How I Judge Investors

Pitching your startup to investors is a deeply personal matter.  More often than not, they––politely or not––call your baby ugly. And that hurts. Good founders, I think, learn to not take the criticism too personally. But in the end, it is personal. They are judging you. And your baby. Thumbs up, or thumbs down. 

And such is life. But how should we, as founders, judge them? Not all investors  are created equal, after all.  Once betrothed, the investor––unlike the entrepreneur––is unfirable, a step-father to your newborn startup, an undivorceable spouse in an epic marriage.

Like any proud founder, I am extremeley protective of my newborn startup. She's my motherfucking baby, after all. 

Now, I don't claim to have years business knowledge or even neccesarily have it right––I'm doing this for the first time––but I do have my own formula. 

"Do I want this guy on my board?" This, above all else, is the question. 

Another way to put it: When the shit hits the fan, do I want to be accountable to this guy? Do I want this to be the guy who has my back? Is this guy good enough for my baby?

In good times, it's always all smiles. But not all times are good. 

In my previous life, I worked for many years as a paramedic in Harlem and the South Bronx. Before that, I fought forest fires on a hotshot crew for the US Forest Service. I have seen what stress does to men (and women). I have seen people die. Lots of 'em. Babies too. I have seen how people react, flip out, and lose their shit entirely. And I've seen people fail then recover with grace despite mortal danger.  And in all this, I learned a little bit about judging the character of men. Quickly. For this, I make no apologies.

And it is this experience––combined with my own listening and study of the travails of those who have come before me––that informs what I am about to say. 

1) Intelligence

It should be obvious, but I want to be convinced that the investor is a very smart man. Preferably smarter than me. Steve Young (the 49ers QB with a law degree & his own private equity firm) once said that he aims to be "the dumbest guy in the room." Amen to that.

The beauty of hanging around and dealing with really smart people is that they have a  rub off effect. Really smart people challenge you and force you to think bigger, harder and, at the risk of sounding completely vague, better. They pick apart your bad ideas quicker and see through the bullshit that even you might have convinced yourself to believe. 

That said, scoring high on the intelligence test is not a dealmaker. Brains is a big plus, but brains without self-knowledge or an approprite level of humility is just fucking dangerous.

2) Security & Self-Confidence

People who are insecure make bad, irrational decisions. We are all insecure in some way, so really it's just a matter of degree. More is worse, less is better.

Generally speaking, being insecure causes you to make decisions based on fear, and people who are motivated by fear alone cannot embrace a big, disruptive vision. They end up being fundamentally risk-averse and drive you to be too. Invariably, this leads to a focus on bullshit, like what other people are doing. 

Even worse, you can't honestly call bullshit on people who are insecure without undermining your relationship with them. For me, this is an instant dealbreaker. 

People who are secure, on the other hand, like to be challenged. They enjoy vigorous debate. The intellectual swordplay is what they live for. 

When someone is secure in themselves and their position, you can be honest with them. And I ONLY want to work with people I can be honest with. Life is just too short and I'm just not that patient. 

3) Reverence for the Entrepreneur

I can see how easy it is for VCs to think of themselves as masters of the startup universe. As a VC, people compete for your attention and pitch you constantly. They are the judge in a never-ending baby beauty contest. It must get tiring. And in their shoes, I can see how it would be easy to think that the world revolves around you. 

But it does not. 

At the center of the entrepreneurial universe is the entrepreneur. And behind the entrepreneur is the employees, the team, the company. It is they who are the heros. It is they who operate unhedged. It is they who take the real risk. 

 In my mind, good investors get this. They understand their place in the ecosystem as enablers. They don't let their celebrity status get to them. Which brings me to my next point… 

4) Humility & Self-knowledge

To be humble is to know your strengths and weaknesses, to be aware of your place place in the world. It does not mean being non-confrontational or a softie.

My favorite people are those who will push hard and argue vociferously on behalf of an idea but then freely admit that it's possible their assumptions are wrong. They test you, but acknowledge the limits of their own knowledge.  Or maybe they really do know something about your corner of the universe. The important part is that they are acutely aware of when they do know something and when they don't.

The other thing that's great about people who possess a high-level of humility and self-knowledge is that they are not afraid of being challenged. Because they don't have huge egos, they are constantly listening to the people around them and learning new things, which in turn makes them amazingly capable as teachers. And god knows I need teachers in my life. 

5) Does he understand what it means to be an operator?

The investors that scare me most are those who posses a low-level of humility in combination with a non-operational background.

