What Makes a Startup Fundable?

In 2012 my MIT Sloan MBA classmates and I had the opportunity to visit Doug Leone, a partner at Sequoia Capital; he shared his insights and advice on what Sequoia looks for in potential investments. Here are some of the most important takeaways:

Understanding Market Dynamics

Understanding market dynamics is the first and foremost aspect of identifying a good investment. According to Leone, the only thing that can truly kill a startup is a bad market. Founders, on the other hand, can be recovered. Sequoia prefers investing in startups with misfit founders, those who may have failed in the past, and those who are driven to succeed because they have had a bad life up to that point.

Characteristics of a Good Founder

Sequoia likes founders who are misfits. They prefer investing in people who have failed in the past and those who are driven to succeed because they have had a difficult life up to that point. They also avoid those who have had previous success and want to take their company to the next level. Instead, they prefer founders focused on making 50 calls a day and building simple, user-friendly products.

Building User-Friendly Products

Sequoia likes to invest in startups that build simple, user-friendly products. Product managers who build simplicity are their favorite. They also like founders who are building a product for themselves. The best founders build a product for themselves, while the opposite wants to master a business plan in something they don't know a thing about.

Being Close to Customers

Being extremely close to customers and agile in the development process is crucial. Leone highlighted the significance of getting information from customers and building a vision around their feedback. If a company can't get customers to pay for their product, chances are they won't care.

Evaluating Startups

Leone has a different approach when it comes to evaluating startups. He prefers investing in startups that have the potential to grow ten times their value. This means talent will leave the building if a startup is too early. Also, if the idea takes more than 12 months to build, there is too much change, and investors may be too late to the market.