How to Assess Founders During Due Diligence
Investing in early-stage startups? Evaluating founders is the most critical step. At pre-seed, seed, or Series A stages, the success of your investment often hinges on the founders’ skills, decision-making, and ability to navigate challenges. Here's what you need to know:
Key Areas to Assess:
Experience: Look for domain knowledge, past entrepreneurial efforts (even failures), and leadership growth.
Skills: Technical expertise, market understanding, and fundraising ability are essential.
Commitment: Full-time dedication, resilience, and genuine passion are non-negotiable.
Team Dynamics: Evaluate communication, equity distribution, and conflict resolution.
Vision: Ensure their goals align with market realities and scalability potential.
Process Overview:
Start with pitch decks and initial screening.
Conduct background and reference checks.
Use structured interviews to explore leadership and problem-solving.
Test their responses with real-world scenarios.
Red Flags to Watch:
Inconsistent storytelling or financial mismanagement.
High team turnover or unresolved conflicts.
Lack of market understanding or resistance to feedback.
Why it matters: Early-stage companies often lack financial proof, making founders the deciding factor. A systematic evaluation helps manage risks and identify areas where the team might need support, ensuring better investment decisions.
Read on for actionable steps, tools, and strategies to assess founders effectively.
How to pick startups - a crash course in due diligence
Key Criteria for Evaluating Founders
When evaluating founders, it’s essential to look beyond their resumes and credentials. By focusing on five key areas, you can better assess their ability to tackle challenges and deliver strong returns. Here's a breakdown of these criteria.
Experience and Track Record
Start with domain expertise. Founders who have a deep understanding of their industry, customer pain points, and market dynamics are better positioned to succeed than those figuring it out as they go.
Prior entrepreneurial experience, even if it includes past failures, is invaluable. It provides lessons on navigating challenges and making tough strategic decisions. A successful exit is particularly telling - it shows the ability to build value for investors and scale effectively.
However, having prior founding experience or an exit should not be considered a decisive factor. For instance, at Allied Venture Partners, we assess a founder’s historical experiences outside of business, including academic pursuits, athletic involvement, military service, non-profit activities, or other areas. We look for individuals capable of demonstrating skills in planning, execution, attracting talent, and leadership; therefore, prior business experience is not the sole criterion for showcasing these competencies.
Also, consider the career progression of the founders. Have they taken on increasingly complex roles? Managed larger teams or budgets? These are strong indicators of leadership growth and potential.
Skills and Capabilities
Experience only gets you so far - founders need the right skills for the job. A strong team will combine technical expertise with leadership abilities to guide product development, market strategies, and investor relations.
Don’t overlook commercial acumen. Founders must understand their market, identify revenue opportunities, and execute effective go-to-market strategies. Skills like sales, marketing, and partnership-building are critical for driving growth.
Another key factor is fundraising ability. Founders who can craft compelling narratives, present clear financial plans, and build strong investor relationships will have better access to the capital needed to scale. This also facilitates the capacity to attract and retain top talent. The ideal founder shall be capable of persuading not only customers to purchase their product but also talented individuals to join the team, often accepting lower compensation and benefits in exchange for the opportunity to contribute to a much greater vision.
Commitment and Motivation
Full-time commitment is non-negotiable. Founders who are fully focused - and willing to invest their own resources - demonstrate the kind of dedication that aligns their interests with those of investors.
For example, at Allied Ventures, we require all co-founders to work full-time on the business before we will invest. Additionally, we prefer to see founders who have bootstrapped to at least a handful of early customers and a few thousand dollars in monthly revenue. A founder who does not want to go full-time or start building until they raise money is a non-starter.
Perhaps the most important trait is resilience under pressure. Startups face constant hurdles, from technical issues to funding challenges. Founders must have the emotional strength to push through setbacks without losing momentum.
As Matt Wilson, Founder and Managing Director of Allied VC, states:
“The most common reason I see startups shutting down is running out of cash while searching for product-market fit. Founders need unmatched focus and resilience to keep iterating, even when it seems like nothing is working.”
