As investors we talk a lot about the importance of people in our decisions; yet how much do we understand about the largely intuitive decisions we make about the people and teams we invest in?
In some areas we are overwhelmed with data, obsessing over metrics, cohorts, gross margin, payback on CAC (cost of acquisition), mom (month on month) growth. We can be empirical in our analysis and evidenced-based in our decision making but this is at best managing through the rear view mirror. What has happened in the past is no guarantee of what will happen in the future.
Many of our investments are very early, with minimal revenue, data or evidence. So much, if not most, of our investment hypothesis is predicated on our intuition and belief in the potential of the founding team.
“They have what it takes”, we say.
But what is “it”?
“She’s a machine”.
“He’s a force of nature”.
“They are a world-class team”.
But what do these words mean?
Without context and the ability to compare and contrast our decisions, these descriptions are unhelpful. They don’t help us in our decision-making, they don’t help us learn and they don’t help us to understand our teams, they don’t help us understand how we can help that founder to grow and to build a world class team around them.
As an organisation Notion is striving to engender a more meaningful understanding of entrepreneurial potential. First and foremost so we can better understand the people we are working with in order to help them reach their potential and build diverse, powerful and high performing teams. Our role is simple in this regard…
- Invest in people with genuine entrepreneurial potential solving a massive problem;
- Help them building a world class team; and
- Do what we can to help them fulfil their personal and company potential
- And over time, make ever better decisions about how and when we invest and how and when we help.
It’s interesting to consider what an entrepreneur actually is. The French Philosopher Jean-Baptise Say apparently coined the term in about 1800:
The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield. Jean-Baptise Say.
The term entrepreneur can encompass many people with varying ambitions, however, the technology entrepreneur, in particular, the type that appeals to venture capital investors is well captured by economist Joseph Schumpeter:-
Schumpeter’s view is that entrepreneurs are first and foremost innovators: people who come up with ideas and embody those ideas in high-growth companies.
These entrepreneurs destroy old ways of doing things and create value and stimulate economic progress by finding new and better ways of doing things at scale, seeing and exploiting opportunities.
Notion’s founder characteristics
As you would expect our approach to understanding founder characteristics combines a healthy combination of left brain thinking, which is really my input [i.e. Stephen Millard] with a right brain, slightly bonkers in a brilliant way twist that is – frankly – all Chris Tottman.
1. Conventional characteristics, aka how smart?
We believe the conventional measures of IQ and EQ are important as a starting point to give immediate insight into two of the founders’ core strengths. So smart both in terms of intelligence and their understanding of themselves and the people they work with.
- IQ: Intellectual Quotient. Their raw intellectual horsepower. This doesn’t necessarily correlate with academic success, although often does.
- EQ: Emotional Intelligence. How well they understand and handle themselves and others (personal and interpersonal awareness)
We look for evidence of both of these, the latter being harder to judge, yet equally if not more important.
2. Competency characteristics, aka how good at the job at hand?
- TQ: Technical Quotient. The ability to understand complex technical challenges related to their area of expertise which could be technical skills, but could as well be sales and/or marketing.
- DX: Domain Expertise. Do they demonstrate a deep understanding of their market, segment or industry? Does that manifest in a strong network or community they can engage with. Are they a thought leader in their industry?
- CX: CEO / Leadership Potential. Does this person have the ability to lead their team well now and through the life of the current investment? Do they surround themselves with great people, who make them even better? Are they building an A* team? Do they have previous experience of leading teams at scale? Do they have the potential to scale themselves all the way from founder to leader to CEO?
- LQ: Learning Quotient. How readily do they take on new information, acquire new skills and behaviours? The term intelligent humility is powerful, as the two combined would indicate someone who is open to failure, learning from mistakes and the constant iteration and innovation necessary for success.
These are all important, we expect one or two areas within this section in which the founders are exceptional.
3. Unconventional measures – aka how likely to build a massive and valuable business?
These three are often less tangible at the outset, but more evident in the founders with the greatest resilience over time and we believe that those with outstanding capability in these areas – balanced with the appropriate strengths in other areas such as leadership, learning, interpersonal awareness – will correlate with the biggest outcomes. Of course, only time will tell.
- GSDQ: The “Get Shit Done Quotient’. These people move forward at a relentlessly fast pace, over extended periods, driving delivery and holding themselves and others to account throughout the organisation. They have the capacity to keep moving forward relentlessly, demonstrate real grit and staying power. They also have the ability to understand what’s important and what’s not, focusing on constant progress on the most important factors for success.
- GPQ – Generates Profits Quotient. These leaders demonstrate the ability to build a business with strong underpinning economic viability. They build what Warren Buffet calls an “economic moat” around their business. In the world of SaaS, this doesn’t necessarily mean EBIT, but rather the deep understanding of the importance of building a business based on strong underlying financial strength – high gross margin and high recurring revenue margin, rapid payback on customer acquisition, customer retention, revenue expansion and growth. They know that in building a value SaaS company there are only three things to really care about: how fast they grow, how much it costs to acquire a customer and what that customer is worth. They know to never run out of the cash to fuel that growth.
- FuckQ: The fuck you quotient. We know them as archetypal Type A’s. We love them and fear them in equal measure. People with high FuckQ are driven to achieve, to shape the world to their way of thinking, often in the face of accepted wisdom. These founders will listen to advice but ultimately have complete clarity of their vision and total belief in how the world should work, how it should conform to their point of view. “Sure I will listen to what you say, but I make the decisions, this is my business.” Of all the “unconventional” characteristics this is the most intriguing and enticing almost intoxicating, but also potentially the most dangerous and damaging. This must be balanced – in our opinion – by a high learning quotient otherwise it simply becomes hubris. And the leadership team is an A* team that is open and trusting, yet combative and committed to balancing the strengths of the leader.
What does this teach us and what next?
Firstly and most importantly these criteria give us a common vernacular to describe the people we invest in and secondly allows us to understand them better.
We recognise there are limitations. This is a subjective process and each of our team assesses and thinks about their founders differently, so it is evidently not a tool for ranking founders. What it also provides us with is a window into how each of the Notion team thinks about each of the people they have invested in a way that is actionable which may also be very interesting over time.
This is, of course, a relatively simple framework, but nevertheless, one that we believe will allow us to understand our teams better and over time support them better and faster, earlier in our investment journey.
Posted by Chris Tottman and Stephen Millard.