I’ve been spending a lot of time thinking about the people that I invest in. With 5 years and 50+ (firm wide) data points, what works and what doesn’t? This is the first of a few posts to come on this topic.
The characteristics of any person – including those we invest in – can be grouped as inspection characteristics and experienced characteristics. Inspection characteristics are those you can measure or observe from the outside, by looking at linkedin or having a cursory conversation. Experienced characteristics are the ones that can only be observed through extensive interaction. This post focuses on inspection characteristics and how they combine to form successful startup team modes, in our experience:
Startup experience, professional experience, and industry/product experience seem to be the three inspection characteristics that matter the most. These three dimensions chart a clear framework and set of combinations, or modes, where we’ve seen success.
Two primary modes of success
Mode 1 – “The YC Model”:
First startup + limited professional experience + industry/product expert
I call this mode the YC Model because many Y-Combinator teams fit this bill: pre-career or early career founders in their first startup but with coding and/or product experience that is often tied to the industry they are disrupting. In our portfolio, two of our companies stand out strongly in this mode:
Farmlogs – software for farmers. They are actually a YC team, and the two co-founders started the company a few years out of school. Both were hackers and one grew up on a farm. Boom.
Shipbob – simple, fast and affordable fulfillment for e-commerce. Another YC team! Both co-founder are early-career developers – one from another portfolio company of ours and another at Deloitte. They started an e-commerce business before Shipbob and experienced the problem they are now solving first-hand.
Terminus and FourKites are also similar – relatively early career teams with direct product experience in their markets.
Why does this mode tend to work? Early-career, first-startup teams have little to lose. They are often unmarried, no children, mobile. While by definition these teams have a lot of learning to do on the job, they are typically cash efficient in the early days – they don’t need or want high salaries to accommodate the burdens they don’t have. They are also accustomed to getting their hands dirty. In cases where these teams have started their careers already (not directly out of high school or college), they were likely individual contributors and are not desirous of building big teams to which to delegate. Finally – and as important – these young teams have just enough experience to see and want to solve the problems in an industry, without being jaded are hardened by norms in need of change. Kudos to YC for productizing this combo.
“YC Model” teams consequently do a great job finding product-market fit cash efficiently. They are nimble and fast. The flips side is that they tend to struggle scaling a business after finding PMF because they are inexperienced in hiring, managing and building organizations, navigating complex market dynamics and working with investors. They may also struggle with enterprise sales – a skill that develops over years of experience – and so default to lighter touch sales models even when they aren’t a fit. I am happy to say our teams above have worked handily through these challenges.
Model 2 – “Do it again, Sam”:
Successful startup exit + extensive professional experience + industry/product expert
This one seems like a no-brainer. Been there, done that; do it again, Sam; pick your proverb.
The best example in our Portfolio is G2Crowd – Yelp for B2B software – whose founding team built and sold Big Machines. We have a number of newer investments in our portfolio in this mode that we are also excited about including Truss, Hubdoc, Lookbook, Catalytic, and Upfront Healthcare.
While these teams may burn a bit more cash upfront, their on-the-job-learning is very low, so they are efficient on balance. They’ve also made money for investors before so have strong access to capital. As veterans of life and the startup journey, they know how to attract talent, build organization, sell to big customers, navigate a market and work with investors. Finally, if they are a big enough deal themselves, their prior industry role may help bring celebrity attention to their new endeavor.
This mode is not without risks, however. Experienced teams make mistakes, too. A common one is raising too much money, too quickly, at too high a price. This limits options for the company in the case where the team doesn’t get as far as it wants or burns too much doing so, eg, the company doesn’t hit plan. While experienced teams are much more likely to hit plan, it’s still a startup, so most don’t!
Do any other modes work?
