Monday, May 20, 2024

Beyond the Pitch Deck: Evaluating Co-Founder Fit for Startup Success 

The startup journey is both exhilarating and arduous. A brilliant product idea is a must, but it’s not enough. True startup success hinges on the team behind the idea.

While investors like yourself meticulously evaluate market potential and pore through financial projections, many fail to ask a critical question: Are the co-founders a good fit? 

Imagine this: You meet with a founding team that has a revolutionary product idea, perfectly positioned for a burgeoning market. They’ve crafted a compelling pitch deck and secured initial funding. It seems like a no-brainer, so you invest. 

However, months after your check has cleared, tensions arise between the co-founders on strategic direction, work ethics, and communication styles. This disharmony is derailing the startup’s progress—and it’s putting your investment at risk. 

What if you could have identified these issues before investing? You could have helped the team develop and grow together, mitigating risks and preventing problems before they bubbled up. Sounds too good to be true, right? 

It’s not. Over a century of research in organizational psychology can help investors understand how people reach their potential, enhance organizational performance, and collaborate to meet goals. 

Let’s explore what psychological science reveals about high-performing founding teams. Here are five questions that will help you evaluate the fit between founding members and two ways to accurately assess the situation.

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Five questions to ask when evaluating co-founders 

  1. Do the co-founders share the same vision?

It’s nearly impossible for co-founders to turn a vision into reality if they have different mental models of the vision. This might sound obvious, but I’ve interviewed co-founders who believe they’re on the same page when, in reality, they see the future very differently from one another. 

Ask co-founders independently about their vision for the future to make sure they’re aligned. 

  1. Do the co-founders share values?

Founders often believe they don’t need to articulate their values until they have an HR department. Yet this should be one of the first things they do because it will help them determine whether or not potential co-founders are the right fit. 

Imagine two co-founders: One is conservative and believes in slow, deliberate decision-making. The other is a risk-taker and values decisive action. When it comes time to make important decisions, these two founders will disagree on the path forward.

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  1. Do the co-founders have complementary skill sets?

It’s all too common to see co-founders choose one another because they’re friends or have worked together in the past. While this initially seems like a good idea because they’ve already established trust, the net result is a team of people with lopsided capabilities.

Research has shown that the most effective teams consist of people with diverse backgrounds and skills. Imagine a team of three highly visionary co-founders who excel in abstract thinking. Sure, there will be a lot of synergy and energy at the start, but when it comes time to execute, they’ll lack a co-founder with concrete thinking skills who’ll plan the nitty-gritty details of the operation. 

  1. Do the co-founders have the same level of commitment?

Building a startup is a long, trying process. As an investor, you must ensure the co-founders are equally committed to getting it off the ground. 

I often see co-founder teams with one fully committed lead co-founder and one or two others who have yet to quit their full-time jobs and take the plunge. Very rarely do the latter stay on the team for long. Eventually, the lead co-founder will tire of carrying the heavy load and seek someone who can share the responsibilities.

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  1. Do the co-founders trust one another?

Trust is the basis for any relationship. Open and honest communication is essential for navigating disagreements, fostering trust, and aligning on critical decisions. Without trust, the co-founder relationship is doomed to fail. 

Two effective ways to assess co-founder fitBook jacket image of book Data-Driven Decision Making in EntrepreneurshipBook jacket image of book Data-Driven Decision Making in Entrepreneurship

Most investors rely on traditional approaches when evaluating co-founders, such as unstructured interviews, reference calls, and gut feelings. However, research shows that these methods are the least effective in predicting performance.

Yes, these approaches may offer valuable insights, but they have limitations. Intuition and gut feelings can be subjective, and individual interviews may not reveal underlying tensions between co-founders.

 Try these two research-backed methods instead:

  1. Structured interviews. In a structured interview, you’ll ask each founder a standardized set of questions, which makes it easier to compare and contrast the founders’ responses.  To level up your structured interviews, consider hiring an industrial-organizational psychologist to help you identify the most predictive responses.
  2. Psychometric assessments. A psychometric assessment is a tool (typically a questionnaire) designed to measure psychological traits such as personality, cognitive abilities, and behavioral styles, which can all predict how well individuals will work together. Using psychometric assessments saves time and money and provides the most accurate portrayal of the founding team within the brief time period of due diligence.

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Using one or both of these methods will help you:

  • Uncover hidden strengths and weaknesses. Reviewing a resume or asking about previous experience only provides a surface-level understanding of the founders. Studying their psychological traits gives you a much deeper understanding of the founders at a human level.
  • Predict team dynamics. Early in a funder-founder relationship, it may be difficult to observe and gain insights into how co-founders will collaborate under pressure or make tough decisions. Assessing team dynamics with a psychometric assessment will give you a quick “deep dive” into the underlying dynamics of the founding team.
  • Identify potential red flags. Data-driven assessments can reveal underlying tensions or misalignments that traditional methods miss. Sometimes, founders may not even be aware of these misalignments, so digging deeper can highlight future risks and help you mitigate them upfront.
  • Facilitate open conversations: A newly formed founding team will never be perfect because they’ve just started to form relationships and learn about one another—and they’ll have to add new members in the future.

Understanding the human capital aspects of the team opens the door for open conversations about how the team needs to approach development and growth, building a stronger foundation from the start.

Remember, human dynamics within a startup are just one piece of the puzzle. You should still evaluate the overall market opportunity. However, the market opportunity is only as strong as the team that’s behind it. Be smart, and invest more time during due diligence into investigating the founding team.

 “Data-Driven Decision Making in Entrepreneurship: Tools for Maximizing Human Capital “ by Dr. Nikki Blacksmith is available on Amazon.

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