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Introduction: Qual vs. Quant DD, Seeking Alpha

Can computers and algorithms abstract away the “art” of venture capital due diligence and company selection?

This past year Google Ventures scrapped their investment decision-making algo, after 5+ years in use as an aid for their committee. Think about that: surely they had some top-decile data scientists trying to generate signal from noise across a startup’s financial projections, market size, transaction counts via Stripe, Twitter followers, and other quantitative realms. The likes of SignalFire and Correlation Ventures — which rose in prominence circa 2014 for their quant approach to VC — have similarly moved away from algo-based decisions (though they still maintain killer metrics databases). Such models likely attempted to capture “scores” for qualitative elements as well, but we all know it’s tough to assign numbers and ranks to that realm — as if trying to describe colors through words.

Ultimately, it’s impossible to quantify everything when assessing startups and founders.

Later-stage (Series B+) companies have track records and projections that can be sensitized endlessly (been there! 🤓). But at the early stage — where quantified traction is sparse at best, nonexistent at worst — people and psychology play an outsized role in a VC’s decision framework relative to hard-and-fast data.

Accordingly, I hypothesize that an early stage investor’s ability to parse qualitative/intangible aspects is what drives meaningful outperformance.

If you’re an avid consumer of startup ecosystem content (podcasts, tweets, the like), you’ve probably heard something like this “people matter most” ethos from several prolific early-stage investors. Surely the likes of Peter Fenton at Benchmark (49:19) or Union Square’s emphasis on empathy — among many others — are onto something. Evaluating such elements is a crucial component within a VC’s diligence. To succeed, we must exhibit a certain “perspicacity”- a level of psychological and motivational discernment, both at the founder and market level (i.e. sector tailwinds, magnitude of pain point, user receptivity to new solutions, etc.).

Through the lens of investment selection, this does not negate the importance of quantitative diligence. What I mean is VCs don’t differentiate meaningfully in their interpretations of TAM, unit economics, and models/projections. Alpha generation strictly from financial due diligence is — more often than not — arbitraged away, since everyone’s running the same numbers and reaching similar conclusions. Numbers are rarely up for interpretation, and projections for companies at this stage barely carry weight anyway. Forecasting inaccuracies by orders of magnitude are not uncommon (in both the beat and miss directions), even for the most thoughtfully-constructed model.

Where VCs do diverge is, per this hypothesis: (a) how they assess the qualitative aspects when prospecting and diligence-ing, and (b) how they dispense their insight and earned wisdom to the founders they support.

The following sections discuss how we at Fika think about that first part — evaluating founders before we write a check. We see the world through a “people-first” lens, as my colleague Jeff wrote. “Founder-firm fit” goes a long way in our books.

Below we’ll delve into 8 key qualitiative factors for founder assessment. Interestingly, each attribute has both an ideal and adverse manifestation — a VC’s job is to understand the subtle differences between functional and maladaptive. Hopefully this scaffolding helps you examine more closely, through this lens.

8 Qualitative Factors For Founder Assessment

1) Narrative + Storytelling

If nothing else, a founder needs to be a tactful storyteller — capable of synthesizing, packaging, and explaining their life/career journey to show why they’re THE best person on the planet to start this business. This spans beyond the founder’s life story; they ought to be adept at understanding the “why now” and market+sector dynamics, user pain points, and customer “journeys” when it comes time to package/sell (or know to delegate sales or any other function, but more on this in #8).

But a founder’s narrative reflex can be too strong. In those cases, everything becomes a story, even when a direct answer would suffice — especially when discussing metrics. This can rub VCs as well as potential teammates and customers the wrong way. Cogency works well.

2) Vision + Optimism

When assessing a founder’s clarity and cohesion in vision, we’re able to get a sense of the generative force behind that vision: optimism. By optimism, I mean in the way Packy described it — an “elixir”-like force, imbued with the belief that one can “pull progress forward.”