Recently, I met a 20-something year old VC from a supposedly top-tier firm who served on the board of several companies. I had looked him up on LinkedIn prior to our meeting and noticed lots of board seats but little other experience beyond a graduate degree from a very prestigous university. He was obviously very intelligent, but after several minutes of opining to me about my industry, I decided to turn the tables a bit and ask…

"I noticed that you sit on the board of several companies. Tell me a little bit about your background and experience building companies that qualifies you for this role. What companies have you founded? As a board member, I'd report to you and you'd have the ability to fire me. In essence, you become my boss. Why should I entrust you with this power?"

Part of me actually wondered if this guy had had some previous experience that I didn't know about. He squirmed. "Well….ahh," he stuttered. "You know, board members are there to, ahh, give…intelligent feedback and, ahh, be there….ahh….as a sounding board…for the entrepreneur, you know." 

What amazed me was not the vacuity of his response but that multiple CEOs had allowed this guy to take a board seat and a position of responsibility caring for their babies. 

As far as I can tell,  there's good VCs out there who haven't really been operators. But they tend to have grey hair and not be involved in super-early, seed-stage investing. As a first time founder, I want people around me who can understand and help me manage the extreme uncertainty of company building at the ground floor. 

6) Does he want me to lie to him? 

One of the red flags I loo
k for is seed investors that want me to make things up and lie to them. This typically manifests itself in the form of long-term financial projections. "What will your sales be 5 years from now?" 

I have no fucking clue, and if you're asking me that question, neither do you. 

I am a first-time founder in an immature, rapidly growing market. Pricing, exact business model––these things are all up in the air. My task now is to go out and prove certain assumptions about the product and the market in a way that we matched the two up and acheive the magical paradise that is product-market fit. Before I've done that, don't ask me for financial projections other than my expenses, because what you're really doing is asking me to lie to you, and I hate that. 

7) Does he teach me things?

Some of my favorite investors are those who, regardless of whether they've said yes or no, teach me something about my industry, product, market, team, etc. Even if they say no, they're the ones I'm gonna go back to down the road and try to lure them into the yes column. 

My reasoning is this: If in the course of a single 30-minute meeting this person has added value to my company and my life, just imagine how much this person would contribute if he/she sat on my board! MUST HAVE THIS PERSON ON MY TEAM. 

8) Is he a happy person? 

The world is full of extremely intelligent and yet unhappy people. These people are like poison. Their unhappiness rubs off on you, and invariably, they attempt to punish you and take out their frustrations with their own lot in life on you, potentially disrailing your company and your life. 

Again, I don't want you to confuse being happy with being soft. One can be both happy and hard-nosed at the same time. In fact, I like to consider myself a happy warrior. I love life and relish in the entreprenurial adventure, but yet I am (or try to be) ruthless in how I judge and execute that which is important around me and my baby. 

At the end of the day, happy people are optimists. And when the world is going to hell, as startups seem wont to do (not to mention life more generally), you need happy, optimistic people around you to stay focused and productive amidst the storm and cataclysm. 

Oh yeah, and life is just too short to surround yourself with unhappy people. They suck on your soul, and leave it empty. 

I don't know that this is an exhaustive list or even the right one to use, but it's how I think. I hope my thoughts are helpful to and have some positive, enlightening influence on those who come after me. I also hope you my readers will add things that I've missed.

  • http://how2startup.com Roy Rodenstein

    Nice summary Matt, agree with all.
    A couple of others from experience:
    1) Are they a tough, but fair, negotiator
    Later in the company’s development, having another bulldog or two on your team can come in *very* handy. But you want someone that will also treat not just the entrepreneur but the broader team with respect. If they are arguing to the last detail against double-trigger acceleration, you have a problem on your hands.
    2) Are they reliable
    Or do they drop off for weeks. Because if they don’t get back to you or do what they told you they would when they’re “courting” you, you can bet it’ll be more of the same when they’re on the board.

  • http://profile.typepad.com/scottwalker Scott Walker

    Matt – This is outstanding, insightful advice. Indeed, as a corporate lawyer for 16+ years, the most common mistake I have seen entrepreneurs make in connection with raising capital is the failure to diligence their investors (which I discuss in detail in tip #1 here: http://bit.ly/5Gccio).
    You will, in effect, be married to your investors for a number of years. Accordingly, you need to sit down with them and have a beer and do the analysis that you have suggested. Moreover, you should ask for references and talk to other founders who have worked with these guys (particularly where the venture went sideways or failed).
    Cheers,
    Scott (@ScottEdWalker)

  • http://freerobby.com Robby

    Good post. Confidence + humility can be a tough balance to get right, but you know it when you see it.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Tough but fair. I like that.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    thanks dude!

