrepreneurs to do business.

Unfortunately there are a lot of VCs made of inconsistent people. I've held meetings with VCs that where in a rush, not even listening to me and to the work my team has done.

Your blog is truly inspiring, I hope that also some VCs will read it and learn something about dealing with entrepreneurs.

Best

Francesco

Posted by: Francesco Federico at August 28, 2008 03:02 AM

Hi Jeff,

As a co-founder of a socially-oriented collaborative software app that we are incredibly excited about even as we are flushing out all the details, your post highlights many of the issues we are all dealing with.

Each of us has a vision, a passion, and a purpose and firmly believe the synergy (and a fantastic idea) will get us where we want to go. Getting the right investors on board is the next step.

And you're right on -- we only want those who share our passion and can add to the equation to be part of our team, whether they're investors or part of our core organization.

Thanks for the validation, the insight, and the inspiration! Stay tuned...

btw, Deepak, very much appreciate your comments too -- especially the "we are passionate but not desperate". We may also be small, but we are mighty, and the investors behavior during those pitch meetings can help US decide who we want to give our business (and our opportunities) to.

Posted by: Melinda Moses at August 27, 2008 07:31 AM

Dear Jeff,

I think the last series of your blogs/articles have been quite educational and inspirational to the entrepreneur. Now I think that you should also write an article which is targeted to VC's and Angels to educate them the same way that you are trying to educate the average entrepreneur. I speak from my personal experience.

I co-founded a company along with two of my friends and have been working on it full time over the last year developing the technology and slowly rolling it out. We have met with various angels and investors. We have had face to face meetings and been on conference calls. We have attended many conferences, presented at some, and also at angel, venture and industry events. A large number of these meetings have been very positive and we have been treated very well by a large % of the angel and venture community.

However I would like to bring one observation from all of this. It is my personal opinion that if you commit to giving someone 15 minutes, a half hour or an hour of your time, then I think that one should follow up with that commitment. I have been to so many meetings where I have sat across from people who are so distracted with a cellphone that's buzzing every couple of minutes. The entrepreneur pitch is constantly interrupted and the investor is unapologetic. In one example, during a pitch just after the intros and the start of the pitch, the potential investor got a call from someone at a law firm and during the call he exploded into expletives in a closed conference room calling the other person all kinds of names. In another situation, the investor got a call mid-way into the call where his spouse called him to remind him to pick up something on the way home. In other situations many of them peered into their cell phones at all times. So like your rule to entrepreneurs to "check ego at the door", maybe you should write an article to tell the investor community to "check the cellphone at the door". If one does not have the time or has to take that call right in the middle of the meeting, then perhaps they should not setup the meeting in the first place.

As Entrepreneurs we are passionate but not desperate. We only ask for an uninterrupted conversation even if it is for 5 Full minutes.

Thanks.

Deepak

Posted by: Deepak Das at August 26, 2008 12:18 PM

Great post!

Checking your ego at the door seems to be the toughest one there, and I find this very, very true:

"And there are other times when you ask someone for advise and you end up getting their money for your startup."

Posted by: Andrew Hyde at August 26, 2008 12:05 PM

Dear One , Since Mr Pulver is speaking from a personal bias and a personal preference I am hard pressed to understand how you can vouchsafe that he is incorrect, wrong or in any other way inaccurate. Do you feel better placed to understand Mr Pulvers mind than he does ?

The clue in case you missed it was when Jeff says "number of things I take into consideration " which I feel make a clear case for personal preference.

Yours .. someone who pays better attention.

Posted by: Nicholas Butler at August 26, 2008 12:02 PM

Sorry but you are wrong. Again and again I hear this bul...
The speakers are the guys who know nothing about technology.
The idea is the point. And it didn't come from nowhere, it comes from a person. A good idea is a good person, they are tied together - all the rest is ...(as described before)

Posted by: One at August 26, 2008 06:55 AM

August 25, 2008

Part I: Investing in Early Stage Startups - It’s the Team that Matters

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