Would you hire a chef with no professional cooking experience? How about a trainer who confesses you’re his first client? Would you bet on a jockey riding his first race?
Of course not.
Why treat startup founders any differently?
In a way, that’s all startups have – their leaders. Products, technology, go-to-market plans can all change, but the founders are usually the one constant.
They should dazzle you with their drive and determination, but also with their hard-won experience, right?
Well, yes, in theory. But putting it into practice? It’s not always so black and white.
As an investor, you prefer your founders to come with a ton of entrepreneurial experience.
But what if they don’t?
A Challenging Issue
It’s one of the most challenging issues you’ll face as an investor.
What if you love the startup’s idea, its growth strategy, the massive size of the market, how the startup is addressing a pressing need?
What if you’ve also been incredibly impressed with the job the founder has done so far?
This is a gray area of early startup investing that hasn’t gotten a lot of attention. It happens more than you think.
I don’t have to look far back in my memory to find the most recent occurrence. It was two weeks ago.
I added a company to our First Stage Investor portfolio (followed by more than 25,000 people who pay for our research). Its founders lacked an entrepreneurial track record.
In the middle of my vetting process – when I was really getting into the weeds of the company’s idea and how it planned on monetizing it, and growing very excited because the startup had such great possibilities – I paused.
I needed to consider the fact that neither co-founder of the company had meaningful entrepreneurial experience. Sure, they were smart, serious and accountable. They were definitely hard workers. And, to their credit, they had come up with a brilliant idea.
But as businessmen? As leaders who knew how to grow a small business into a large one?
I was looking at a blank slate.
The Greatest Teacher
Before my days as an early investor, I was the CEO of an international trade and finance company. I had spent a couple of decades in the private sector closing deals around the world.
And, believe me, I got plenty of scars to show for it. Hundreds of hard lessons learned.
I know better than most people that experience is the greatest teacher ever invented.
These guys were missing a big piece. I couldn’t just dismiss it. Then again…
One of the most successful tech companies in the world, Facebook, was started by a painfully young and inexperienced founder. And Mark Zuckerberg has done pretty well.
Zuckerberg’s roommate at Harvard and the former chief technology officer at Facebook, Dustin Moskovitz, went on to found Asana, an app that lets co-workers collaborate without email.
The average age of the founders of Facebook, Apple, Google and Microsoft? Just 23!
Brian Chesky was 25 when Airbnb graduated from Y Combinator, and Richard Branson was 20 when he founded Virgin.
What Our Portfolio Reveals
I’ve seen studies that argued both sides. So I thought it would be more interesting to share with you what my own portfolio says on the subject.
When I researched the latest 10 additions to our First Stage Investor portfolio, I discovered five founding teams lacked entrepreneurial experience, and the other five had at least one co-founder with an entrepreneurial background.
It seems like I’m agnostic when it comes to founders’ experience. But that’s not the case. Believe me, I give it its due weight.
What it does mean is that it’s not a deal breaker. And as a single factor among many, the absence of entrepreneurial experience can be outweighed by other positive attributes.
The One Offsetting Factor
But here’s the thing you may not realize. There’s another factor that can go a long way in neutralizing negligible entrepreneurial experience.
It starts with this simple dictum: The more recent the experience, the more meaningful it is.
And what’s more recent that what happened yesterday?
If founders can point to achievements and/or milestones accomplished within their current startup, that takes a lot of the sting out of their lack of business experience.
Such achievements would have to be on the business side, including the metric that speaks the loudest: rapid sales growth.
Of course, we take dozens of other factors into account before deciding to back a startup.
Let’s return to the case of the relatively inexperienced founders whose startup Arbit I added to our portfolio.
What separated them from the pack was not revenue or user traction, which was modest. It was exceptional capital efficiency – doing a lot with very little – and the potential for viral growth.
The product they’ve developed (quoting my research here) “offers instant polling… instant engagement… and instant results… [I believe] it’s quicker, more engaging and more addictive than Twitter… And the cherry on top: algorithm-provided instant analytics.”
Could their relative inexperience hinder progress – or worse, doom the company? Sure it could. It’s a risk. But they’ve made the right moves to date to get this far. In my book, that mitigates the risk.
It wasn’t easy, and it’s not going to get easier. It took Elon Musk years to figure out how to become a good boss. He’s a much better CEO now by orders of magnitude. Yet his first company, Zip2, was still bought out for $307 million in cash and $34 million in stock options. Not a bad outcome for a newbie founder.
Getting to the 1%
We’ve looked at thousands of startups. We’ve passed on 99% of them.
We recommend investing in what we believe to be the best companies. Their founders range from those with little business experience to those with a great deal, including Inc.’s “Entrepreneur of the Year” (Kevin Surace of Appvance).
I like our startups to be GREAT at one or two things while we tolerate a couple of holes in their profiles. That’s preferable to them being just good (or even very good) at everything.
One of those holes? It can be entrepreneurial experience – an important factor, to be sure. We get that.
It’s just not the only factor.
Co-Founder, Early Investing