February 10, 2020 | Investment Themes

What I Look For in Founders as an Early-Stage Investor

John Cowgill

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John Cowgill

What I Look For in Founders as an Early-Stage Investor

Many founders tie themselves in knots over the funding process. Everyone knows that early stage investors want to back great founders, but it’s difficult to anticipate precisely what will resonate with VC firms.

Is it your background? Industry knowledge? Charisma or connections? Despite founders’ best efforts to research and backchannel a particular firm or investor, it inevitably feels exasperatingly opaque.

As an early-stage investor, I know exactly what I’m looking for in the founders I’d love to fund. Here are the five things I care about the most.

1. You know your industry cold.

Tell me about the players, the market dynamics, and the gaps that exist. My favorite pitches make me feel like I’m talking to an encyclopedia on the market.

I often spend over half of a first meeting talking about the market with a founder. I love seeing that you’ve gone to industry conferences, can discuss market trends and recent developments at length, and have done your due diligence on competitors and potential partners. Bonus points if you’re passionate about an unsexy (overlooked and maybe boring on the surface) industry.

Although many investors say they love to invest in founders that have direct experience in their market, I actually get particularly excited about founders who didn’t come with background in the industry but threw themselves into learning it. To me, the humility and intellectual curiosity required to build depth as an outsider demonstrates a higher bar.

2. You combine an unshakeable belief in yourself with the humility to adapt to market signals, or pivot altogether.

This is a hard — but not impossible — combination to find. Startups are intensely difficult. Things are always breaking and every week brings new fires to put out. I want to work with founders who have an innate sense of self. It’s the kind of confidence that says, I’ve got this, even when the company is in a very challenging place. It’s not arrogance — which I see too often — but a deeply-rooted and quiet self-assurance.

This needs to be coupled, however, with clear-eyed flexibility and an openness to admitting you’re wrong. Is a new VP’s management style creating a toxic team environment? You see that and make a change. Thought your target customers were architects but only general contractors are responding? No problem, you pivot and keep it moving. I look for founders who can read the tea leaves, be decisive, and maintain momentum through the ups and downs.

3. You’re an effective team builder.

With the U.S. unemployment rate hovering around 3.7 percent, it’s a buyer’s market for talent. Amazing people can go almost anywhere, and companies have to pull out all the stops to build a great team. That’s a big burden for an early-stage founder, who typically can’t compete and win on perks, salary, or other standard variables for recruiting and retaining excellent team.

So what does it come down to? You. Your ability to sell the vision, the role, the company and yourself to prospective talent. I look for founders who are always recruiting — and landing — smart, passionate people to grow their team. More importantly, I look for founders who take a genuine interest in developing and retaining their team, and who communicate their philosophy around team development and culture as part of their fundraising pitch.

4. You exploit your superpower and delegate your weaknesses.

I find the best founders have at least one superpower- one thing they can do better than just about anyone. It can be technical aptitude, sales instincts, product vision, operating discipline, or even recruiting ability. I like founders that know their superpower and own it, leaning on their unique strength to run circles around their competition.

That said, no one has mastery of every domain necessary to build a great company. A keen awareness of weaknesses, coupled with an ability to delegate them to those stronger in these areas, is just as important as honing a superpower. Unfortunately, I find the majority of founders struggle with this and end up micromanaging. It’s understandable- letting go of your baby is difficult! But the biggest difference between founders who remain effective as the company grows in size and those who don’t is the ability to delegate.

5. You balance everyday pragmatism with long-term ambition.

Founders have to walk the knife’s edge between what has to get done today while keeping their eyes on the prize of tomorrow. Today demands you sign customers, block and tackle, introduce new product features, raise another round, and keep the business alive. It is intensely pragmatic- all execution, all the time.

But tomorrow asks for long-term strategic thinking. What markets will I enter? What game-changing hire do I need? What decisions must be made now so I can deliver the impact we’ll need two years from now? How can I get to that billion-dollar business I’m building faster? What are we building towards?

In the start-up world, strategy can feel like a luxury. But if you’re an exceptional founder, part of your brain must always be reserved for exactly this kind of thinking.

Founders are special people. At Costanoa, we strive to be worthy of the opportunity to partner with individuals who embody the traits described above.