VC Masterclass: The Art of Evaluating a Deal — Part 4

To date, we’ve covered Deal Dynamics, Lead Investor, and Execution. This time, we’re looking at how we assess CEOs and their team. It some ways, this is a job interview: Is this leadership qualified to execute the business model and make money for investors?

To learn more, you can also watch our on-demand webinar here.

Part 4: Leadership Team

Evaluating the management leadership team — with the greatest scrutiny applied to the CEO — is naturally a more subjective element of due diligence. But we still aim to apply a consistent, repeatable process to making investment decisions.

While our due diligence sessions are generally organized around answering business questions, they double as job interviews for management — with the understanding that management is also interviewing us as potential partners. These live sessions give us the opportunity to supplement a desk review of the team’s backgrounds (education, previous work experiences, demonstrated successes) with seeing how they defend assumptions, react to scrutiny, and interact with each other.

Across our portfolio, we invest behind successful CEOs with a broad range of backgrounds, personality types, leadership styles, etc. So, if there is a single formula for predicting success, we haven’t found it.

Absent this silver bullet, we focus on trying to understand what we call “founder-market fit.” This is the idea that every company has a specific set of technical, operational, strategic, and other challenges that need to be overcome to build a viable, successful, and valuable business. A CEO’s background should align with those challenges in a deeply personal way, so that he or she is equipped to push through the delays, disappointments, and peanut gallery criticisms in order to stay focused on a long-term vision.

In addition, we look at the team to see how they complement the CEO, including what experiences and connections they bring. We also want to ensure that the team is aligned in terms of goals, expectations, and commitment.  For us, it’s a significant positive if team members have successfully worked together before in similar circumstances.

*No representation is intended that the results discussed are representative of the outcomes experienced by any AV fund or investor. Past performance does not guarantee future results.

Challenges

• Repeat founder, new focus. We frequently see repeat founders who achieved impressive results in the past start a company tackling a different problem / industry. These can fall into the category of “passion projects” based on inefficiencies they’ve experienced. It’s difficult to determine whether these situations are likely to have a positive outcome. We weigh entrepreneurial experience against motivations (are they still hungry?) and adaptability (have they surrounded themselves with industry experts?).
• C-level executives moving to CEO. Another challenge is evaluating founders that come from C-level positions at other successful startups, as it’s hard to determine the real impact that these individuals had. While they may have an impressive resume, sometimes this success was driven by the CEO, and the founder that’s now trying to break out on his / her own is not as effective.

To learn more, please watch our on-demand webinar here. You can also read the rest of our series on The Art of Evaluating a Deal (Deal Dynamics, Lead Investor and Execution).

This communication is from Alumni Ventures, a for-profit venture capital company that is not affiliated with or endorsed by any school. It is not personalized advice, and AV only provides advice to its client funds. This communication is neither an offer to sell, nor a solicitation of an offer to purchase, any security. Such offers are made only pursuant to the formal offering documents for the fund(s) concerned, and describe significant risks and other material information that should be carefully considered before investing. For additional information, please see here. Venture capital investing involves substantial risk, including risk of loss of all capital invested. This communication includes forward-looking statements, generally consisting of any statement pertaining to any issue other than historical fact, including without limitation predictions, financial projections, the anticipated results of the execution of any plan or strategy, the expectation or belief of the speaker, or other events or circumstances to exist in the future. Forward-looking statements are not representations of actual fact, depend on certain assumptions that may not be realized, and are not guaranteed to occur. Any forward-looking statements included in this communication speak only as of the date of the communication. AV and its affiliates disclaim any obligation to update, amend, or alter such forward-looking statements, whether due to subsequent events, new information, or otherwise.

This communication provides some information regarding Alumni Ventures’ investment process, but is not intended to comprehensive and functions as a summary only. This communication is not personalized advice of any nature.