As a seed stage VC, when making an investment decision, you are taught to focus on Product , Market and Team.
In my mind, diligence on product is not too hard. First thing to look at is 'does the technology deliver what it promises?' That's binary. Then I try to understand how the product works. If I don't understand the actual technology, I find someone who does to help me and work through it first with the company and then one on one with that person. The product market fit thinking is harder. I think about the problem being solved. I think about the actual buyer. I think about the user (who is often different from the buyer). And I work through the challenges the company will face as it finds customers, pitches customers, closes customers and services customers. Granted this is a simplification, but the point is that doing diligence on 'product' can be learned and refined. I wouldn't go as far as to say it's checkbox, especially for really unique products, but it is process driven.
Defining the size and growth rate of a market is probably easier than the work that gets done on the product. There is some acceptable threshold in terms of size and growth. Analyzing the TAM, SAM and SOM (I will make a separate post on this) can be done using data that is publicly available. Most analysts that are starting out usually get assigned this task, because it's heavily researched based. Not a lot of intuition required for understanding. Again, this is a simplification, but the point is that when a bad investment is made it is rarely because a mistake was made sizing and assessing the growth of the market.
So that leaves team. Of course a team must be uniquely qualified to solve a problem and there must be a great team dynamic. Usually good resumes and good experience can get you part of the way to answering these questions. The locus of the team is the founder. My view is that a great deal of the success of a company will depend on the founder and how she or he assembles the team, nurtures it and manages it to build a great product and sell it into a large and growing market.
But how can an investor know if they have a great founder? Okay... maybe that person has has success with startups prior. Usually a good sign. But maybe they haven't. What qualities should I look for as an investor? Tough minded? Open minded? Good vision? Good motor? Something else? It might depend on the situation. And even if I decide what qualities I'm looking for - how will I know if I've found them? Is it as easy as just asking? I doubt it.
So the irony here is that the factor or factors which contribute most to the success of an investment are the qualities possessed by the founder, which are both hard to know and hard to measure.
That's why this blog focuses on intangible qualities of founders. The more that can be understood about what makes a great founder, the better chance there is to find great founders and help cultivate great founders. And be successful as an investor in great people and great companies.
Get ready for more on 'intangible qualities' of founders over time.