We started the “Are you VC fundable” series in order to demystify the funding logic of a VC. To help founders get access to the fundamental elements that lie behind investment decisions and VC logic. We’ve gone through the scale, product-market-fit, MVP, and cap tables. Finally, the last part is dedicated to the heart and core of each company — the team.

Let’s begin with a statistic: Noam Wasserman, a former professor at Harvard Business School, stated in his book The Founder’s Dilemma that 65% of startups fail due to problems within the startup’s management team. Ed Catmull, a Pixar executive, echoes this in his book Creativity Inc., “Give a good idea to a mediocre team, and they will screw it up. But give a mediocre idea to a great team, and they will either fix it or come up with something better.” On the other hand, you have VC-juggernauts like Marc Andreessen, who in his famous blog post from 2007 emphasized the market’s role in predicting the success of startups. Jeremy Liew from Lighthouse Ventures concurs in his post titled “A rising tide lifts all boats”.

So, which one is it?

We don’t think it’s a case of one or the other. Wasserman’s and Catmull’s insights are especially true for companies at pre-seed and seed stages when a strong team with vision and ambition is needed to explore the product-market-fit and carve a space for themselves amongst the competition. At Series A and beyond, the size of the market and the defensibility of the product become the heroes of the story, and the team needs to adapt from visionary planning to systematic execution. The team plays a crucial role across the company lifecycle, but the emphasis on certain team dynamics changes based on the stage the startup is in.

Identifying a winning team is difficult and largely based on experience, emotional intelligence, and intuition, but there are some common features that we always assess in detail when considering an investment opportunity.

VCs are assessing the team on three levels: individual characteristics, group characteristics, and team dynamics. Emphasis on sought-after indicators of team dynamics depends on the company’s stage. Picture inspired by Valtter Vihervaaras thesis “Assessing startup teams and team dynamics from an investor’s perspective”.

Individual characteristics

• Knowledge: We often see teams with strong technical knowledge, but the market they base their assumptions on doesn’t work the way they think. It’s crucial for the team’s individuals to know more about the market than the investor — every good VC wants to emerge from a meeting or a pitch either a) feeling educated or b) been proven wrong. Strong market knowledge within the founding team is required especially in the seed stage when product-market-fit is still a moving target.
• Ambition: This requires very little explanation. VCs look for companies that can scale globally and disrupt an industry. A profitable company that pays good dividends to its founders but either serves a small niche market or operates in limited geography isn’t unfortunately of interest to VCs.
• Leadership: The CEO is too often nominated based on the notion that they are the ones carrying most of the organization’s weight while others may focus on doing their own thing. This is a red flag for a VC. There needs to be a clear division of responsibilities and assigned areas of expertise, but everyone needs to carry their own weight and lead the planning and execution of their respective areas. VCs never only assess the CEO, but the entire founding team and their individual capabilities to lead.
• Curiosity: While knowledge, ambition, and leadership are very important, they can also lead to the dark side where a person thinks they know everything. We want to see a certain curiosity and readiness to learn, the market might not act as expected or the customers might want something else and adjustments are needed. We might not have it right, but when we give feedback or suggestions on how to go forward, we’d like to have a conversation about it and see that the founding team is ready to hear us out.

Group characteristics

• Diversity: Instead of gathering the founding team from a group of friends or from ex-colleagues, VCs consider a diverse constellation of people with complementing characteristics and strengths to be a positive indicator of the company’s potential. In a research-or tech-driven company there is usually a gap of commercialization and vice versa — to address this requires brutal honesty and self-reflection.
• Transparency: This is a tricky one, as transparency or honesty are not statistical features and are extremely difficult to evaluate. In a small team, little things tend to gather momentum and can easily create a butterfly effect if things aren’t escalated quickly enough. Small teams are built on total transparency, as transparency builds trust, and trust builds commitment.
• Commitment: VCs want to see a team that lives and breathes the company and its vision. Building and scaling a company is not just a full-time job, it’s a lifestyle. Potential side hustles indicate that the team members are go-getters and doers, but with limited time and resources, that energy should be steered to only one direction — the team and the shared goal.

Team dynamics

• Shared targets: A huge red flag for a VC is when team members disagree on the short-term objectives. A long-term vision at the seed stage is esoteric at best, but every founder should stand behind a shared 12–18-month execution plan for finding the coveted product-market-fit.
• Constructiveness: Finding product-market-fit is about trial and error. Success often lies in ideas that at first might have sounded far-fetched or just plain crazy. The team members need to respect each other and foster a culture where even the most outlandish ideas can be presented for discussion without fear of judgment.
• Culture of change: The best teams love their product but love their market even more. In a seed-stage startup, the only constant is change: no product will survive their first contact with the customers, and the customers are never wrong. The team needs to be able to move from one go-to-market obstacle to another and find a good balance between smart iteration and panicked pivoting.
• High standards: The ability to recruit high-caliber individuals and adhering to high recruiting standards are amongst the most difficult parts of scaling a business. Smart recruiting and related headhunting require significant effort and are key common denominators in successful early-stage companies. In many cases, key talent must be sought outside the country borders, which adds an additional level of difficulty into the equation. High recruiting standards often come hand in hand with an ambitious vision and high-performing operations.
• Focus: When early-stage companies have found their product-market-fit, the entire team’s priorities should be steered towards activities that expand on that and only that.
• Execution: This walks hand-in-hand with focus — planning and strategizing, regardless of focus, should give way to systematic execution across sales and operations. Ideas without execution are to stay as ideas.

Choosing your founder team is a huge commitment, therefore it’s not something the entrepreneur-to-be should rush. Changes in the founding team structure are among the biggest crises a seed-stage company can face, as they require the entire team to temporarily switch their focus away from the market and product. Both from an entrepreneur’s and investor’s perspective, identifying and addressing gaps in the core team is always easier than replacing a founder. In this respect, VC differs greatly from private equity where the main thesis for a buy-out is often a complete reshuffling of the operational management layer.

What’s also good to keep in mind is that the team dynamics might change over time. The most innovative founders might only be interested in founding companies but aren’t interested in scaling. These kinds of shifts in dynamics can be difficult and require effort to make it work. A visionary founder in a scaling phase can be a disaster for the company. A good team can make all the difference, but it requires some restructuring of responsibilities in the team. This is definitely not the case for all teams, but the requirements of the different stages of a growing company are good to keep in mind when growing.

The importance of the dynamics between the founding team and the VC shouldn’t be overlooked either. After all, venture investing is largely a people-driven business, and fruitful board work is based on mutual respect, open communication, and shared goals. VCs and the founders are on the same boat for 5–10 years — longer than the global average of the length of a marriage — so the interpersonal chemistry and “click” are a must, at least for VCs who want to get their hands dirty in everyday problem-solving. Therefore, as the VC assesses the team, the team should also be encouraged to assess the VC — it’s always easier to find money than to find an investor that’s a perfect fit for the team.

This is it, we’ve gone through the scale, product-market-fit, MVP, Cap table and now finally, the team. We hope that with this series we’ve been able to unveil the mysterious world of venture capital, what kind of companies venture funds are after, and why we sometimes say no to good, even great, companies.

We keep looking for the greatest teams and most controversial ideas.