Can investors see potential just by looking fintech founders in the eyes? Here’s what three of the world’s leading venture capital firms think
It is arguably the most successful investment of all time. Masayoshi Son invested $20 million in Jack Ma’s internet startup Alibaba in 2000. That chunk of cash helped Alibaba grow into a $600-billion ecommerce giant. Son’s company SoftBank enjoyed a payback of more than $100 billion. Just count those zeros. It’s a 5,000-plus return.
And why did Son back Ma, someone who couldn’t code and didn’t own a computer until he was 33? “He had no business plan, zero revenue, but his eyes were very strong,” says Son. “I could tell from the way he talked he has charisma, he has leadership.”
It’s an interesting quote. And a huge claim. Did he really invest on the glint of Ma’s “strong eyes”? And if so, what does it say about how investment works? How important is the personality of the founder when it comes to winning investment?
“It’s enormous,” says Richard Anton, founding partner of venture capital (VC) firm Oxx and former chair of the British Private Equity and Venture Capital Association. “The characteristics of the entrepreneur we are backing are key. It’s hard to create a new business. There are lots of new challenges. They may need to pivot multiple times. You need a leader capable of doing all that.”
To identify the right candidates, merely looking for steely eyes isn’t quite enough. The founder must be committed. “They need to be thoughtful, to understand their domain well and to understand the problem they are solving,” says Anton.
“There are two kinds of ownership. The economic sense of owning shares. And the other kind is emotional ownership. The kind a parent has for a child. An entrepreneur needs to be emotionally invested in a business for it to succeed.” He rattles off examples: Bill Gates at Microsoft, Larry Ellison at Oracle, Mark Zuckerberg at Facebook, all synonymous with their creations.
And the hallmark of an investable chief executive? “The standout predictor is that the person who founds it and runs it has already been successful as an entrepreneur. I don’t think it’s possible with unproven people,” Anton adds.
It’s an often overlooked detail of Ma’s career that before Alibaba he had already founded two internet companies, at a time when a webpage took minutes to load.
The power of telling stories
In Germany, one of the best known VCs is Oliver Holle. He’s a tech entrepreneur turned investor and now leads Speedinvest, backer of almost 40 fintech companies including hits such as Tide, Curve and Wefox.
Holle says: “It’s easy to laugh at Son’s quote, but there is truth to it. It makes sense. The leader needs to be able to paint a picture. They need to be obsessed with the product and then zoom out and give a broad-brush story to investors. The best founders don’t even use a pitch deck. They just have a talk with investors. If the entrepreneur can’t explain their story this way then there is a problem.”
Speedinvest has developed methods to analyse fintech founders. “The way we test entrepreneurs is to put them in front of incumbents, who we are friendly with or, even better, another founder from one of our portfolio companies and see if they can have a meaningful conversation. That gives us a clear picture,” says Holle.
For founders who pass the early tests, there’s one final challenge. “We always have a ‘three customer’ rule. Before we invest, we put them in front of three potential customers. That’s great for them, as they may win new business, and useful for us as we can see how they act,” he says.
Holle has red flags that disqualify an investment. He says: “If the company has a very distorted cap table. That means the founding team only owns a relatively small fraction of the company at that early point in time. That makes it impossible for us to invest. As we know the company will need a lot of future fundraising rounds, so that’s a big problem.”
There’s the question of how management and staff work together. “If the dynamics of the team members are not aligned, or there’s potential conflict, that is a huge red flag. It’s one of the biggest reasons startups fail,” says Holle. And the final one: “Dishonesty. There is a fine line between making big claims and making untrue claims. We’ll call customers to check claims about contracts and future sales. If a claim is not true, we walk out immediately.”
Can you bluff it?
In Silicon Valley, the cynical view is that a showman with enough razzle-dazzle in his pitch can hustle investors. A gadget for squeezing fruit juice called Juicero won $120 million from top-tier investors, including Kleiner Perkins and Alphabet, only to go bust after a reviewer noticed the packets of fruit mush could be squeezed just as efficiently by hand. Journalists noted the founder of Juicero was a former graffiti artist with no college degree. So how do VCs filter out the stars from the wannabes?
Mark Sherman is managing director of Telstra Ventures, which boasts three deca-unicorns with $10-billion-plus valuations, including cybersecurity company CrowdStrike, currently valued at $37 billion. “I think the Son quote has shreds of truth to it,” he says. “The piece I agree with is determination. Grit is something you can suss out. You can get a feeling from the steeliness of their eyes.”
What else are VCs looking for?
Other qualities require some probing. “We are looking for people with high EQ [emotional intelligence] and IQ. We watch their alertness and how they respond dynamically to questions,” says Sherman. “Are they a leader, able to take the hill? Or are they somebody who hides in a foxhole?” A sense of leadership is critical. Fintech companies can grow from a handful of staff to hundreds or even thousands.
Naturally, the complexity of fintech means these qualities are only part of the package. “We’re looking for super-deep domain knowledge,” says Sherman. He cites regulatory requirements, the nature of backend technologies and how to structure details, such as billing methodologies, as the kind of things a fintech founder might need to know. This is why fintech is comparatively immune to bluffers. A deep knowledge of payment architectures or cloud-native databases can’t be faked.
But the conclusion is that VCs still rely on gut feel in fintech. They have to. It’s the nature of the business. Neither a detailed business model nor glitzy presentation can compensate for the need of investors to feel the man or woman they hand cash over to is a born winner.
Even a veteran like Sherman comes back to this intangible quality. “You can tell within 30 seconds,” he says. “When the first words come out, you get a sense of whether they are a great guy or gal.”
Speedinvest’s Holle concludes: “In the end we look at the founder and for their pure will to succeed.”
It’s clear that in an age of artificial intelligence and algorithms, fintech investing remains refreshingly human.