There’s a long list of founders in the Jobs/Musk archetype whose visions carry a sort of gravity — the kind that feels as if it’s conforming reality to their wills. Behind the scenes, that type of elixir can motivate employees to meet ungodly deadlines, etc., but it is a slippery slope if that “reality distortion field” is left unbridled…

Covered exquisitely by Alex Danco in a piece entitled “Are Founders Allowed to Lie?”, truth-bending is ever-present as founders find themselves in a sort of perpetual “sales-mode.” The extreme example of this is Elizabeth Holmes-esque megalomania, or the folks at Nikola who literally rolled their nonfunctioning truck prototype down a hill and shot an ad to pretend the truck worked.

There’s a fine line between explaining a grand (not-yet-existent) future vision and showing the interim steps on the startup’s ascent. As a founder, be sure not to conflate the two when explaining your progress.

3) Inquisition + Curiosity

It’s inevitable that the founder’s early-stage concept will undergo continuous refinement as it scales, from light tweaks to fulsome pivots. Inquisition, in this sense, distills to one question: “How can I do X better?” The right founders ask that daily, drawing on their curiosity across both their problem space and the world at large. They think deeply about incentives and gauging customer/user adoption psychology. They are coachable and welcome any feedback, especially constructive criticisms.

Even though a founder may have a superpower in one domain (see #8), they should be open to ideas and frameworks from other functions or disciplines. Having an introspective and explorative mind can help create a compendium of mental models — a “latticework” of knowledge — and can drive creative solutions in the infinite test→tweak→refine process of startup building. Such tendencies help move “unknown-unknowns” to “known-unknowns” in a founder’s infinite quest to reduce uncertainty.

But unchecked curiosity can lead to over-pondering. Inquisition ought to be balanced by decisiveness.

4) Grit+Drive

To illustrate this point, I’ll employ a metaphor I wrote about a while back that’s a fresh take on the tortoise and hare narrative:

Think about a race car, its speed unsurpassed on paved roads. But if there’s rain and slick conditions, that race car might lose its grip and skid into a wall; if it drives over a pothole, its transmission could rattle right out. Placing a premium on resilience — proverbial four-wheel drive, some shock absorbers — may render a car less aerodynamic, but it’ll win the race in the end. We’re looking for founders with high-performance but durable internal drivertrains.

This motivation ought to be intrinsic in the sense that its vital source resides within the founder — they’re driven by the mission, by a desire and curiosity to solve a problem. Some founders rely too much on extrinsic motivation — for example, questing selfishly for media accolades, like a teenage phone addict hunting for their next dopamine hit. This adverse form of motivation can detract from a founder’s precious time and energy (more on this in #6 Resourcefulness).

Having a bottomless well of motivational reserves is, to some degree, table stakes if one aspires to be a successful founder in the first place. We look to assess that drive as well as a founder’s ability to cultivate equanimity. Those who’ve spent time on sports teams may have heard their coach say “the best ability is availability.” The same goes for founders. Finding that symbiotic balance between work and life is often elusive; it’s so rough to encounter a founder who’s lost their zest for life by continually de-prioritizing their relationships and wellness. You don’t get bonus points for having bags under your eyes.

Despite the fact that startup life may feel all-consuming, it’s important to identify the “right” kind of motivation and to strive for that work-life equanimity on the margin.

5) Irreverence for Status Quo

We love founders who exhibit the *right* levels of irreverence. If you’re planning to drive a new product or platform into existence, you’d better believe that something about the status quo is already broken / worth breaking to be built back better. Related in a sense to Vision+Optimism (#2), irreverence manifests in that “move fast and break things” type of mindset. In a recent The Generalist piece (about the FTX fallout) Mario Gabele noted, “Something I don’t think VCs like to talk about is that building a great company requires transgression. This is especially true when a company must parry with regulators or confront parties with entrenched interests… behind every great company is a litany of infringements and encroachments, soluble sins.” [emphasis added]

And as my partner John Chen remarked, there is “nuance within founders who have set ‘noble values’ that could rationalize bad behavior.” Travis Kalanick comes to mind here; he thought the taxi industry was corrupt and not serving customers well, but that doesn’t necessarily justify a complete slash-and-burn and law-bending campaign. Even the “best intentioned” missions can be used as false-justification, so the best founders know how to toe the line.

