How Do Early Stage Investors Underwrite People?

David Goldberg

February 15, 2024

Most talk about early stage investing as ‘more art than science’ – and for good reason: there is typically very little data available to evaluate a business at this stage. And while the majority of investors align on the ‘three legged stool’ of Team, Market, and Product, there is far less consistency in a) the weighting of those three criteria and b) how different investors break these down during their evaluation processes.

In this post, I’m focusing on what we at Alpaca VC believe is the most important aspect of the three-legged stool framework: the founding team. It’s also the one that is, more often than not, the hardest to quantify. For markets, we can consider overall TAM, revenues, unit economics and growth rates for clues. But when it comes to a team, measuring ‘people’ is a way murkier business. 

As we reflected on our own underwriting process, we decided we’d get a sense of how many of our peers think about the same questions. To that end, we conducted a survey that garnered 67 responses from Seed and Series A investors. We were excited by the responses, which included top level investors from well-respected firms such as Bessemer, Bonfire, Flybridge, Footwork, Founder Collective, Hustle Fund, Inspired Capital, Lightspeed, Menlo Ventures, M13, Northzone, Redpoint, Shasta Ventures, Union Square Ventures, and more. A big thank you to all for your participation and insights.

At a high-level, we asked:

• Whether the investors have a set process and framework for evaluating founding teams
• How these same investors rank 10 key qualities or attributes of founders. A note on our scoring: We asked respondents to rank each 1 thru 10, with 1 being the most important and 10 being the least. From there, we took an aggregate score. A ‘lower’ average score means the quality or attribute ranked as high priority among investors, while a higher score means it ranked as a lower priority.

We’ll share some of the more granular data below, but first, here are our top takeaways:

1. Just Winging It. Only 37 out of 67 (55%) responded as having a formal process or framework for underwriting founders. Perhaps this has contributed to the inherent bias we have historically seen in the category.
2. So. Much. Variance. This wasn’t totally surprising to me, as, anecdotally, I hear so many different responses from investors when discussing the topic. But the degree was a bit startling, specifically the extremes of some attributes that were popular choices for both MOST important and LEAST important attributes. From a data perspective, the most important attribute (Personal Characteristics) was ‘only’ ranked 4.7, while the lowest ranked (Hyper Successful at Something Else) scored 6.57. I expected a broader range here (perhaps 2-3 for the highest rank and 8-9 for the lowest rank), but the data shows less consensus amongst the responses.
3. Minimal Correlation. There was almost zero correlation in how investors ranked one attribute vs. the others.

Below, we share the full ranking. Thank you to Makda Fitsum for your help with the data. Note: a lower score indicates a higher importance ranking.

We certainly recognize the imperfection in these results, as there is potential crossover and confusion baked into those numbers. But directionally, I think the data tells an interesting story. Specifically, the top two most important attributes from an investor perspective are about the founders themselves as individuals, and not related to what they are building. This supports the theory that ‘great entrepreneurs are great entrepreneurs,’ versus the ‘Founder-Market fit’ theory.  It could also be an interesting follow-up to further break down the Personal Characteristics mentioned (Grit, Resilience, Curiosity, Integrity) in order of importance, as well as how investors go about identifying these characteristics.

It’s often difficult to capture EVERYTHING in data, so we also left space at the end of the survey for open format answers to shed light on investors’ framework and process. Below are a selection of responses that stood out:

Important: able to articulate the catalyst, the why now, the unique earned insight. Understand their business inside-out. Show that they can be magnets for talent. Combo of hungry and humble. Red flags / unimportant: you don’t have to be able to answer every question — it’s okay to say “I don’t know and here’s why,” or “Let me think through this with you,” vs. to give some BS answer. — Nikhil Basu Trivedi, Footwork VC

I look for 4 things in particular: unstoppable drive, persuasive skill, practical business judgment, desire to self-improve. Ideally the overall team makeup offers a strong advantage over a random team chasing the same idea. — Russ Wilcox, Pillar VC

My top attributes: (1) Clock Speed (both raw horsepower and decision-making speed); (2) Pied Piper (magnetic ability to draw people around them; sales / storytelling); (3) Exceptional at something (i.e., they must spike in some critical attribute, recognizing they can hire for others); and (4) Authentic (founder-market fit, high integrity, earnest, passionate about the work/problem). — Jeff Bussgang, Flybridge

We look for several early indicators for whether or not a founder is a fit (in no particular order): — demonstrated ability to build and sell a product via early revenue traction; — ability to build a world class team, including core technical talent; — honesty / integrity / grit / likability; — focus and discipline around what he/she is building and why. — Jennifer Richard, Bonfire Ventures

Definitely focus on founder-market-fit (unique insight/expertise), try to avoid sole founders unless they’re very credible (like having a technical co-founder on team), teams that can move quickly and want to go down venture path is important. Red flag would be someone who isn’t coachable, unable to articulate clearly the problem/solution and struggles with storytelling/painting a compelling vision. — Andrew Hippert, Techstars

The best founders I know will break through any obstacles they encounter, they are just undefeatable. They will also be thoughtful to data that changes their original assumptions and adjust to that. They will be data driven in their approach to markets. And they are able to convince me that they are the best person in the world to accomplish this business plan, and they can demonstrate that early success by showing third party validating signals like early product tests, customer feedback, strong advisory board and references, etc. — Anonymous SaaS Investor

We are very focused on off-list references, and specifically underwrite ‘founder velocity’ which ranges from small things such as email response times to progress made over a period of weeks/months. Out of everything mentioned here, off-list references and some of their peers’ desire to join the company are often strongest signals. Common red flags include a lack of fiduciary duty or partnership or a sense of “I” over “we,” which is often discovered by meeting in person / spending time together in addition to reference calls. — Sakib Jamal, Crossbeam VC

I really just want to see someone so fired up about an idea that they’ve basically done everything they possibly can to move it forward with their limited resources. Shouldn’t be able to ask easy questions they haven’t already tried to answer in depth, they should know their space and potential competitors products cold, they should be doing all sorts of scrappy things that bely an obsession with the space they’re tackling  — Anonymous Tier 1 Consumer Investor

We hope the findings here help demystify how early stage venture capital investors think about evaluating founders at the deal stage.