Equally important is their personal motivation. Founders driven by a genuine passion for solving a problem or creating value are more likely to stay the course than those motivated solely by financial gain or recognition. Their commitment directly impacts the company’s ability to weather tough times.
Team Dynamics and Collaboration
A founding team’s dynamics can make or break a startup. Look at how they communicate and how equity is divided. Equity distribution often reflects team harmony and mutual respect. For example, the CEO will often hold slightly more equity than the other co-founders to establish clear leadership and responsibility. However, highly unequal equity splits can signal unresolved tensions or disagreements about contributions.
Also, evaluate the founders’ decision-making processes. Can they make quick, effective decisions? Do they have a track record of resolving conflicts and sticking to their choices? Founders who can work through disagreements and maintain focus have a clear edge in the fast-paced startup world.
Vision and Market Alignment
A clear, scalable vision is essential. Founders need to go beyond surface-level market research and show a deep understanding of customer behavior, competitors, and trends that are not yet widely obvious. They should explain not just what they’re building, but why this is the right moment to build it.
Scalability thinking is another critical factor. Founders must demonstrate they can grow their solution to reach larger markets and establish sustainable competitive advantages. As the saying goes, a first-time founder focuses on product, while a multi-time founder focuses on distribution. In the world of venture-backed startups, distribution and go-to-market strategies are essential.
Finally, adaptability is key. Rarely do startups succeed with their original plan. Founders need to pivot based on market feedback while staying true to their mission and values. Their ability to align their vision with current market opportunities can directly influence the potential returns of your investment. Even the best founders will struggle if they’re building for a market that’s not ready or solving problems that don’t exist. This is where coachability also significantly influences the founder’s capacity to adapt and pivot.
Step-by-Step Process for Founder Evaluation
Here's a structured approach to evaluate founders during due diligence, ensuring you gather all the critical information needed at each stage.
Initial Screening
Start by reviewing the founders' materials. Take a close look at their pitch decks to see how well they explain the problem they’re addressing, their proposed solution, the market potential, and the roles within their team. An effective executive summary should break down complex ideas into concise, impactful points and highlight early traction, such as customer validation, revenue growth, or user engagement.
Remember, how a founder pitches investors is similar to how they pitch customers, so look for persuasive ability to craft a story that addresses a real and urgent problem.
Pay attention to the founding team's background and its relevance to the problem they’re tackling. For instance, a fintech startup led by former banking executives brings a different perspective than one led by first-time entrepreneurs with no financial services experience. Neither scenario is inherently better, but understanding this context helps shape your evaluation process.
These initial observations set the stage for a deeper dive in the following steps.
Background and Reference Checks
After the initial review, verify the information provided through thorough research and background checks. Confirm their education and employment history, looking for patterns that show growth and leadership skills.
Professional references are invaluable, especially when they come from former colleagues, customers, or investors. Ask targeted questions about how the founder performs under pressure, their leadership style, and their ability to deliver results. References from individuals who have worked with the founder during tough situations often provide the most telling insights.
Don’t skip over social media and public presence. How founders present themselves online can reveal their judgment, communication style, and personal values. Look for consistency between their online persona and how they present themselves to you as an investor.
Also, investigate any legal or ethical concerns. This includes checking for past lawsuits, regulatory violations, or non-compete agreements that could affect their ability to run the business.
In-Depth Interviews
Use interviews to dig deeper into their leadership abilities and strategic thinking. Structure these conversations to explore both their business vision and personal traits. Start with open-ended questions about their journey, motivations, and long-term goals for the company.
Ask them to describe specific challenges they’ve faced and how they managed them. Pay attention to their problem-solving methods, decision-making processes, and the lessons they’ve learned. Founders who can articulate what they’ve learned from setbacks often demonstrate strong leadership potential.
Panel interviews or diligence calls with multiple team members can be revealing. Observe how founders interact with their team, who takes the lead in certain discussions, and how they handle disagreements or build on each other’s ideas.
