Many investors?--?including our team at Village Capital?--?evaluate founding teams on a largely subjective level: "He just gets it" or "She has grit."
Sure, investors look at what founders have previously done--if they previously exited a company, or have an MBA--but this focuses on actions more than character. Some investors look to studies on leadership traits by Bloomberg and Gallup, but these don't give a full picture. For the most part, investors rely on instinct.
Several months ago, our team set out to tilt against the windmills?--?to create a new tool to identify and communicate what makes a founder "strong".
We partnered with the psychometrics consultancy Waypoint People Solutions to survey 500 of our alumni companies--both founders and their teams--around eight personality traits that commonly correlate with company performance.
We call this tool, which is still in development, STAR (Startup Team Aptitude and Readiness). Here are a few early takeaways.
Spontaneity can have its downsides
One of the traits we measured was whether an entrepreneur is an "originator". An originator is creative and spontaneous--they make decisions quickly and decisively. Investors often consider these qualities a strength. But we found that being an "originator" was the trait most negatively correlated with success--what's more, this negative correlation held true in the founder's self-reflective surveys and the team surveys. The takeaway: this decision-making style can be great for initial idea generation, but less useful when it comes to execution. The most successful businesses in the study had founders that were focused, calculated, and deliberate.
Concern for people can actually be a negative trait
This was another surprise, given that compassion and consideration are typically regarded as strengths in leaders. Our survey found that the trait of "people-focus"--a perceived level of concern for others--was negatively correlated with success. One hypothesis is that overly "people-focused" leaders possess a strong need to be liked by others and tend to be overly considerate. This can result in failing to enforce rules, guidelines, and deadlines.
One interesting finding here: the negative correlation was strongest when the team thought their founder was "people-focused" (versus what the founder thought of themselves). While I'd like to stop short of promoting the idea that founders need to be mean to get the job done, there is certainly a case to be made that teams needs to feel their leader is not easily swayed and that they can make hard decisions--even if it means firing the wrong hire.
Self-awareness is critical
Since we surveyed both founders and members of those founders' teams, we were able to compare the two viewpoints. We found that our most successful companies had a very aligned understanding of one another's traits. The smaller the discrepancy between the founder's self-awareness and his/her team's perception of the founder, the higher the firm's performance. From my experience, an early startup is never going to have the perfect balance of traits, but it is incredibly important that the team is in sync with each other so they can collaborate without a great deal of friction.
Teams with a female founder perform more strongly
This is more of a meta-finding (gender isn't an implicit "trait"), but the results were too clear to leave out. Women-founded companies performed stronger in nine out of ten of the categories we measured of subjective and objective performance. This means they are outperforming companies with only male founders in YoY and LTM Revenue, Funds Raised, and company-specific objective and subjective goals (this aligns with lots of other research).
So far, women founders are also reported to have a higher level of self-awareness. Conclusions cannot be made at this point, but the data suggests that this could be a key reason why women founders are more successful.
As we build on this data set, we hope the tool will become more and more of a predictor of success. We will be able to dive deeper into the traits that are correlated (or cross-correlated) with strengths to understand better and highlight strong teams. We will also be able to develop better the tool to share more information with the founder and team and help them grow. A key point: this survey was conducted entirely with early-stage companies, and the lessons learned apply to founders that are working to get a company off the ground: it is very possible that CEOs of larger companies (who are not always the original founder) need different qualities.
What I learned most from this exercise is how easy it is to misinterpret extremely nuanced traits?--?and that as investors, we have to get better at it. We aren't going to be able to solve this problem ourselves, but hopefully, by sharing what we're learning, we'll hear from others about what they are building and get there faster together.
Special thanks to the Hitachi Foundation for their support in this research and Stephen Jeong from Waypoint Solutions.