Does your team have the skills it needs?
How VCs judge teams (1/2)
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While we spent the first lesson explaining why VCs care about your team so much, the rest of this module is dedicated to teaching you what to do about it.
Right now we’ll start with the basics. By the end of the next two lessons you'll:
- Know the two questions VCs' ask themselves when they assess teams
- Know how to convincingly answer these questions so that VCs believe your team is the perfect fit
There’s a lot to learn in this module but if you only have a little time, I beg you to focus on these two areas. These are the fundamentals, if you fail at these, nothing else you learn here can save you.
Let’s start.
How do VCs judge your team?
How VCs judge teams is actually quite simple. When VCs look at a team they are really asking themselves two questions.
- Does this team have the skills to execute on this idea?
- How much do I believe that this team is capable of achieving the impossible?
The first question, which can be paraphrased as “can you even build it bro?”, is what I call a hygiene question. It has a yes or no answer. A yes doesn’t mean they’ll invest – it just means that they’ll continue considering you. While a no unfortunately leads to rejection.
The second question is where the real evaluation happens. The more strongly VC’s believe you’re capable of achieving the impossible, the more likely they are to invest in you. You can think of it as if you’re being marked on a scale of 1 to 10.
For now we're going to focus on the first question and how to show VCs that you pass this ‘test’.
Does this team have the skills to execute on this idea?
Imagine for a second that your sink is broken, you wouldn’t just hire the first person who says “hey I’ll fix your sink”... you’d hire a plumber. This is very similar to how VCs think about picking teams to invest in, the only difference is they're not looking for people to “fix their sink”, they’re looking for teams who can turn an idea into a business. So when they evaluate your team they’re constantly asking themselves whether you have the skills to execute, i.e. to turn your ideas into reality.
So, what does a team that can turn an idea into a business look like? What qualifications do they have?
At its most simple, a startup team needs to be able to:
- Build the product
- Sell the product
So as VCs look at your team, they ask themselves, “who’s gonna build it?” and “who’s gonna sell it?”. By the end of this lesson you’ll know exactly why these questions are so important and how to show VCs that you pass both of these tests.
How to answer the “who’s gonna build it” question?
Because VCs primarily invest in tech products, the answer to the “who’s gonna build it?” question is much more important than the answer to the other one. To illustrate why, let me tell you a story from when I was a baby VC.
A few months into my first VC job, I invested in a company that had a really smart founder who had a ‘business’ background. There was a lot going for this startup. The founder was crazy convincing, the idea made logical sense, the market was massive and they even had pre-orders. What they didn’t have was someone to build the product. But that was fine, they said that they were going to hire a CTO after the round, so we invested in them.
Big mistake. Unfortunately, it turned out to be way harder to hire a CTO than we had expected. The company spent six months looking, before they finally managed to get someone. Two months later they launched v1, but it wasn’t quite what users wanted, so they spent another four months taking feedback and writing code before they released v2. Twelve months after our initial investment, they finally had a working version that users liked and, more importantly, that was starting to sell.
But it was too little too late. They only had three months of cash left in the bank and they needed to fundraise to keep going. Unfortunately, because they had spent the last twelve months just trying to build a good product, they had really poor traction. This meant prospective investors didn’t find them attractive versus other companies that had raised as much money as them. Spending six months unable to build destroyed the company.
After this disaster, I promised myself that I would never invest in a team that this could happen to again. And the funny thing is, I know tons of other VCs who’ve made the same promise after a similar experience – we’ve all been scarred.
What does this story teach us?
While VCs are generally happy to believe you can learn skills like sales and marketing quickly. They know it takes much longer to develop the hard skills required to build products like coding and design. Therefore, given that not being able to build equals paralysis, they will auto reject any startup that they don’t think will be able to build from day one.
So, how do you show VCs that your team can actually make the product?
- Figure out what skills building your product requires
- Tell investors that you have those skills explicitly
If your product requires hardware design… show investors that your team knows how to design hardware. If building your product requires machine learning specialists… tell them that you have machine learning specialists.
Product building skills must be in-house
One extremely important thing to note before we move on to the “who’s gonna sell it?” question is that VCs will only give you credit if the person building is a co-founder or an employee. In other words, saying that an agency is going to make your product won’t help you. In fact it will actually make VCs more worried.