Evaluate their market knowledge by asking detailed questions about their customers, competitors, and industry trends. Founders who can speak with depth and nuance about their market often have a clearer understanding of their business landscape.
Scenario Testing and Problem-Solving
Once interviews are complete, test their practical skills with real-world scenarios. For example, ask how they’d handle funding shortfalls, like, “What would you do if your current funding round fell short by 30%?” Or pose a competitive challenge, such as, “How would you respond if a well-funded competitor launched a similar product tomorrow?”
You can also explore operational scenarios to see how they’d manage key challenges, like losing a critical team member, resolving a major customer issue, or dealing with delays in a product launch. Their responses will shed light on their decision-making processes, crisis management skills, and leadership instincts.
Focus on how they approach problem-solving. Do they ask clarifying questions? Consider the perspectives of multiple stakeholders? Think through long-term consequences? Often, their reasoning process is more telling than the specific solution they propose.
Gauge their financial understanding by discussing topics like unit economics, cash flow, and fundraising strategies. While they don’t need to be financial experts, they should have a solid grasp of the key financial drivers for their business.
Final Summary of Findings
Compile all your findings into a detailed assessment that highlights the strengths, potential risks, and overall fit of the founders for the investment opportunity. Create a founder profile that includes specific observations about their capabilities and areas for improvement.
Assign confidence ratings to key attributes. For instance, you might feel confident in their technical expertise but have reservations about their sales experience. Being specific about these evaluations allows you to make more informed investment decisions and identify areas where the founders may need additional support.
Document your findings and outline recommendations for investment structure and support. For example, founders with strong technical backgrounds but limited business experience might benefit from board members with commercial expertise. Those with a compelling vision but concerns around execution might require more hands-on involvement from investors.
This systematic approach ensures you evaluate founders consistently across opportunities while gathering the insights needed to make well-informed investment decisions.
Tools and Resources for Founder Assessment
Having the right tools can make founder evaluations more consistent and objective. These resources allow you to capture essential details, compare founders fairly, and make smarter investment decisions. Below, we’ll explore some key frameworks, templates, and organizational strategies to streamline the process.
Founder Evaluation Frameworks
Using a scorecard can help standardize the way you assess founders. The Berkus Method, or a simple 1–10 scoring system with specific criteria - like leadership experience, market knowledge, technical skills, and team-building abilities - ensures a fair and structured approach.
To evaluate founder–market fit, consider how well the team’s background, skills, and network align with the opportunity. For example, a cybersecurity startup led by former enterprise security executives would likely show stronger alignment than one led by individuals from unrelated fields.
If unsure where to start, use our free Founder-Market Fit Scorecard tool.
Behavioral frameworks are also an effective way to assess less tangible qualities like resilience, decision-making, and adaptability. These tools focus on how founders have handled past challenges, their hiring practices, and how they manage customer relationships.
Another important area to evaluate is team dynamics. Assess how co-founders collaborate by looking at complementary skills, decision-making processes, role clarity, and conflict resolution. Successful teams often demonstrate clear roles, mutual respect, and shared long-term goals.
Interview and Reference Check Templates
Structured templates can simplify how you gather and analyze information. Behavioral interview templates with open-ended questions are particularly useful for uncovering leadership styles and problem-solving approaches. For instance, questions like, “Can you describe a time when you had to pivot your strategy?” or “How did you go about building your current team?” can reveal critical insights.
Standardized reference check templates can help you gather consistent feedback on leadership, collaboration, and the ability to achieve milestones.
Scenario-based interview guides are another effective tool. These guides present hypothetical challenges, such as a funding shortfall, and explore how founders would prioritize, communicate, and plan contingencies.
Technical assessment templates can help you evaluate a founder’s understanding of their product and market. You could ask about competitive positioning, customer acquisition costs, unit economics, or technology roadmaps. Tailor these templates to align with the specific industry or business model you’re assessing.