This spirit is instrumental at that zero-to-one stage and early PMF. As companies build momentum and become more established enterprises, having too much irreverence can pose an existential threat to the company. We’re all too familiar with the Icarus-like stories of the WeWork, Uber, Theranos, and now FTX founders. Be a maverick thinker; know when to bend (but not break) the rules as you scale.

6) Resourcefulness

Resourcefulness in this sense relates to resource management and allocation. It implies a level of ingenuity, efficiency, and leverage-seeking — doing more with less. Beyond managing their own time, capital (raised from VCs and generated from operating) is the key resource that requires founder discipline. A founder must tactically deploy their time and the funds at their disposal to hire, build, test, and sell their vision.

The ability to stretch a dollar will go a long way especially in today’s crazy macro backdrop, but that’s a skill that transcends market cycles. Hitting a level of “penny-wise, pound-foolish” is the paradigm. Stringent with all cash use on the margin, but not afraid to shell out major $$ for a “10x” hire, critical R&D efforts, or the right marketing channel.

That’s easier said than done. It’s hard to know what the “right” customer acquisition channel is, whether a lead engineering candidate is truly “worth” above-market comp… But too much stingness can be self-defeating; sure you’ll have more runway, but if you skimp on the jet engines you may never get airborne 🚀

7) Magnetism

The term “magnetism” may connote a certain social grace or charisma. Our definition extends beyond that; we know not all founders are extroverts (in fact, many elite founders skew introverted).

A founder with an engineering background, for example, might generate gravity sheerly from their technical prowess, brainpower, or unique insights. That engineer’s work product might leave such a lasting impression on coworkers and industry peers that they’d jump at the chance to join the engineer’s mission. Whatever the style, this magnetism will help a founder attract, retain, and (dare we say) inspire their team.

Magnetism’s downside manifests in a sort of force-fitting or chameleoning dynamic. Such founders overly-contort themselves in an attempt to generate connectivity with a particular business concept, or to a particular audience. This traces back to the Narrative/Storytelling elements (#1) and the concept of founder-market fit: if you’re not authentically resonant with your work, solving a familiar pain point, etc., everything will feel contrived. Try recruiting an experienced technical cofounder if you’re a newcomer to the problem space, let alone attempting to conjure customer empathy while selling…

8) Superpower

Above I alluded to a “10x” hire — the concept relates to an individual who is 10x superior than their peers in a given domain. That’s the minimum threshold; we look for even further differentiation in talent in the founders we back — founders with superpowers. Our friends at Basis Set covered this topic excellently.

Closely related to the drivers of Magnetism (#7), a superpower can be a technical or functional superiority, a prior series of experiences or connections that present an “unfair advantage”, interpersonal dynamism, raw mental processing power, and beyond.

When combined with the awareness that Inquisition+Curiosity (#3) connote, a founder with superpowers will naturally know their limits, and they’ll seek to bring on team members with heroic domain- or function-specific capabilities. But without that introspection, a founder may think their superpower can transmogrify into another skillset, then wind up under-delegating and under-performing.

Conclusion: Imperfect Systems

It’s tricky to parse through the qualitative; my hypothesis and the eight factors mentioned above are inherently based on availability heuristics, pattern-matching, and simplistic distillations.

And in startupland, the proverbial mold is broken every day. Let this serve as a caveat that (1) every founder (and VC) is unique and shouldn’t be expected to be held up to this (or any) archetype, and (2) just to be clear, quantitative diligence matters.

Tactics for assessing the intangibles is another challenge unaddressed herein. And with today’s compressed round timelines, it’s even harder to get to know someone well enough to make judgment calls based on motivations and character. It’s an imperfect system, no doubt.

The way we handle it at Fika involves striving to ask the right questions of the founder(s), personal and professional references, operator contacts, and the like. One thing we love to do is connect pitching founders with target customers across our portfolio and broader network, and hopefully they’ll let us sit as a fly on the wall for that conversation — as an example.

This thesis touches on what is arguably the hardest part of the VC gig — making people-based decisions, with incomplete information. That said, I happen to think this is exactly what makes this job SO much fun.

James Shecter is a Senior Associate with Fika Ventures and focuses on enterprise / dev tools, fintech, and web3 infrastructure.