How to pick founding employees and investors for your startup

published on02.04.2021

We’re serialising our first book Survival to Thrival: The Company Journey online to make the full content of the book available for free for all enterprise entrepreneurs. In a recent post, we talked about how to pick the best co-founder for your startup. Continuing with this theme, here’s how to pick your first employees and investors.

  • Pick early investors as you would pick co-founders.
  • The path through founding stage is a non-linear mix of planning and opportunism.
  • At the end of each stage, plan ahead by setting milestones to make the next round of financing easy.

Founders and the first employees are the pioneering team, embarking on a mission to build a company from nothing. The early team is the foundation of a company’s culture and its ability to succeed. Skills matter. Chemistry matters. Passion matters. Luck matters.

The romantic view: the early team is embarking on an exhilarating ride that will make their startup into a thriving business. The practical view: they’re going to have to work their tails off to survive, win customers, resolve conflicts under intense pressure, and achieve milestones that justify new rounds of capital. The bottom line: in the early days, a founding team will go through some of its highest highs and lowest lows.

The mission for the early team is simple: survive long enough to exit founding stage with a Founding Idea that has enough validation and proof points that attracts people and investor capital. Basically, create gravity.

Then drive to the next milestone: finding Product-Market Fit, or PMF (the subject of the next chapter). The early team is small—capital is scarce and every penny matters. Early hires should have specific technical customer or market skills. The team must simultaneously balance the idealistic passion for the mission of the company with practical month-to-month survival.

The early investors: Pick like a co-founder 

From the founders’ perspective, picking an early-stage investor (especially the lead investor, who will serve on the board) is like picking a co-founder. For the investor, placing a bet on a yet-proven Founding Idea requires a leap of faith—the same leap that a co-founder has to take. Belief matters: belief in the Founding Idea, and belief in the founding team. Fit matters: fit with the co-founders, fit with the market, fit with the risk. Trust matters: a solid relationship marked by trust and candor buttresses a startup when the inevitable ups and downs start to put stress on the company. An early investor should contribute not only just capital but also expertise and relationships to help the company exit founding stage, achieve Product-Market Fit, and move beyond.

Be prepared for an unpleasant side effect of finding the right early investor. Other than unusual circumstances, finding the right early investor takes time and meeting different investors. Unfortunately, those meetings often educate the investment community and can accelerate funding of potential competitors. Discretion is useful, but being overly secretive is rarely effective. Execution is what matters in the end: the company that executes better will win.

Founding path is non-linear and uncomfortable

To get through the founding stage, a startup needs to refine the Founding Idea, recruit the founding team, hire key advisors, raise the initial funding, meet the target customers, define the product, and start developing the product. All these deliverables are important. All are necessary. All are interrelated. But what sequence to do them in? Which one should come first?

First-time founders (especially those with strong execution back-grounds) crave a linear path or process through the founding stage. It usually doesn’t work that way. The path tends to be a non-linear mix of planning and opportunism.

Organized customer interviews help refine the Founding Idea. But an introduction to a key advisor or customer can also drive major changes in the idea. Networking to find early employees and investors is both deliberate and serendipitous. An opportunistic meeting with a potential advisor could lead to the ideal teaching customer, who helps refine the product requirements, which together leads to the initial funding, which then leads to the first hire. Founders have to shift their energy from focus area to focus area in order to learn, fill in gaps, and achieve early deliverables. Maybe they spend a day building a prototype. Then a day doing customer interviews. A day networking. A day meeting investors. A day completely re-thinking an approach. Founders have to know that what they do today can often be quite different from yesterday or tomorrow. The path through the founding stage often lacks clear definition, but what’s necessary to exit the founding stage is usually clear: the ability to raise capital and shift gears to iterate to product-market fit.

Think ahead: Milestones to make the next round easy

Once a startup has finished the founding stage and raised capital, what’s next? There are so many things to do. What should the founders prioritize?

The answer is this: At the beginning of each stage, establish key business milestones that will allow you to easily make your next financing round at roughly a 2x valuation—and then survive on your existing cash until you hit those milestones.

These milestones are usually a mix of product and customer traction, combined with some sort of market proof. They become a unifying set of goals for the team to execute against. For example, a company might strive to get five paying reference customers for a live product, or to achieve an active user base of X with a sales pipeline of $X.

Tae Hea: “It is not unusual to see a team who believes that they have made a huge amount of progress—yet can’t raise additional funding and have to shut down. Every startup should have a clear understanding of the specific milestones required for an easy next round.”

Creating overly complex milestones with false levels of precision doesn’t help. Sometimes, first-time founders—particularly those who have been executives at large companies—start with an overly detailed three–five year execution plan that looks impressive but becomes immediately outdated when it collides with the reality of building a startup.

Better are simple milestones that everyone can understand and that justify the next round. Coming up with these milestones is harder that it sounds. And for the startup team, delivering against them takes a crazy amount of hard work and, as always, a dose of good luck.

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