How founders can prepare for VC founder diligence

In this series on founder evaluation, I’ve tried to demystify the process at some top firms and some shortcomings of these interactions. 

But knowing what to expect is only half the battle — founders should also proactively ready themselves for the various types of founder evaluations. 

Investors take a lot of team risk when investing at the early stage. Statistically, founder-led ventures perform much better than those with a leadership transition. Replacing the founders is one of the last things VCs want to do. Hence, they care a lot about understanding them.

Preparation for individuals

To be best prepared to be evaluated as a founder, you need to learn about yourself and understand what your personal development path could look like. 

As investor Christian Miele from German VC Headline puts it: “At the end of the day, early-stage investing is all about the human beings. Soul searching, self-awareness, and reflection are powerful tools for founders to get to know themselves. This will make it easier for teams to leave a confident impression on VCs.” 

Here are three tools you can use to do so.

1/ Self-exploration

The first, most vital tip is to start with what you already know. We all have hunches about what the next great hurdles in our personal growth might be, from key relationships we want to improve to old patterns and beliefs we want to break free from or elements of our personality we need to understand in order to change. Create a roadmap of these topics. 

Miele also suggests that founders think about their communication style: are you someone who communicates through logic and facts? Or are you someone who paints a big vision? Situating yourself on that spectrum can help you identify weaknesses. 

2/ Personality Tests

If you are into personality tests, take one you’re not familiar with. I like to use a combination of strength-based and derailer-based tests. Some well-known ones are the Clifton Strengthfinder, VIA Strengths (free) and the Hogan Assessment (especially for derailers). Some of the leading founder coaching groups work with the more esoteric Enneagram framework. Of course, some other classics are Myers Briggs — though not scientifically validated — and the NEO Personality Inventory (NEO PI-R). 

Do consider that as a founder, you are often under high stress — stress that impacts you more emotionally and intimately than if you were simply employed. As you go through these diagnostic processes, make sure you understand how your responses might change under high stress. 

3/ 360-degree Feedback

So-called 360 performance reviews can be a great way to get multiple-source feedback from your team, colleagues and other stakeholders, helping you to guide your leadership.

The most effective 360 reviews are detailed and capable of generating deep and broad feedback. Ideally, you will identify up to 12 people with the requisite level of insight to enable them to review you. They report their own observations regarding qualities you want to improve upon. You, in turn, fill out a self-assessment identifying the areas you perceive to be your strengths and weaknesses, as well as areas for growth.

If you want to try a 360 performance review, consider bringing in a coach to make the process really effective. A coach can do some of the heavy lifting to generate the report, review feedback and come up with a development plan.

How to integrate feedback

Ultimately, the type of feedback process or personality test you work with matters much less than the quality of the integration process. Interpretation is the most valuable part of the process. Sit down either with your colleagues, a mentor or a coach to chart your journey forward. Consider the question: what will the business need from you as a founder-CEO today/in 12 months/in five years? What will the people on the team need from me? What will my family, friends and other stakeholders outside of my company life need from me? 

Without the interpretation phase, all the testing and feedback is worthless. Make sure you work with someone who can challenge your logic eye-to-eye and hold you accountable. 

Preparation for teams

To get your team ready for evaluation, it can be useful to consider where you stand in relation to your team, with regard to multiple dimensions.  

Dave Winsborough, a world-renowned expert in team behaviour, has a good framework for thinking about this. He writes that each member has “a functional role, based on their formal position and technical skill, and a psychological role, based on the kind of person they are”. Winsborough notes that many organisations only look at a team member’s functional role, assuming that good performance will simply follow, but “a more effective approach focuses as much on people’s personalities as on their skills”. Keep this in mind when looking at your team. 

1/ Capability analysis

You need to understand how to develop your team’s capabilities over time in multiple dimensions. These incorporate members’ leadership skills; the functional skills, specific to the business model and stage-specific scaling challenges: is each member familiar with the types of problems they will face at each maturity stage of the company?

2/ Team interaction

Next, gain a fuller understanding of how your team works together and the social dynamics at play. The Belbin Team Roles model might be helpful here. Google has also published strong work on team dynamics that you might want to consider. 

Integration

Just like the personal development work, the team development work does not stop with the diagnostic phase. You need to answer the “so what?” question and be able to talk about your growth as a team. In the fundraising process, specifically, you will need to answer: What needs to happen until the next fundraise? Which are the critical hires that need to be onboarded? What are the communication issues we need to work through?

Conclusion

The founder evaluation process can be fraught. But keep the process in perspective by remembering that you can learn just as much about VCs as they do about you from their approach to founder evaluation. 

Acknowledge you are helping investors get to yes or no by asking them directly: “What do you need to make a decision?” If the response is: “I know it when I see it,” you’re likely looking at a VC shooting for optionality in a FOMO-driven funding market. You can identify them by their lack of specificity; they’ll also likely be biased. Great investors, in contrast, will be able to clearly present their process, framework and expectations in order to make an investment decision.

When it comes to your evaluation, trust in the knowledge that the more authentic the portrait of you is, the better the match with the investor will be. Just don’t let that portrait be distorted by the anxiety of being put in the “hot seat” of the VC diligence process. Evaluation is not something you should be afraid of. 

As Zoe Jervier Hewitt, who has evaluated hundreds of founders and built frameworks at EF and EQT Ventures before joining Sequoia in 2021, eloquently puts it: “The raised awareness and actionable insight that comes from a good diligence process can be invaluable to a founder as they look to grow both the company and themselves as a leader.” 

Julius Bachmann is an executive coach based in Berlin focused on working with entrepreneurs. He is also cofounder of JRNY.