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    When you see it, it’s fucking magical.

  • http://donaldryan.net Don

    Very insightful post. I especially like the beginning where you discuss your background. I’ve been a nurse for 22 years (not practicing clinically anymore) and seeing people bleed and die brings things into stark perspective. I’m in the consulting and medical equipment business (and a web start-up) and I remind myself that, while this is very important to me, it is not life and death. A little joy in the journey goes a long way. And at this point, I’m not working with a-holes anymore. Again, excellent post.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Hi Don, glad to have you here. I started EMTing in LA when I was 19 and then ended up paramedicing in NYC to pay for college and ultimately this startup. The perspective is helpful indeed.
    Just curious, how’d you find me?
    Cheers!
    -Matt

  • Viktor Klyachko

    Amazing post. Just do not completely agree with point 6. Someone might ask for your financial projections which do include a business model might be merely looking for assumptions to see how you think. Plus it’s always important to see that it CAN make financial sense. That said…at the end of the day we, the entrepreneurs, cannot know for sure that the numbers will be even close to the projections. Good VCs know that.

  • http://www.alexascordato.com Alexa Scordato

    I love this post for so many reasons. Your passion and love for your startup is oozing out of every paragraph and you nicely summarize some really valid points. Next time we’re both on the UWS, we should definitely hang out!
    I’ve never had the experience of having a startup to call my own, but being a part of several in the past and present, I’d add the following:
    1) Kindness – This is probably one of the most underrated qualities in people today, but IMO, it’s one of the most important. Is this person just a flat out *good* human being? Does he/she wish to interact with others fairly and generously? Is this a person who I’d want to get to know independent of any financial transaction?
    2) Networked – Is this person connected? Do they make his or her networks known in some type of medium whether it’s on Twitter, LinkedIn, or the rolodex on his/her desk. If and when I have a startup, I want my investors to know people and not just investor-type people or people in my particular vertical. I want them to have a diverse portfolio of connections and I want them to be resourceful with their network.

  • http://shortscreen.com/ David Pinsen

    How is your search for angel investors going, Matt? How much money are you looking to raise now?

  • http://profile.typepad.com/blakejohnson Blake Johnson

    Matt,
    Love this list. I particularly like #5. At the last company I worked for I was always amused by consultants who would be tasked to come in and tell the company how to run itself, without any experience every doing any “real work” of implementing solutions. There’s something to be said for having real operational experience. Things look a bit different in the trenches as opposed to from an excel sheet or powerpoint slide. Seems like the VC board member/startup founder relationship could be very similar relationship.
    BTW – No Disqus for commenting?

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Arg, yes, no disqus for the moment. This blog format specifically and Typepad more generally do not seem to support Disqus implementation without a lot of work, which is fucking lame. I will try to ameliorate this situation in the coming weeks.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Def agree on #1. Excellent point.
    With regards to #2, yes, rolodex is important too, and I want people who have good rolodexes, but I am reluctant to classify that as a make-or-break thing. For me personally, I have been able to get to know and network my way to a lot of people without having investors at all, and frankly, I’m more interested in how a person thinks than who they know. Maybe I shouldn’t be, i dunno, but I’ve just never had trouble in rolodex dept.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Sure, so there’s some leeway to be granted there with #6. It depends how people frame the question. Generally speaking though, I count it as a ding against the person if they really focus or insist on made up numbers. Real entrepreneur-investors would just never do that.

  • http://profile.typepad.com/mengwong Mengwong

    Hey Matt, great stuff. I’m helping to publish an investor sourcebook for entrepreneurs (www.megsg.com) and I wonder if you’d mind if we republished your article in it? No fee, attribution only; the sourcebook has very limited distribution (fewer than 1000 copies) so I’m afraid we can’t offer to pay anything. But it would make a great chapter. I’m contributing some content of my own from the investor side, and your piece would be good to balance the perspective.
    appreciate it,
    [email protected]

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    It goes well. That said, I’m not at a point where I can go broadcasting announcements regarding this on my blog just yet.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Do it. I’m not in this game for the cash.

  • http://www.finallytv.com @MsMobileConverg

    Fabulous subject matter and brilliantly stated. Thank you for taking the time to write this.

