If you ask an entrepreneur what qualities he or she thinks venture capitalists look for in founding CEOs, you often hear them rattle off a litany of fairly stereotypical characteristics: Proven track record of leading companies to successful exits; history of successfully raising money from brand name VCs; an impressive network; and so on.
Those are good qualities to look for, particularly the track record of successful exits. But when I meet founding CEOs, there are three other things that I look for to give me the confidence I need to move forward:
1. A crystal clear and compelling vision
This is the single most important factor in determining whether or not a company will be successful in the long run. Founding CEOs who possess a strong vision of the market they are targeting, and the approach they must take to fulfill a need in that market, are often able to instill that vision into everyone else at the company.
As companies begin to scale, that vision is absolutely critical. Driving efficient growth is all about figuring out the right market, the right need, and the right way to address that need with the appropriate solution delivery model. Founding CEOs who can clearly articulate how they plan to do so are very appealing to investors.
And you don’t have to be a serial entrepreneur to have a clear vision.
2. The ability to attract, recruit, and retain top talent
The types of talent that are effective at the startup phase are very different than those needed at the expansion stage. As a company scales, it needs to bring in more tenured, functional professionals to develop the types of processes, structure, and functions necessary for growth. When I meet founding CEOs, I look to see if they are leaders who are capable of recruiting that kind of talent.
The way a CEO recruits that talent relates back to my previous point. If a founding CEO can communicate a compelling vision that gets investors excited about the company’s future, he or she will likely be able to do the same with talented, highly experienced executives. Retaining that talent is an altogether different issue, of course, and investors often must use their best judgment to assess a CEO’s capability in that regard.
I do find that recruiting is something that improves tremendously in the entrepreneur’s second startup. First-time CEOs rarely can attract expansion-stage executives, even if they can attract the right talent at the startup phase.
3. A track record of successfully executing against a vision
While having a clear vision is an important starting point, investors also like to see that the founding CEO is capable of executing against that vision. Otherwise, what good is it?
VCs want to see CEOs who possess the skills to keep their company operationally focused on the things that really matter. That is typically personified by their ability to minimize distractions, rally the organization around a common set of goals, and consistently execute against key objectives.
Again, that ability to focus and execute gets better with every startup. First-time CEOs must pay particular attention to focused execution.
What if Founding CEOs Lack Those Qualities?
Having the qualities above don’t make or break CEOs. Not having one (or even all) of those qualities doesn’t mean that VCs won’t invest in the company. After all, if a company has proven its business model and shown phenomenal growth over an extended period of time, the CEO has obviously done something right.
That said, it’s critical for founding CEOs who lack the three qualities listed above to be open and honest with themselves and potential investors about any gaps in their skill sets.
After all, partnering with an investor is about much more than securing money and preserving egos. It’s also about identifying a partner who can help you grow and develop as a leader. Yes, some VCs will be scared away by that kind of honest approach. But if that happens, you are better off not signing a term sheet with them anyway.
Remember, honesty is the best policy. If you’re an all-star, good for you. If you’re not, don’t hide behind a false front. It will only hurt you -; and your company -; in the long run.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.