Part 3 - How I Underwrite Founders and Opportunities: Team Building and Sales-Led vs Product-Led Founders
This is part three of a four-part series on how I approach underwriting founders and opportunities. In part 1, I covered why people always come first. In part 2, I covered market understanding and the $100m revenue question. Now let's dive into team-building capabilities and the critical differences between sales-led and product-led founders.
Can You Build a Team? (I'm Back to the 'People')
I’m back to underwriting as more art than science once again. But I break it down to this: to build a generational company, you need to be able to attract and retain an amazing team. This may actually be the most challenging and overlooked vector in early-stage startups and company building. And when I am assessing this, I’m doing my best to intuit how capable a person might be of getting others to follow them. Oddly, the thing I credit most for developing my ability to understand people is the time I spent in volatile environments. From homelessness and youth centers, all the way to prison. It’s a feeling.
Yes, a founding team may be whip-smart, but can they attract and retain great people to work with them and keep them for years to come? It’s not a singular question. It has many layers. Do they understand what great hires look like? Are they open to being coached? We have even paid for some of our founders to take improv classes. I cannot overemphasize the importance of this. Hiring, talent attraction, and talent retention are mission-critical.
The hard thing here is that it can be misleading early on, especially in VC, where often much of the early fundraising momentum and traction is a result of who they know rather than how good they are. However, even for the brilliant ones, the individuals who possess that ‘magic’, hiring remains one of the most difficult and overlooked aspects. It may also be why so many second-time founders initially gain much quicker traction - the experience of hiring is hard to learn without actually doing it. This is where the coachability piece comes into play, and it ties back to Part 1 in this series when I shared how I like founders who are constantly seeking to learn. If you know stumbles will happen in hiring and team building, how can you get through them as quickly as possible?
The Coachability Factor
This can be defined in many ways, but the main trait I’m looking for is are you open to shifting your perspective as new information comes in. Are you able to ask for help when you need it? This means acknowledging when you don’t know something. It does NOT mean you can’t be highly opinionated. But circumstances change, roles evolve, and I need to know you’re open to continuous improvement. The ability to take on new information and adjust one's approach is a superpower, especially in tech where things move so fast.
Stumbles are to be expected. And rather than painting over holes, we want to address them - we all have them. This is why we invest significantly in founder development - from executive coaching to improv classes - because no one is born a perfect manager or leader. But, the best always seek out feedback and input. Great coaches (and mentors) can help exponentially - if you’re open to it.
The 'Default Alive/Default Dead' Approach
An often repeated belief is that startups should always have a baseline of being 'default alive.' I can empathize with why this dogma has caught on in venture, but when Paul Graham wrote about this many years ago, the world looked different than it does today. Default alive doesn't mean growing, learning, or experimenting - it means remaining constant and linear, where you are hoping time will save you. That is why I mentioned earlier the importance of a growth mindset: a ‘default alive’ mindset won't allow you to win, and often it only gives your inevitable competitors time to catch up and pass you.
The excellent summation of how I feel is this thread from Parker Conrad, founder of Rippling, where he responds to someone mentioning that a YC founder wanted to raise ‘as little as possible’ and grow incrementally. Parker responds, ‘The way this will play out is a competitor will raise a ton of financing, invest more deeply in R&D, build a better product, and absolutely crush this guy with sales and marketing. You have to play the game on the field.’ He then adds, ‘The "raise very little" strategy only works if you're in a market that most people believe (incorrectly) is tiny or unimportant. If other people are paying attention, you have to beat the next guy.’ I completely agree with his perspective on this. You do not exist inside a vacuum.
So when I’m looking at teams, I avoid those focused on 'default alive,’ which to me sounds like just good enough. This is a dangerous place to be. I don’t view as being in the zone of greatness. I’m looking for that Parker Conrad approach. To build a great team, you need to attract great talent - good enough, is just not good enough.
This is why I always ask myself: Can I see this person leading 100 or 1,000 people? Are they open to learning what that takes? Working solo is easy. Building teams is hard as hell. I often joke that anyone who believes in the Illuminati or an evil empire that controls the world has clearly never been a project manager. You're telling me someone controls a billion people? Sheesh, it’s hard af to manage five.
Sales-Led vs Product-Led: Different Things Call for Different Founders
Depending on the company someone is trying to build, I'm also looking for different skill sets and superpowers. Oftentimes, the way a company scales is determined by its go-to-market motion. Different companies have different needs, and well, they need different types of leaders.
Sales-Led Companies
In companies that must be sales-led, such as highly insular industries like shipping or freight, I am looking for founders who can wiggle their way into enterprises and figure out how to build champions inside companies. Enterprise sales is a confusing beast, so you need someone who likes the challenge and runs towards it. I would go as far as to say that doing it well is an art form.
Sadly, over time, I realize more and more that some people just hate selling things. It’s remarkable how many people will do everything in their power to avoid making a phone call and trying to sell someone. However, being a good salesman and hard-charging it will give your company a massive advantage. It speeds up feedback loops and makes your runway feel exponentially longer because you're learning at such an accelerated pace. It isn't just closing deals that is valuable. It's all about the interaction and learning that occur along the way. So, if you are building this type of company, and I don’t think you can sell it, it will be hard for me to get involved.
Product-Led Companies
On the other side of this are companies whose offering is product-led. Many times, I define this as something that, when it works, people discover it on their own, and the product then sells itself. Dropbox and Slack are both product-led companies. I would also put a cancer drug in the same category. You don't need a good salesperson - if it works, it sells itself.
What that means in actionable terms is for some companies, I'm not looking for a great salesperson - I'm looking for a technical beast and visionary who can build something that works so good the product sells itself. In cases like this, if the founder or co-founders have no technical background and can’t build it themselves and are relying solely on individuals they can hire to build it, this is a tough one for me. Regardless of how good they are at sales in this case, my gut always comes back to, 'Well, then, I should just fund the guy they hire.'
Of course, it's not that straightforward, but what I'm getting to in both cases is that I don't want to invest in managers. I want to invest in builders and doers that can execute on those early essentials themselves. When you strip away everything, ideas alone are worth nothing. If ideas were worth something, then someone would have built a marketplace by now to buy and sell them. I want executors.
The Integration of All Factors
Everything comes back to discovering how all of these things come together. I’m trying to balance all the factors to get as full of an early picture as possible. Working to understand the intangibles significantly informs the picture I am creating.
When all these factors align, and I can envision the founder building a team that can execute on a $100M+ revenue opportunity, that's when I get excited about moving forward and digging in.
Next week, in Part 4, I'll wrap up the series by diving into investment mechanics - why price alone will never make me pass on a deal and how the art vs science of early-stage investing all come together. Until then, keep building.