At Charles River Ventures, we seek to support founders who can build foundational companies in their respective industries and, in so doing, have a huge impact on the world. Over the last 40 years, 15 funds, 70 IPOs, and 100+ M&A events, we have been fortunate to get to know thousands of talented entrepreneurs. We know that high-impact companies are able to constantly face adversity and navigate changes in markets, technology and competition over extended periods of time (years – not months!). The key to this capability is outstanding founders. That is what drives our business.
It is also one of the greatest mistakes that venture capitalists make. A false read on a founder, or a founding team, has cost us more in missed opportunities than almost any other decision in our business. And when we find amazing founders we support them through thick and thin. Just this summer, David Sacks sold Yammer to Microsoft for $1.2 billion in cash (CRV was the largest investor). The story that is less often told is that my partner George Zachary had also invested $10 million+ in David’s prior company, Geni, that did not work out as planned. However, despite this first outcome, George still had a ton of conviction to invest in David again before Yammer ever got any meaningful traction.
My point is that our history has shown us that investing in early product/market fit can create a false positive about a company which can be a big mistake. Similarly, so can reading too much into the lack of early product/market fit. Great companies have to continually adapt and be willing to take risks. And while we work our asses off to help, ultimately we rely on our founders to make the right calls in navigating their respective markets.
As such, we spend a tremendous amount of time at CRV getting to know founders and evaluating founding teams. We have to do this, because a majority of our investments are in founders raising venture capital for the first time. They are not known entities. Internally, we call our founder analysis FQ or the Founder Quotient. The Founder Quotient is an assessment of founder strength and founder/company fit. Similar to an EQ or IQ test, but for founder strength (hence FQ).
The way we measure FQ has been refined over the years. I could write a book about each of these factors. For now, I will share a high-level list of attributes we look for and weigh, in different ways, in our FQ:
- Original product thought. Most founders copy. We look for the 1 percent of founders who have their own original strong views on how to build a great product (e.g. it took a Steve Jobs to set the touchscreen standard for smartphones).
- Psychological factors. What drives this person? Are they driven to face the adversity and uncertainty of startups? Do they have a chip on their shoulder and/or something to prove? Do they have a strong desire to win? Are they willing to make the sacrifices required to succeed? This is often influenced by their childhood.
- Authenticity. Does this company align with the founder’s beliefs and values? Do the founders care deeply about the problem they are working on? How passionate are they?
- Unique market insight. Do they have a unique insight into what the problem is, market timing, how the future may play out?
- Intelligence. IQ, EQ, self-awareness, ability to hold convictions loosely, etc. Startups are like chess. The founder needs to be able to think several moves ahead as it relates to product decisions, business decisions, and people decisions.
- Values. Are they honest? If they are in a people-intensive business, do they genuinely like and value people or are they too focused on themselves?
- Judgment. Product judgment, people and hiring judgment, etc. Do they exercise good decision-making skills no matter how small or large the decision?
- Experience. Are they uniquely capable of executing? Do they have a relevant 10,000 hours?
- Ability to recruit. Includes selling a vision, being respected, build a cross-functional team, having a network, etc.
What other factors do you think we should look for in determining FQ?