Three dimensions, two levels each = 8 modes. We’ve talked about two. How about the other six? It turns out we almost never see success when teams don’t have industry and/or product experience in their target industry. The rare exception is the brand-new market which arises more often with consumer startups (think social in 2005), but rarely in B2B. So that negates four of the six other possible modes. The remaining two fall perpendicular to Modes 1 and 2 in the red/green axis above:
Mode 3 – “Exec-turned-founder”:
First startup + extensive professional experience + industry/product expert
This is a tough one. These teams are often stacked with CxOs – managers or “leaders” who want big salaries from the start and want to hire armies of people to do everything for them. They know a lot about managing existing organizations but nothing about finding PMF or seeding scalable sales. These teams burn money fast and often fail or disband quickly as their financial and emotional dissonance with taking real risk pushes them back into corporate jobs. We have rarely seen success in this mode, highlighting some of the fundamental differences in traits between corporate leaders and startup leaders. Note that everything I just said applies to “IT” software startups. Biotech and med-device are very different – credentials and years of scientific experience and knowledge matter a lot, and those often come with long academic and corporate stints.
Mode 4 – “This is the big one”:
Successful startup exit + limited professional experience + industry/product expert
Even if this type of team is still young and inexperienced, they know what success looks like and can often do it again. Their first exit may have been decent or even great, but they want a huge one now. We have certainly seen this work. The major risk is hubris or misplaced attribution. Young successful founders (and the investors who chase them) may conflate the success of being in the right place at the right time with the success of doing the right thing at the right time. The latter is more replicable, arising from judgment and skill, not luck. For some reason, more mature teams tend to avoid this type of mis-attribution. As an investor, that’s the crux of the other half of people assessment, assessing experienced characteristics like hubris and mis-attribution. That is for my next post.
Less any of this discourage a forming team that doesn’t “fit the mode”, please remember that these are only experienced rules of thumb. There are always outliers. I love being proven wrong, and I know many of you will do so.
8 thoughts on “People, Part 1: Successful startup team modes”
Hi Guyhturner, thanks for structuring your thoughts on analyzing startups based on the founder’s profile. How would you define experience? There are some founders that form insights that originates from the different subset of different experiences across their work lives. For instance, a founder that used to work in a HR consulting industry and then take up HR roles in the startup industry and also take up academic role in the data science area looking at HR. From a pure corporate executive standpoint, that founder might have limited experience. From a cumulative experience standpoint, that founder has multi-faceted experiences in the HR space and can see HR from the consulting angle, from the data science angle and from the startup angle.
what about founders that fail in previous startups given their previous roles in the past startups as early employees? Wouldn’t these learning experience help these founders to be aware of the pitfalls like burning cash, determining product market fit and thinking about scalability?
There could be a Mode 5: The hidden tiger crouching dragon.
fail startup exits + multi-dimensional experience + industry/product expert.
Jack Ma from Alibaba, Mikael Hed from Angry bird, Colonel Sanders from KFC, are classic examples of this mode. Most people love to write off these founders because of the bias in past failure, inability to recognise multi-dimensional experiences.
Hi Andrew, thanks for commenting!
Experience: Yes, the world is not simplified into corporate and startup only. There are mid-size companies, consultancies, small-but-not-startup companies, family run businesses, etc – and then whether you are junior or senior in an organization (regardless of size or type). I view “professional” experience as a distillation of all of these factors, and clearly age is a correlated with it, though not perfectly.
Failure: I also agree that failure shouldn’t count against anyone, as long as it isn’t too common or recurring for the type of risk they are taking. Though, the latter caveat is hard to quantify. One failed startup is clearly a positive learning experience and often part of career development for great founders, but how about five? My view probably falls somewhere in the middle depending on a lot of other factors, including how much it cost in funding and time to get to the failure. Learning is optimized in cheap, fast failures. Of course, “guilt” is only by leadership accountability not association, meaning a startup’s failure is critical context when considering funding the founders to do another. It is far less relevant – often even irrelevant – when considering hiring people who worked in the lower or mid-levels of a failed startup.
Thoughtful post on successful startup models, and the founder rubric you’ve observed from years of pattern recognition. I’m curious to your opinion on whether corporate venture capital arms can play a helpful role for founders who may lack the deep ‘industry/product expert’ function you described above? I may argue that they can fill that gap by providing product development focus, acceleration/growth of sales, and even potential exit options.
Looking forward to Part II which I can only imagine is an ‘Experienced Characteristics’ post.
Greg, thanks for commenting. Expertise on the Board is a big help, but feels like no substitute for having the same on the day-to-day team….
Guy, this helps me get my arms around some intuitions that I’ve long had around “First startup + extensive professional experience + industry/product expert”, but had not thought about nearly as thoroughly as your analysis here.