What I learned after interviewing 100 early-stage VCs globally
by Ashish Kulkarni, Founder of Founders’ Psyche & Research Assistant at INSEAD. Originally published on Founders’ Psyche
Guest post by Ashish Kulkarni, Founder of Founders’ Psyche & Research Assistant at INSEAD. Originally published on Founders’ Psyche
I recently did a year-long research study with INSEAD where I interviewed 103 early-stage VCs worldwide. The goal of the study was to find out what kind of psychological traits VCs look for in founders and if these traits were the same across all regions. I will be focusing on the global stage for this blog and will look at regional nuances later.
Sample Size
For this study, we reached out to VCs investing in pre-seed to series A stages. We also tried to keep our sample size as diverse as possible from a regional perspective. Here is a breakdown from a regional point of view:
We did have around 10-15 VCs on average from every region we got VCs in - Asia (excluding the Middle East), Middle East, Europe, Africa, Australia & New Zealand, US and LATAM. We did not have VCs from China, Japan, or Russia.
Interviews
We interviewed each VC for an average of 20-30 minutes. We primarily asked them about their investment process, approach to cold emails, green flags, and red flags they look out for in founders, deal-flow stats, and founding team (solo vs team, couple founders). Let's go over each of these one by one:
Solo Vs Team Founders
The data indicates a nuanced VC approach to founder composition, with a slight preference for team founders at 47.5%(49), underscoring the value placed on diverse skills and collaborative potential. However, the majority, at 51.5% (53), show no specific preference, highlighting a flexible VC stance that prioritizes the quality and potential of the business concept over the number of founders.
VCs recognize the benefits of having a founding team, such as a broader skill set and shared responsibilities, which can enhance the startup's chances of success. However, they also understand that a strong solo founder with a compelling vision and solid execution plan can be equally promising. This flexible approach allows VCs to focus on the overall potential of the startup rather than strictly adhering to team composition. You can read more in detail about this factor in the link below:
Cold Emails
With 69% of VCs open to considering cold emails, the data underscores a significant openness within the venture capital community to explore opportunities beyond their networks. While most VCs did say they do go through cold emails, the investments that they make rarely come from cold emails. The reason for this according to them was most of the cold emails are sent without any research – the startup belongs to a different sector where they don’t invest at all, very long emails, or it’s just an email campaign sent across to all investors without any personalisation.
This openness to cold emails reflects a willingness among VCs to discover new and innovative ideas regardless of their source. It suggests that VCs value a proactive approach from founders who reach out directly, demonstrating initiative and the drive to seek investment actively. You can read more in detail about this factor in the link below:
Green Flags/ Desirable Traits in Founders
The top 5 green flags in order of number of times mentioned in the interviews are as follows:
Coachability
VCs prefer founders who are open to feedback and willing to learn. Coachability indicates a founder's ability to adapt and grow, which is crucial for navigating the challenges of building a successful startup.
Domain Expertise
Founders with deep knowledge in their field can make informed decisions, identify opportunities, and mitigate risks effectively. Domain expertise reassures VCs that the founder understands the industry landscape.
Past Experiences
Here past experience...refers to life experiences not just career experiences. A diverse range of experiences can provide valuable insights and perspectives. Founders who draw on their varied backgrounds and have overcome difficult situations are often better equipped to handle the complexities of entrepreneurship.
Resilience
Building a startup is fraught with challenges and setbacks. Resilient founders who persevere through difficulties are more likely to succeed in the long run.
Communication
Effective communication is essential for articulating a vision, leading a team, and attracting investors. Clear and compelling communication helps build trust and aligns stakeholders.
The top 5 green flags identified by VCs suggest VCs value founders who are coachable, deeply knowledgeable in their field, draw on diverse experiences, persevere through challenges, and effectively articulate their vision.
You can read more in detail about green flag in the link below:
Red Flags/ Undesirable Traits in Founders
The top 3 red flags in order of number of times mentioned in the interviews are as follows:
Arrogance
Arrogance can hinder collaboration and learning. Founders who believe they know everything may not listen to advice or be receptive to new ideas, limiting their growth potential.
Unethical Behavior
Integrity is paramount in business. Unethical behavior can lead to legal issues, damage reputation, and erode trust with stakeholders, all of which can be detrimental to a startup's success.
Unrealistic Goals
Setting unattainable targets can indicate a lack of understanding of the market or poor planning. VCs prefer founders with realistic and achievable goals, as this reflects a grounded approach to business growth.
Most VCs refrained from specifying red flags, the most common was the absence of green flags. We can say from the top 3 red flags explicit negative behaviors significantly deter investment. These red flags indicate potential challenges in collaboration, ethical operations, and feasibility of business targets, highlighting the importance VCs place on integrity, realism, and effective founder collaboration.
You can read more about red flags in the link below:
Couple Founders
We asked the VCs how they looked at startups that have founders who are in a relationship with each other. Out of 74 VCs who responded, data suggests a varied perspective within the VC community, with a significant portion open to evaluating couple-founded startups on their merits. In contrast, others express reservations or prefer to steer clear, likely due to concerns over potential interpersonal dynamics affecting business operations.
Couple-founded startups can benefit from strong trust and commitment. However, VCs may worry about personal issues spilling over into business, potentially impacting decision-making and company culture. Evaluating these startups on a case-by-case basis allows VCs to balance the strengths and potential risks.
Dealflow Stats
Annual Deals: 1000
Annual Investments: 10
Median Investment Rate: 1%
The low investment rate highlights the highly selective nature of venture capital investing, emphasizing the competitive environment startups face.
This is quite consistent with what we see in the market.
Our year-long study reveals that VCs prioritize traits such as coachability, domain expertise, past experiences, resilience, and effective communication in early-stage founders while avoiding arrogance, unethical behavior, and unrealistic goals. VCs show a flexible stance on solo versus team founders, with many open to considering cold emails and evaluating couple-founded startups on their merits.
Key Takeaways:
Coachability, Domain Expertise, and Communication are top traits VCs value in founders.
Arrogance, Unethical Behavior, and Unrealistic Goals are major red flags for VCs.
VCs show flexibility on whether startups have solo or team founders.
69% of VCs are open to considering cold emails, indicating a willingness to explore opportunities outside their networks.
Couple founders receive mixed reactions, with some VCs open to them and others cautious due to potential interpersonal dynamics.
VCs are highly selective, with a typical investment rate of 1%, highlighting the importance of a compelling and well-rounded pitch.
Wanna be featured on eu.vc? Learn how here.
