Former Facebook General Counsel Rudy Gadre sat down for a Q&A to discuss what he’s learned about investing and building startups at the seed level.
Q: What’s the biggest investor insight you know today about backing startups that you didn’t know two years ago?
A: It is both simpler and harder than it looks. Simpler in that there are really only a few important things to look at at the early stage – basically team, traction and size, and nature of the market opportunity. Harder in that many companies seem promising on first glance, but developing a philosophy and discerning eye for which companies among those candidate investments are really likely to make it through all the twists and turns of being a startup takes a lot of (sometimes painful) trial and error.
Q: Does a solo founder (versus 2 or 3 co-founders) negatively affect your decision to invest? Should I be looking for someone to cover my weaknesses (marketing, sales) before looking for investment, or is that something investors can connect me to?
A: If you are a one-man band, you would need to have awesome technical chops and show at least an aptitude for non-technical skills for me to consider an investment. I wouldn’t invest in a solo founder who lacked technical skills barring very unusual circumstances, as someone obviously needs to build the product. For people who are looking to fill in missing skillsets on a founding team, programs like Founders’ Institute and 9Mile Labs may be worth looking into as they can help fill gaps in a team’s skill set.
Q: How do you source deals? Conversely, how would you like entrepreneurs to find you?
A: I am fairly well known in the local community by now, so by and large people come to me. In general, I am much more likely to take a close look at a company if an entrepreneur is referred to me by someone I think is awesome, as I find people who are awesome in some regard tend to refer other people who are awesome.
Q: How much of a startup’s success has to do with the founders, as opposed to the idea? If you had to choose, would you put money into an awesome founder(s) + average idea or average founder(s) + awesome idea?
A: Founders are much more important than ideas – as the cliche goes, the A team will turn the B idea into gold, but the B team will turn the A idea into something unmentionable. Startup success is much more about execution than the original idea.
Q: Within how many seconds after meeting the founder do you get a gut feel for an investment? How often do you follow through with that gut feel once you’ve done the standard due diligence?
A: I wouldn’t say it’s “seconds”, but certainly by the end of the first meeting I will have a gut feel for the founder. If my initial gut reaction is that something is off, then there is a high rate of “no”. Conversely, if a founder passes the gut check, I will end up investing a fair percentage of the time – maybe 30%?
Q: If you were a self-funded start-up with a proven, high visibility product in the marketplace (mobile applications), traction and large growth opportunities, what would be some of your deciding factors between a Super Seed or Series A round?
A: First, how much money do you need to get the business to the next inflection point (be that another round of funding, profitability or an acquisition). Second, which set of investors (angels or institutions) will bring the most strategic value for your stage of business. Third, how much dilution are you prepared to take on (although within reason, I always encourage startups not to worry too much about dilution at the early stage, since (a) entrepreneurs are almost always too optimistic and raise less money than they actually need, which frequently results in them trying desperately to raise a bridge when their backs are to the wall, and (b) an entrepreneur’s goal at the outset should always be to survive and grow a big business, as you would much rather have a smaller share of a larger pie than a huge share of a nonexistent pie).
Q: How do you evaluate follow-on rounds as opposed to the initial round? Do you look at different things? Or is it generally the same formula with more data?
A: I am mostly looking for successful completion of promised milestones when evaluating a follow-on investment, as that shows whether the team is executing with accountability and at a high level. Conversely, broken promises and missed deliverables are a red flag. I am also always looking at “what is the next fundable event”, and how is the company going to get there? It is a good exercise for startups to figure out what proof points they need to demonstrate to get their next round of funding and work backward from there to figure out what they need to do to get there and how long it will take. They should also plan for at least six months (at the minimum) after they have demonstrated those proof points to raise institutional money – one very common mistake entrepreneurs make is to not raise enough money to see them to their next fundable event + at least six months of burn beyond that. Finally, I am looking at the general environment to make sure my original investment thesis (or another compelling investment thesis) is still intact.
This Q&A originally appeared on Yabbly and has been edited for length and clarity.