Whether they’re right or wrong, VCs are extremely biased against agencies and freelancers when it comes to product work. They see them as mercenaries that overcharge startups and have no sense of ownership. When you say that an agency is building your product, what the VC actually hears is this:
I’ve given over responsibility for the most important aspect of my business to a mercenary, we’re going to get stuck in six months when these people – who definitely don’t care about our business – start demanding another $40k to make version two.
You sound like a clown.
While there are companies who have succeeded despite relying on agencies to build their initial product (e.g. Calendly), 99% of the startups that take this approach don’t make it and VCs don’t have the patience to figure out whether you’re part of the lucky 1%. They’ll just reject you instead. The core skills you need to build your product need to be in-house.
With the “who’s gonna build it” question now handled, it’s time to move on to “who’s gonna sell it”.
How to answer the “who’s gonna sell it” question?
When it comes to convincing VCs that your team can actually sell the product, things are much easier. As I mentioned earlier, VCs generally believe that smart people can learn sales and marketing quickly. As a result, they are far more receptive to teams that lack sales experience than those that lack product building chops.
This, however, doesn’t mean that investors don’t assess whether your team can sell at all. There are two scenarios where investors will pay extra attention to whether your team has anyone who can actually sell:
- If you’re selling to notoriously difficult customers (e.g. large enterprises or governments)
- If your team have academic backgrounds
Getting past the difficult customers problem
In market segments where sales cycles are long, technical and involve many stakeholders, VCs have seen thousands of founders waste months in ‘discussions’ only to end up with nothing. As a result, they’re often skeptical of startups in these segments. The good news is that, if you have a team member who has prior experience selling, it’s not that hard to get rid of this scepticism. All you need to do is tell VCs about that person’s sales experience. You’ll get even more credit if the types of organisation or people they used to sell to are similar to the ones you’re currently targeting.
However, this doesn’t mean that you’re screwed if nobody in your team has a sales background, it just means that they need to be convinced. Here’s a list of things that make it more convincing that you’ll succeed despite your ‘problem segment’. I’ve ranked them in order of most to least compelling:
- Traction → there’s no better proof that you can sell to difficult customers than the fact that you’ve already sold to them
- How similar you are to your buyers → VCs find it easy to believe that founders will be able to sell to industries they used to work in
- Pitching well → VCs will use how well you present in your meetings with them as a proxy for how good you are at selling
Getting past the nerd problem
Like founders selling to enterprises or governments, academic founders also face increased scepticism when it comes to their ability to sell. Why? Because VCs have negative stereotypes about the sales abilities of the average astrophysics professor, that’s why!
Thankfully, just like if you’re selling to enterprises, it’s possible to mitigate this scepticism without saying that you’re going to hire a ‘commercial cofounder’. Once again, here’s a list of things that make it more convincing that you’ll be able to sell, even if your team has a purely academic background:
- Traction (for the reasons mentioned earlier)
- A track record of collaboration with the industry that you’re selling to
- Pitching well (for the reasons mentioned earlier)
“Who’s gonna sell it?” is typically a softball question compared to “who’s gonna build it?”, but it’s your job as a founder to recognise the situations where you need to make a strong argument that your team can actually sell.
What if you don’t have the right skills in house?
Now that we know how to answer both the “who’s gonna build it?” and “who’s gonna sell it?” questions, you're probably wondering what to do when you don’t already have the people who are going to build or sell in place.
The best thing you can do in this scenario is to go out and recruit people who can fill the skill gaps you have, whether as co-founders or early employees. If this is impossible, then your next best option is to tell investors that you’re going to hire people with the missing skills the minute the round is raised. This is a hard argument to make because anyone can say “we’re going to hire a CTO soon”. So it only really works if you’re able to convince the VC listening that you’re 1) completely dedicated to bringing the missing talent on board and 2) that you’ll be able to do it quickly.
Conclusion
Now that we’ve reached the end of this lesson, you should have a good understanding of how to show VCs that your team has the skills in place to build and sell your product. However, this understanding is purely theoretical.
So before we move on to discussing how to prove you meet investors’ second criteria. The next two lessons will use real footage of founders pitching to show you how to put what we just learnt into practice.
Firstly, you’ll see an example of a founder successfully demonstrating that they have the skills needed to build their product, complete with analysis of why it works and takeaways for your own pitch. And secondly, you'll see footage of a founder failing to convince VCs that they’ll be able to fill a skill gap, combined with a breakdown of why their argument isn’t convincing and advice on what you should do if you find yourself in a similar position.
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