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Diligence Gold
4 things we look for in a founder interview
Takeaway #2
Over the last few weeks, our team prepared 20 diligence reports, each one analyzing a different early-stage startup. That’s the tightest report density we’ve ever delivered.
Last week, I shared our first takeaway from the experience: when resources are constrained, simple, discrete application questions are best.
This week, I’m sharing our second takeaway: founder interviews are diligence gold.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
It’s tempting to “ignore” a founder’s claims, and only trust personal/independent research. This is a mistake.
A founder’s maniacal focus on a particular space presents a tremendous learning opportunity, which can serve as an excellent baseline for additional diligence.
4 things we focus on when interviewing entrepreneurs to kick off diligence work.
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Tempting
It can be tempting for investors to ignore or minimize much of what a founder claims about a market or the company’s future.
Why?
Because they’re (obviously) biased, and they’re incentivized to paint their company in a positive light. They tend to be optimists by nature, and it’s generally in a founder’s best interest to cast a compelling vision. Some investors tend to think it’s better to rely on independent analysis and personal research.
While I understand and appreciate this posture, I think it’s a huge mistake to ignore the founder’s perspective.
I’d like to propose a richer alternative: always begin due diligence with a founder interview.
Here’s why.
Maniacal
I think the best founders are “a little crazy” (more on that in this article). They hyper-focus on a specific problem set and develop creative solutions.
Whether the company ends up being successful or not, a founder will likely have spent dramatically more time, energy, and brainpower focused on a specific problem set than 99% of the population. They will have a ton of information that would be valuable to investors stored away.
That maniacal focus and breadth of knowledge make the founder a fantastic diligence resource to be mined.
How? Through an interview.
Here are 4 things we look for during entrepreneur interviews.
4 Things We Look For
What is the problem and the solution? (More in this article)Developing a solid understanding of the problem & solution enables an investor to establish a baseline for defining who the target customer is, critically evaluate whether the solution is appropriate, and quickly assess the leadership team’s focus, buy-in, and research level. To establish this understanding, we generally employ the 3-step confirmation tool:
Listen to the pitch.
Restate the problem/solution + ask “Is that right?”
Repeat until the entrepreneur is satisfied.
How big is the problem? A great founder will know their market well and will be able to map out a starting point for additional diligence. By acknowledging their perspective is likely biased, that information can be an incredibly valuable shortcut to accelerate the independent research process. For example: “How many above-ground storage tanks are there in the US? What about the entire world? How many have floating roofs and how often do their walls need to be inspected? How did you calculate these numbers?” By asking the founder to explain, we experience a significant jump in basic knowledge and can perform independent analysis with much greater efficiency.
What makes your approach different? This question is so powerful because it reveals what they believe makes them different. Having sat on hundreds of diligence calls, I can tell you that what a founder thinks is unique about their approach is often not at all unique (it’s a flag we raise pretty regularly). But hearing from their mouth what they see as their distinctive, moat, or competitive advantage is incredibly insightful as a starting point for competitive analysis.
What else should we know? This is one of my favorite questions to ask. Founders will often point us to critical information that wasn’t asked in the application, or that would not be obtainable any other way. For example, one of the founders we spoke with this month indicated to us they had a portfolio with over 3 dozen patents. Google patents showed less than 10. Without their comment, we could easily have missed out on learning this and our analysis would have been incomplete.
Final Thoughts
Don’t skip the founder interview - they’re like diligence gold.
After interviewing 20+ entrepreneurs for these diligence reports, I’m more confident than ever that they’re the best place to start (though they should never be the end) due diligence. Our 5-step diligence process (almost) always includes a founder interview because we’ve found it to be such a rich source of information, and we tend to focus on exploring the 4 questions listed.
What do you think?
How do you approach founder interviews?
Weekly Observations: 3 Lessons Learned
Sometimes the best business meetings involve no “business.”👥This week I had a meeting on my calendar with another founder to discuss a possible partnership. We spent the entire meeting talking about family, faith, culture, and our top book recommendations. Yet I left feeling even more excited at the prospect of working together. As one of my mentors always says - relationships are everything.
Seeing your team grow and mature is so satisfying.🌱Keaton and I tend to follow the “Model, Assist, Watch, Leave” training framework. I’ve been modeling how to lead a particular meeting for one of our team members for several weeks, and this week we transitioned to the “assist” phase. Watching them step up and do well was deeply fulfilling in a way I didn’t expect.
Communicate, communicate, communicate.💬This week I made a classic sales mistake. In my enthusiasm about a new opportunity, I committed us to something without first validating we had the capacity to fulfill it. We’ll figure it out (startup 101), but a lesson learned: communicate and confirm availability before committing the company to something.
Weekly Links: 3 Things I Found Interesting
Thanks for reading, have a great week.
-Andrew
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P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.
How did I do this week?
About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.