A venture capitalist's first question to a founder is about a major failure. An inability to answer ends the meeting, as it signals a lack of experience in confronting and overcoming adversity, a crucial skill for leading a startup.
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To test an entrepreneur's resolve, Lanny Smith's first piece of advice is to abandon their idea. He believes if simple discouragement can stop someone, they lack the resilience for building a company. Only those with "undeniable faith" will proceed, making it a powerful litmus test.
To predict the future health of a partnership, intentionally have difficult conversations before any investment is made. If you can't productively disagree or discuss serious problems before you're formally linked, it's highly unlikely you'll be able to do so when the stakes are higher post-investment.
Founders who have experienced failure develop healthy skepticism, preventing them from acting on weak signals. They require an overwhelmingly high bar of evidence, like ten consecutive successful demos, before believing they've truly achieved product-market fit and are not deluding themselves.
When evaluating senior candidates, don't view a failed entrepreneurial venture as a negative. It often indicates valuable traits like risk-tolerance, scrappiness, and resilience. These leaders have learned hard lessons on someone else's dime, making them potentially more effective in a new organization.
VCs can handle pivots and financial struggles. Their primary nightmare is a founder who quits. A startup's ultimate survival hinges on the founder's psychological resilience and refusal to give up, not just market or product risk.
A rising tide lifts all boats. The true test of a founder partnership emerges during downturns. Diligence should focus on teasing out traits like adaptability, humility, and accountability, which predict how a founder will react when plans inevitably go awry.
Beyond IQ and EQ, interview for 'Resilience Quotient' (RQ)—the ability to persevere through setbacks. A key tactic is to ask candidates about their proudest achievement, then follow up with, 'What would you do differently?' to see how they navigated strife and learned from it.
Founders from backgrounds like consulting or top universities often have a cognitive bias that "things will just work out." In startups, the default outcome is failure. This mindset must be replaced by recognizing that only intense, consistent execution of uncomfortable tasks can alter this trajectory.
A founder deep in the idea maze can articulate not just their current path, but also the alternatives they considered and why they were rejected. This demonstrates a profound understanding of their domain and problem space.
Great founders turn a pitch into a collaborative discussion by asking investors to identify business weaknesses. This signals curiosity, strength, and a desire for genuine feedback over just presenting a perfect picture. It demonstrates a coachable leader who is focused on gathering data to improve.