  • http://profile.typepad.com/suster Mark Suster

    All good advice, Matt. One of the most important things I would encourage entrepreneurs to think about is how they behave in difficult times. If you interview a team at Facebook, Google, Twitter or Zynga about how their investors acted you’ll only hear goodness. But interview companies that struggled and you’ll find out the true story about whether the investors will have your back in hard times.
    I wrote about this topic in a post called “Nobody Loves You When You’re Down & Out” (a reference to my man, Eric Clapton). Post is here: http://www.bothsidesofthetable.com/2010/02/08/how-do-you-reference-check-a-vc/

  • Lucy McQuilken

    Matt,
    This is good advice and I especially like #8. Venture Capital is basically the business of optimists investing in other optimists. I was surprised, though, about how you only used male articles in you post. Why is that? Don’t these qualifications also apply to women?
    Lucy

  • http://www.ghilliesuitvideos.com Ghillie Suit Videos

    #8 is the most important. However, we know that in the startup business it’s easy to lose sight of that working 80 hour weeks.

  • http://profile.typepad.com/cianna Cianna

    Wow, Matt. This is a fantastic article! Really great points, insightful thinking, passionate writing, and filled with living by your own rules for others. I’m filing & forwarding this under “essential reading.”
    I have another one that I use: Must have & be open to many ideas. I am not interested in working with the kind of person who only has One Big Idea because they get married to that, get stubborn, and have a harder time accepting the inevitable changes that happen as projects grow (and the world shifts around them). Without your #3, Reverence for the Entrepreneur, having many ideas can turn into a struggle for power. With it, several people who have many ideas can have dynamic sessions as they try to find the best one together. And it’s fun.
    Thank you for this. I’m eager to read more of your thoughts.
    –cianna

  • http://profile.typepad.com/jimsnavely Jim Snavely

    Generally a great post.
    There is one thing I would take issue with:
    “At the center of the entrepreneurial universe is the entrepreneur.”
    Shouldn’t your users be at the center? I’m not one who thinks that the “customer is always right”. However, it is their interests and concerns that will make or break your product.

  • http://donaldryan.net Don

    You caused quite the shit storm in the Alley Insider. It was also excellent writing. That’s when I started following your blog.

  • http://profile.typepad.com/ibagrak Ibagrak

    Another great post, Matt. All seem like obvious points but they don’t get to be obvious until you write it down, so thanks for that.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Funny, my GF gave me shit for this too. Yes, obviously the same is true for women, and I did drop a few he/she’s in there. That said, of all the investors I have spoken with, only 2 (literally) were a women. Thus, I think it’s safe to assume that 9.5 times out of 10, tech investors will be men. Hence the predominance of the male article.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Within companies, yes, users/customers should be first. However, in the startup social scene, founders should be first.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    I was actually thinking of your post when I wrote mine. Couldn’t remeber the name though. thanks for sharing.

  • http://www.AGreaterTown.com Drew Knapp

    Thanks, Matt,
    great advice.

  • Nic

    Very interesting article, thanks! Just a small piece of advise from someone you don’t know… Don’t swear/curse so much. It weakens what you are saying and indicates a lack on confidence. Also, no parent would ever refer to their baby as “motherf***ing”. I think the parent/child metaphor isn’t working when you say that.

  • http://profile.typepad.com/nitinmittal Nitinmittal

    Amen, great post. When raising capital, you want to do your homework on this person and his fund. Make sure to have him/her offer up 2-3 references from CEOs of his portfolio companies. Try to speak to those companies that do not get a ton of media coverage because they could be the same investments that the VC has give up on. This is a good indicator of were an investor maybe wrt to its fund performance, or general strategy.

  • http://www.fiabee.com Enrique

    Great article ! Just coming from a pitch to investors and yes, you see from a thousand of miles who with you’re going to have feeling.
    With all the humility because the money never comes when you need it – most of the times you need to engage with the first investor interested in your “baby”: a recommendation to all seeking funds -> start designing your next round and contacting investors as soon as you close a round. With cash in the bank you can be selective and choose the best investors, even you can wait for them if they’re not investing at this moment.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Excellent point.

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    I am of two minds on this one. On one hand, I CANNOT WAIT to focus on product and customer development once again. Once we get a check, I want to stop stop thinking about investors and building the f’ing company! On the other hand, however, i see your point. But I don’t think that raising $$ is more important than making $$. And I want us to make money!

  • http://profile.typepad.com/1233532474s12769 Matt Mireles

    Ahh, yes, the inevitable “You sound like a sailor” critique. Point taken, although I think cursing does help dramatize the writing and conveys a sense of unfiltered voice and genuineness that is in fact quite valuable. The question is “at what cost?” So far it’s worked pretty well for me, so i’ll take my chances.

  • Pingback: Quest Software to Announce Results for Second Quarter 2010 on July 29 | software blog

  • Pingback: How I Judge Investors « The Metamorphosis | Investors Club - Zentrica.net

  • Pingback: Judging investors | Sayanee Shares...