Data Room Organization
Once you’ve gathered your evaluation data, organizing it efficiently is key. Store all relevant documents - like resumes, reference letters, and equity agreements - in clearly labeled folders for easy access.
Keep an interview log to track key insights, interactions, and follow-up questions from conversations. This log can be invaluable when comparing opportunities or revisiting past decisions.
Create a reference check database that includes contact details, relationship context, and summaries of your conversations. This helps identify patterns and ensures no critical details are missed.
This doesn’t have to be an overly complicated process. At Allied, we use a simple master Google Doc that includes all of the company’s key information and meeting notes, with links to supporting documents stored in a Google Drive folder.
Support from Allied Venture Partners
Allied Venture Partners offers access to industry experts who can enhance your startup evaluation process. For instance, as part of our Advisory Program, any member of the Allied syndicate network can lend their knowledge and expertise during the diligence process. These professionals, including former tech startup executives, provide valuable insights into assessing founder capabilities and market fit.
Our network specializes in connecting investors with expertise across a wide variety of sectors, like AI, fintech, consumer, and enterprise software. By participating in due diligence discussions and mentorship opportunities, Allied limited partners can gain fresh perspectives on leadership potential and strategic alignment.
Identifying Red Flags and Managing Risks
Even the most thorough evaluations can uncover warning signs. Spotting these red flags early and taking steps to manage risks can safeguard your investment while still allowing you to explore promising opportunities.
Common Red Flags
Certain patterns and behaviors can hint at potential trouble. Here are some key red flags to watch for:
Inconsistent storytelling: When founders provide conflicting accounts of their company’s history, market size, or financial projections, it can raise concerns about transparency or attention to detail. Look for discrepancies in timelines, revenue figures, or explanations of past challenges.
Poor financial management: Warning signs include unrealistic burn rates, weak financial controls, and unclear unit economics. Founders who can’t clearly explain metrics like customer acquisition costs, lifetime value, or cash flow projections may lack the financial discipline needed to grow the business.
Team instability: High turnover or unresolved equity disputes often point to deeper governance issues. If early team members leave within the first 18 months, it may signal problems with leadership or company culture. Moreover, if team members leave soon after their one-year vesting cliff, this could indicate potential downstream equity issues related to the employee stock option pool (ESOP).
Market disconnect: Founders who don’t fully understand their competitive landscape, customer needs, or industry trends can struggle to succeed. This might show up as overestimating market size, underestimating competitors, or proposing solutions that don’t address real customer pain points. As mentioned earlier, one of the most common reasons startups fail is running out of cash while seeking product-market fit.
Lack of adaptability: Founders who are overly rigid about their vision, dismiss feedback, or resist pivoting when necessary can face challenges in early-stage businesses, where flexibility, responsiveness, and coachability are critical.
Inconsistent reference feedback: When former colleagues, investors, or customers provide feedback that contradicts the founder’s narrative, it’s worth paying attention to. Recurring concerns about leadership, follow-through, or communication skills should not be ignored.
Once these red flags are identified, the next step is to manage risks effectively to minimize potential losses.
Risk Management Strategies
Spotting red flags is only the first step. The real work lies in implementing strategies to address these concerns while keeping the opportunity on track.
Staged funding: Rather than committing all funding upfront, consider milestone-based investments. This allows founders to demonstrate progress while protecting your capital if issues arise.
Advisory board requirements: If founders lack certain expertise - like enterprise sales experience for targeting large corporate clients - requiring them to bring on seasoned advisors can fill these gaps and improve their chances of success.
Enhanced reporting and governance: Introduce monthly updates that include key metrics, financial statements, and assessments of challenges and opportunities. Additionally, accelerated vesting tied to performance milestones can balance accountability with retention.
Co-investment strategies: Partnering with other investors, especially those with complementary expertise, can help spread risk while adding valuable oversight and support for the company.
Professional development: Address skill gaps by encouraging founders to engage in executive coaching, participate in accelerator programs, or attend industry events to build their capabilities.
