August 18, 2023
We look for a lot more than traction and metrics when investing. While market dynamics, product feasibility, and unit economics comprise a big piece of the diligence pie, you can’t ignore the human side of the business, either.
Yes, founders need technical skills and unique market knowledge to succeed. But that’s just a small fraction of what it actually takes to scale a startup.
How will a founder lead through a crisis? How will they motivate a team to get to that next big milestone? Leaders need strong EQ to survive the gauntlet that is entrepreneurship.
We at Alpaca believe EQ is a critical assessment factor in early-stage investing, and we have developed a series of assessment tools to help uncover who founders really are, and if they can harness their EQ to fundraise, execute, and lead a proper team in the short and long run.
Psychology Today states that “[EQ] is generally said to include at least three skills: emotional awareness, or the ability to identify and name one’s own emotions; the ability to harness those emotions and apply them to tasks like thinking and problem-solving; and the ability to manage emotions, which includes both regulating one’s own emotions when necessary and helping others do the same.”
Sure, everyone has emotional baggage, but people with a high EQ are able to set that baggage aside and make effective, clear decisions. In a business setting, they’re coachable and responsive to feedback. They also know how to use their awareness and intuition to “read the room” and find common ground and winning strategies for their team.
We bucket successful EQ traits into 3 major categories, which ultimately help us shape the questions we ask founders, as well as how we diligence founders and deals. We ask ourselves, “Does this founder possess these traits, and to what degree?”
From this initial framework, we aim to form probing questions that 1) unearth founder archetypes for each deal, and 2) identify risks for that archetype.
1) Tell me about an example where you learned from a failure.
2) Testing growth vs fixed mindset, ego, and resilience
1) What does progress at your company look like to you?
2) Testing prioritization, ability to execute, expectation management
1) Who was the last person on your team to teach you something and what did they teach you?
2) Testing growth vs fixed mindset, ego, multiplier leadership
1) What skills/traits does your leadership team need to leverage for this company to be successful? Which of those skills do you bring to the leadership team?
2) Testing strengths/weaknesses, experience, ability to inspire (hire)
1) Take us through a recent smooth day operationally at the company. What went well and why?
2) Testing ability to execute, ability to inspire, responsibility, communication
1) Take us through a recent difficult day operationally at the company. What went wrong and why?
2) Testing ability to execute, ability to inspire, responsibility, ego, resilience
1) What have you learned recently as a company? How has this informed or shifted your business strategy?
2) Testing prioritization and clarity, ability to inspire, ability to execute
1) What are the key priorities/responsibilities at the company and who is responsible for each of them?
2) Testing prioritization and clarity, ability to execute, multiplier leadership, ego (control/key-man risk)
1) What knowledge or skills are necessary to transform this sector? What gives your team a competitive advantage?
2) Testing experience, strengths/weaknesses, prioritization, and clarity
1) What is the most important hire you need to make next? Why?
2) Testing strengths/weaknesses, ego, experience
1) Tell me about your hiring criteria and process. What makes a good candidate and how do you close them? Can you give me a recent example?
2)Testing ability to inspire, multiplier leadership, strengths/weaknesses
1) Tell me about a disagreement you’ve faced as co-founders. How did you handle it?
2) Testing empathy, ego, responsibility, growth mindset
1) What is your customer’s biggest pain point? How do you solve it?
2) Testing empathy, effective communication, prioritization, growth mindset
1) As a founder and leader, what’s most important to you in managing a team?
2) Testing empathy, ability to inspire, multiplier leadership, ego
1) Why are you willing to take on outside capital at this time?
2) Testing responsibility, ability to inspire, prioritization, and clarity
As Dr. Emily Anhalt, founder of Coa (a portfolio company), says: “Here’s what I mean by emotional fitness: Beyond having good coping mechanisms to deal with anxiety, depression, self-doubt and a series of curveballs that are completely out of your control, a founder must be able to form and maintain good relationships. You must be able to communicate effectively with co-founders, investors, and employees.”
These questions are a good way to start thinking and baking EQ into your diligence process. As mentioned we believe EQ is a highly important trait, so we have taken it a step further to ingrain testing EQ into our 19-factor matrix (which can be found in our deal diligence blog). Our 19-factor matrix is a tool — a working memo, if you will — to identify key risks and strengths of a company and team. Under our ‘Team’ section of the matrix, there is a trait to rank founders on ‘EQ coachability’. This is everything we just described above. A founder with a high EQ should possess self-awareness, process feedback without taking it personally, and treat people like people, not robots or numbers.
In diligence, the first step is deciding what axes you judge a company on, and the second step is collecting data points that reveal a strong trendline (or not) along that axis.
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Alpaca VC Investment Management LLC is a U.S. Securities and Exchange Commission-registered investment adviser. Alpaca VC Investment Management LLC is committed to diversity and inclusion in the workplace. We prohibit discrimination and harassment of any kind based on race, color, sex, religion, sexual orientation, national origin, disability, genetic information, pregnancy, or any other protected characteristic as outlined by federal, state, or local laws.