As investors, we are asked several times a month – “How do you decide which start-up to invest in?”. Despite the universal truth that the market trumps everything else, we all invest first and foremost behind great teams, market be damned. However, we usually fail to explain what we mean by a great team.
At Stellaris, we have put together our own framework to define great founding teams, which we will detail in this post. The intent behind this post is two-fold: one, to cast more light on this fundamental question; and two, to seek feedback, especially on areas of violent disagreement.
Before we go any further, a few caveats are in order:
- All frameworks trying to define great founding teams are fundamentally BS, since we believe great founders don’t come in standard shapes or sizes. That said, it’s better to have a framework than to not have one at all
- When talking about early start-up teams, we believe that predominantly it’s the CEO that matters. Hence, we use the framework primarily for the CEO
- Different dimensions of the framework contradict each other, and that is intentional. As we go through the details below, we hope this point will become self-evident
- As a corollary to the above, we also believe it is unrealistic to expect a CEO to be exceptional on all counts. What we look for in a CEO is a spike on few dimensions, and a basic level of competence on others. Even Tendulkar could not become the best bowler in the world, though South Africans may feel otherwise
- Several examples given below are from companies which are not part of our portfolio, so please take them with a pinch of salt.
1. Learning Agility
This refers to rapid iteration and ability to derive insights from continuous experiments. No founder has a perfect understanding of customer needs on day one, and it is learning agility that allows him/her to evolve and stay ahead of competition. Agile CEOs are curious to learn, do not get emotionally attached to ideas, and are ready to change their opinion based on data.
Livspace is a great example of learning agility’s impact on a business. When the company started, its business model was based on building modular furniture with parts which were usable across multiple designs. This was to allow them to build a large range of furniture items with low supply chain complexity. Just a few years later, the company looks entirely different. It is now are a home design consumer brand powered by a tech-based designer platform at the back-end. This transition has been possible solely because of the founders’ capability to iterate, learn from their experiments, and evolve the business model.
Another example, and a recent addition to our portfolio, is Varun of Mamaearth. Varun is a hard core FMCG guy, with years of experience in the world of offline brands. Looking only at his background, you would imagine him to be a traditional FMCG marketer. Nothing could be further from the truth! Varun’s knowledge and understanding in matters of online brand building and distribution stands out as a clear spike and was one of the factors that impressed us the most when we invested. The best part about it is how it was acquired in just two years – through reading, taking online courses, learning from industry experts and multiple iterations – and serves as a constant reminder to us that it is the willingness to learn that is scarce, not the sources of knowledge.
This is a much abused, catch-all phrase to do with anything and everything on the team front. Any attempt by us to define leadership will be futile, and hence, we want to highlight two key traits of founders who are strong leaders.
One, these founders look to build a core team of individuals who are stronger than them. A classic example of this is how Myntra built its team, and it reflects in the quantity and quality of founders who were part of Myntra’s senior leadership team. Two companies from our current portfolio immediately spring to mind – Loadshare (Raghu) and Mfine (Prasad and Ashutosh). While there is a long way to go for these companies before they can be called a success, the early signs are very promising.
Two, great CEOs also have high EQ which allows them to persevere far longer than most. These CEOs are decisive by nature and do not look for external validation. Here, we need to look no further than Vijay Shekhar Sharma, who ran One97 for several years before experiencing the explosive growth that PayTM has seen recently.
A last word on leadership. Yes, there are several self-centered founders who have scaled companies to large revenues, but whether these companies will be around long enough is anyone’s guess. Sorry, but we cannot shoot ourselves more in the foot by giving any examples here!
3. Fundraising Capability
This is important in today’s day and age of multi-billion dollar funds. We have seen multiple times that fundraising being the key differentiator between the No. 1 and No. 2 players, especially in consumer businesses. A CEO who excels at this is inherently a great salesperson, can quickly establish a relationship with people, a communicator par excellence, and a strategic thinker who can continuously simplify his / her business for the most shallow of audiences (read, investors!).
No list of successful start-ups in India is complete without, you guessed it, Flipkart. While its focus on customer service enabled Flipkart to establish strong traction in its early days, it was founders’ ability to continuously raise ever-increasing sums of money that catapulted it to the top in the e-commerce space.
4. Growth Orientation/ Hustler
For investors, a founder who strives to be a market leader can be the difference between a great return and a good enough return. Growth-oriented founders are relentlessly ambitious and never happy with what they have achieved, they venture into new growth areas without waiting for answers to all questions – often, these are paths that don’t look obvious on day 1 – and they know how to execute fast.
One of the best examples of this is Swiggy, which has charted a phenomenal growth path for itself. It has surpassed all possible expectations on how fast the company would grow, has built innovative products such as Swiggy Pop, and is venturing into areas that many others will find non-core. We see Swiggy as a company which is not happy with its success in food delivery, and which is building itself into a distribution pipe to deliver anything to consumers.
5. Customer Focus
We cannot overemphasize the importance of long-term customer focus in building large companies. To drive customer focus, you first need to know your customer. A surprisingly large number of founders fail to explain who their real customer is – if you are a healthcare lending business distributing via hospitals, is your real customer your capital provider, the hospital or the borrower? Once you know your customer, you should be able to understand your customer’s needs and translate them to a product that solves their pain points.
There is no other company where we have seen this work, first-hand, better than BigBasket. That company will go to any length to improve customer experience e.g. it is repeatedly ingrained in each employee, from management to their warehouse and delivery fleet, that it is the customer who pays the bills for the company. This ensures a relentless customer focus is built from grounds-up into the DNA of the organization. As a result, BigBasket will happily scrap initiatives which are having an adverse impact on customer experience, even if the same would entail reduced growth.
Apart from the above, there are few hygiene criteria we look for: technology orientation (this does not mean CEOs need to be techies, but it does mean that they understand how best to leverage technology for all aspects of their business), strong ethics, intellectual sharps and overall business understanding. In our view, these are merely table stakes, and don’t separate great CEOs from good ones.
Having shared the framework, it would be remiss of us to not add two specific comments.
1. Companies with equal founders – founders equal not only by ownership, but also by their influence in decision-making – are exceptions to our belief that it is predominantly the CEO who matters. Often, co-CEOs are a recipe for disaster since there is no single place where the buck stops, the speed of execution gets stalled and personal differences become hard to manage. However, when it works, watching these companies grow is like magic being created. In such situations, we look at the level of mutual trust, whether there are complementary skills being brought to the table, and how proactively founders address potential issues between them.
2. There is no denying that markets win over teams. At the same time, as an early-stage investor, we are comfortable investing behind great teams targeting fuzzy markets. In these cases, what we look for is a large and clearly defined beachhead. We feel that over time, great teams figure out the large market they ultimately need to play in. Obviously, the equation changes for late-stage investments, as those companies have had time to build sharper views on their market definition and business models.
Last, this framework is clearly not perfect and is evolving. Most importantly, effectively applying this – or any other framework – requires a high dose of humility, and the desire to understand people rather than judge them. We would love to know more about your experiences and get feedback on our thinking – please share them openly or via DM on this blog.
Happy building great companies! And yes, if you dare to dream big, we would love to be a part of your journey.
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