Board composition adjustments: In cases where founders have limited experience, consider requiring independent board members or investor representatives to provide guidance and ensure accountability.
Risk management is all about proportional responses. Minor concerns might only require closer monitoring, while more serious issues could call for structural changes to investment terms or governance. Some challenges, like skill gaps, can often be resolved through mentorship or hiring, but deeper issues - such as ethical concerns or character flaws - may justify walking away altogether. By tailoring strategies to the specific risks at hand, you can protect your investment without stifling the founders’ ability to lead.
Conclusion: Key Takeaways for Founder Assessment
Assessing founders is one of the most critical steps in early-stage investing, especially as global VC funding reached around $120 billion across 4,000 deals in Q4 2024 [1]. A thorough evaluation not only safeguards your investment but also sets the stage for maximizing returns.
As highlighted earlier, successful evaluation hinges on data-driven checklists and rigorous background checks [1][2]. Venture capital firms often dedicate over 20 hours of due diligence per investment [2]. While due diligence can be time-intensive, it doesn’t have to drag on. With clear objectives, prioritized data requests, and well-organized data rooms, the process can be streamlined to as little as 2–4 weeks, down from the typical 30–60 days [4][5][3].
A balanced evaluation framework is key. This includes examining the founder's track record, technical skills, leadership abilities, commitment to the venture, and team dynamics. Additionally, understanding how their vision aligns with market realities provides valuable insight into their ability to lead a scalable business. These dimensions are especially important for early-stage companies, where future potential often outweighs past performance [1][2].
Unlike later-stage investments that rely heavily on financial metrics and established business models, seed and Series A investments require placing trust in the people behind the idea. This is where networks like Allied Venture Partners, with over 2,000 angels and VCs, prove invaluable. They bring diverse perspectives and expertise to evaluate founders across various industries and markets.
Today’s tools - such as secure virtual data rooms and structured interview frameworks - have made founder evaluation more efficient and accessible. However, technology alone isn’t enough. The best investors combine these tools with experienced judgment, thorough reference checks, and scenario-based testing to gain a comprehensive understanding of each founding team’s strengths and potential.
FAQs
What are the best ways to assess a founder's resilience and problem-solving skills during due diligence?
To get a sense of a founder's resilience and problem-solving abilities, ask about the major challenges they've encountered and how they managed to overcome them. This can shed light on their critical thinking process and how they perform when under pressure.
It’s also worth delving into how they deal with setbacks and adapt to unforeseen changes. Real-life examples of past hurdles, whether in academics, sports, military service, other otherwise, can offer a clearer picture of their determination and how they handle adversity. Pay attention to their communication style and demeanor during these discussions - it can reveal a lot about their composure and strength in tough situations.
How can investors evaluate if a founding team has a scalable vision aligned with market opportunities?
To determine whether a founding team has a vision that can scale and aligns with market opportunities, investors should zero in on three core areas: market understanding, strategic adaptability, and execution capabilities. Founders need to show they have a solid grasp of their target market, including key trends and foreseeable hurdles, while also presenting a clear plan for adjusting to industry shifts.
It’s just as crucial to evaluate the team’s track record. Signs of resilience, prior achievements, and relevant industry experience can highlight their ability to grow the business while tackling market challenges. Conducting thorough due diligence - examining their vision, team dynamics, and market fit - can shed light on their long-term potential.
What are the key warning signs when evaluating startup founders, and how can investors address these risks?
When evaluating startup founders, there are several warning signs that could signal deeper team or operational challenges. For instance, equity disputes, imbalanced roles among team members, misaligned strategies, and poor leadership dynamics can all point to underlying issues. These problems often reflect how well (or poorly) founders collaborate, handle conflicts, and align on their shared vision and responsibilities.
On top of that, keep an eye out for unrealistic financial projections, a lack of transparency, or claims of guaranteed low risk - these can be major red flags. To navigate these risks, it’s crucial for investors to conduct thorough due diligence. This means verifying all claims, digging into the details, and assessing whether the founders can adapt and lead effectively, especially during challenging times.