Startup cofounding team due diligence for investors.

Series 1/4 Introduction

Investing in a startup as an interesting option for portfolio diversification has become increasingly popular. 

For angel investors, some of the reasons they would typically consider for investing in an early stage startup include: 

•  potentially very interesting ROI – if done right

• being close to the entrepreneurial thrill without being in the firing line

  • partially also as an opportunity to give back - by supporting the development of new businesses - with funds but typically also knowledge, networks and expertise

• opportunity to stay up to date and in touch - by exploring the developments in whichever industry they decide to invest in - by reviewing the different startups

Certainly enough reasons to think about it. On the flip side - there are the undeniable cons:

• the fact that investing in the early stage  – means that high potential meets high risk

• the typical survival / success rate of startups at this stage is VERY low

So let’s focus on the million dollar question: How to select the RIGHT  project / business to invest in?      

Experience has value. And as every professional early stage investor, proven entrepreneurs and numerous studies will tell you – the nr. 1 factor in their decision to invest – is the startups’ cofounding team. 

All nice. Makes sense. But. How to evaluate the startup cofounding team? What are the red flags? Can the identified risks be mitigated?

And here is, interestingly,  where the supply does NOT meet the demand. When you start looking, you will find out that there is a LOT of information on how to evaluate early stage startups from business plans reviews to financial forecast due diligence. And very LITTLE on how to select the right startup team. My hypothesis on why that is the case is that some of the ‘hard’ business stuff, especially when expressed numerically SEEMS more objective and therefore can be easier subjected to a review / due diligence process. Future performance and stability of a team - meaning bunch of PEOPLE - is the other side of this (perceived) scale. 

So is there any guidance that can help? What to actually look for? After having been asked this question so many times - I decided to share the answer with all who are looking.

My recommendation is - as with any of the other areas of the business you will be looking at - to evaluate the startup cofounding team by doing a focused and structured due diligence. 

Structure is not an answer to every problem in life, but can be helpful in some fuzzy areas (i.e. how to assess the team potential of a bunch of people). 

Here are the 3 areas you should be looking at:

1. the business set up

   • does the team have the competences and experience to deliver the next milestones in their business plan (for which they are asking you to invest)?

   • how is the team’s delivery and execution capability?

   • did the team define the required commitment, roles and KPI’s for each of the cofounders?

   • does the team equity split seem fair?

2. the legal set up 

   •  is there a cofounding agreement in place?

   • is the IP of the project clearly assigned by the cofounders and all potential early stage collaborators to the project & clean?

   • is there an equity recovery framework in place to protect your investment?

3. the team alignment & dynamics

•  is the team aligned on the what, why and how?

• did the team define (and test) their internal conflict resolution?

•  does the team know their blindspot risk? Does the team know their friction risk?

There is no magic formula or silver bullet that would deliver 'if this, then jackpot'. However, some flags will tell you, “if this - then most likely not a jackpot”. By eliminating or mitigating the risk factors, you can significantly increase the chances of the team you are betting on. Do as the professional (investors) do.