More than 102,000 workers in U.S.-based tech companies have already been laid off in mass job cuts in 2023, according to Crunchbase. Yet for early-stage startups, the outlook isn’t as bleak as the headlines make it out to be — conversely, there’s a huge opportunity for scrappy founders in a downturn. A down market can provide investors with better entry pricing, more time for proper diligence and bigger returns in the long run; early-stage venture capital should be more than prepared to bet on great entrepreneurs in 2023.
Early-stage venture funding is unique. Unlike a Series B or C round, there isn’t a ton of data and metrics to review. Because of this, investors need to rely on the founders to convince them there is a market for their product and that they are the founders to make it happen. As we enter a market downturn, finding and cultivating investment-worthy founders is more important than ever. Whether to invest lies at the intersection of the founder or management team’s mindset, ability and motivation.
Early-stage investors need to pick entrepreneurs with a growth mindset. It’s as simple as that.
Seek out founders with a true entrepreneurial mindset
Early-stage investors need to pick entrepreneurs with a growth mindset. It’s as simple as that. Entrepreneurs that have a strong desire to learn, embrace challenges and aren’t easily knocked down, persist in the face of setbacks, learn from criticism, surround themselves with those that are experts in their field (and trust them), and find lessons and inspiration from other’s successes.
As a fund, we want outsize returns. To deliver those outsize returns, we need to go after a significant total addressable market and challenge to be solved. For an investment that supports a venture outcome, we need to invest in a founder who can stay the course through inevitable challenges. You also need to be sure that the founder you’re investing in wants the same things and won’t bail out on the first exit offer.
In early-stage companies, the focus or thesis can transform as often market conditions and demand for the solution do. That’s why, though opportunity sizing is important, it’s not the determining factor. Early-stage investors must rely on the entrepreneur’s mindset to deliver the outcome; numbers on a spreadsheet can’t do that.
While a founder’s education and work experience come into play, it’s an entrepreneurial mindset that is essential. Willingness to take a risk or walk an untraditional path and ultimately learn from it are critical attributes. So is persistence and grit. Many founders we work with have past startup and founder experience, including some failures. A good entrepreneur is an outlier; they see things others don’t and are willing to go to the wall to back those beliefs.
Questions we ask when sussing out a founder’s mindset include:
- How have you previously led your team through a crisis?
- Take us through a smooth/rough day at your company. What went well/wrong and why?
- How do you motivate your team to get to that next big milestone?