50 Questions: How does a VC evaluate management teams?

Eighteenth in a series of weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital.  We expect the series to run for a year after which we will collate the posts into a book.  You can find the rationale behind the series here, and the list of questions here.  We welcome your comments on any and every aspect of what we are doing.


image It is a cliche in venture capital that ‘it is all about the team’, particularly with early stage investments.  Some will argue that the market and product are more important, but everyone agrees that having a great team is critical.  To give more weight to this point, I recently heard one of Europe’s more experienced VCs describe how his fund used to make investments in companies that had great products in hot markets, but where they weren’t so sure about the team, but they found that those investments rarely ended well and ‘don’t make that mistake any longer’.

So everyone is agreed that having a great management team is important.  The tricky thing is working out whether any given management team is great or not.

Starting with the CEO, there are some objective characteristics that you can look for and which would raise a flag if they were absent:

  • Strong company vision
  • Passion for the product and opportunity
  • Hard working
  • Deep understanding of the market/customer problem
  • Ability to hire well
  • Good communicator
  • Ability to delegate and manage
  • Strategic thinker
  • Good judgement

Beyond that you get to a bunch of ‘nice to haves’ which would include existing personal relationship, relevant industry experience, previous startup experience (ideally as founder/CEO), blue chip corporate experience, technical skill set, ability to sell, product management capability, financially numerate, leadership ability, good outside interests and so on.

All these are ‘nice to haves’ rather than essentials and many of the best startup CEOs and founders don’t possess, them (e.g. Zuckerberg, Page and Brin, Gates, Ellison).  Or at least they don’t when the company is small.  They may acquire them later.

To make matters more complicated, there are many people who tick all the boxes on the list of essentials and have some great experience from the ‘nice to have’ list who turn out to be awful CEOs.  In fact one of the biggest mistakes a startup can make is making what is disparagingly known as a ‘CV hire’, which means choosing someone solely (or largely) because they have a great name on their CV.

Given the absence of objective measures of the items listed above, most VCs fall back on making a gut feel based assessment.  In addition to the list of essentials they will be looking for a good solid feeling that the CEO in question will work well, and will work well with them.  Psychometric testing is an option, but not one that many VCs I know take advantage of.  I think that is maybe because startup CEOs and founders rarely fit into well into standard categorisations of personality types and the tests wouldn’t reveal enough insight to justify the cost and effort involved.

The CEO is the most important member of the management team in any investment analysis.  A good CEO will fill the gaps around her as the company grows, but if the CEO isn’t at the right level then there will inevitably be difficulties ahead.

That said, we do of course look beyond the CEO to the rest of the management team, and we are looking for the same things as we look for in the CEO, but with the expectation that individuals will be deeper in competence in their area and may not be as rounded overall (i.e. may not have the full list of ‘essentials’).  Beyond that we look to see if the team has complimentary skills and that they work well together, and usually that means they get on well together.

Given the importance of gut feel in the evaluation of management teams the assessment needs to come largely from meetings and less from what can be written on a piece of paper.  I would still say that it is worth putting a slide in the pitch deck about team I wouldn’t go overboard on the detail and wouldn’t spend too long on it during a pitch meeting.  Rather I would focus on showing the passion, knowledge, and commitment of the whole team at various points during the meeting.

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