By Samir Kaji. This article originally appeared on PEVC Banker, June 2, 2014.
We recently sat down with Rob Siegel, General Partner at XSeed Capital, a seed fund based out of Portola Valley, to discuss founding team cohesion and the role it plays in a company’s success. Rob’s investment areas include enterprise software, business operations where computational technology helps automate/improve company performance, and computing platforms that shape both business and consumer behaviors. He sits on the Board of Directors of Lex Machina, SIPX, Zooz, DropThought, CirroSecure and ZipLine, and he spearheaded XSeed’s investments in Pixlee, Chatous, Neon and Breeze.
Can you share with us the XSeed Capital story?
We began operations in 2006 and were part the first wave of seed-focused Micro-VC’s. Our investment thesis is grounded in working with companies where strong technology is the core component of differentiation. As such, we gravitate towards deals where the market problem/fit is understood, but the technology is challenging to solve.
While we tend to be very engaged with our entrepreneurs, we also know when to hang back and not get in the way. Our team is comprised of former operators, so our goal is to enable our entrepreneurs to make original mistakes, but also help them with missing the avoidable mistakes that we made in our pasts. Our initial check sizes tend to be in the $500K-$1MM range, but we are flexible to larger or smaller amounts when it makes sense. One thing that is unique to XSeed is the way that we leverage our talent, which includes EIR’s, advisors, and Fellows. Unlike traditional firms, these roles are integral to both our decision-making process and also to supplement our Partners in assisting our companies as needed.
Aside from the core technology platform, it’s difficult to debate the importance of a strong and cohesive founding team as perhaps the most important key driver to the success of the company. What are the top traits you look for in founding teams?
We actually look at the founding team very carefully before we make any investment. For us, we view the world through the lens of the team’s experiences and personality traits. Regarding previous experience, our focus isn’t restricted to working with teams that have run successful startups in the past, but rather we focus on where we find people that have successfully leveraged their experiences to grow critical skillsets and that are passionate about their domains. We love teams that are authentic to the markets they serve, are driven to have a huge impact, and want to draw in others to help achieve their goals.
From a personality standpoint, we look for people who are forceful and strong, but are also open to rigorous debate and divergent viewpoints. We gravitate towards entrepreneurs that are focused on getting things right rather than always being right. We look for people that have a maniacal obsession with creating the best solution for their target market – people who really want to delight their customers.
Those traits seem very important but don’t necessarily speak to how two or sometimes, more individuals will work together. You recently penned a blog post centered on the “Alphabet Soup Theory of Relationships”. Can you explain what this theory is and how it relates to start-ups?
The idea behind the Alphabet Soup Theory actually came from a discussion that I had with my wife about relationships. The core idea is that every one of us has 26 needs, which I characterize through the letters of the alphabet. While no human being can match up perfectly with all 26 letters/needs of another human being, the most important thing in a relationship is to find someone that lines up well with your “vowels.” Without vowels, people are unable to communicate with each other – there is only noise and gibberish.
I think this idea also applies to the start-up world. Every co-founder should strive to determine his or her five vowels and then try to find someone who maps well to those needs.
While the vowels are admittedly person-specific, there are certain vowels that I’ve found consistently important to consider in one’s cofounders:
A=Amusement: You need to enjoy the people you work with. Start-ups are HARD, and you might as well succeed or fail with people you like being around.
E=Evolution: Teams need to be comfortable that roles/responsibilities will evolve. Are you and your co-founder comfortable with the inevitable evolution of roles?
I=Interdependence: Everyone on the team depends on each other. It’s important that, like a successful sports team, team members should have unique and complimentary skill sets.
O=Objective: One of the most painful situations in a startup is when a cofounder is not pulling his or her weight. When this happens, cofounders need to be able to communicate with clear, concise and objective measurements on performance.
U=Understanding: The instant home runs we read in the press are six sigma outliers. Most days are battles for founders, both professionally and personally. As co-founders, you have to fully understand each other’s unique professional and personal challenges.
What are the early warning signs of a deteriorating co-founder relationship?
The most common warning signs that we see are when unresolved or lingering conflicts occur on a regular basis. Disagreements are expected and, at an appropriate level, encouraged. But when you and your co-founder have consistent conflict on a topic and can’t get over these challenges, or if you keep revisiting the same challenge repeatedly, it’s a sign that serious misalignment might be brewing. These things tend to snowball very quickly.
What do you believe is the number one contributing factor in founder dissolution?
Lack of trust amongst co-founders. Without trust, every comment and discussion is colored by perception, misinterpretation, and skepticism around agendas and motivations. With trust, candid and productive discussions are easily achieved, as everyone understands the common objective – to make the company successful with everyone’s interests in mind. When people don’t trust each other, issues don’t get confronted, and this is the single biggest personnel issue in companies.
What roles do investors play in maintaining founder alignment?
For the most part, it’s about pattern recognition. Our job is to look for the types of things we may have seen in the past and flush them out early. Sometimes our job is to get involved directly or to bring in another person to help with a troubling situation. Despite the fact that I have founded and run companies in the past, I know that founders may be reticent to say certain things to their investors as they view likely view me primarily as their source of capital. Because of this dynamic, XSeed will sometimes bring in someone else to help with a difficult situation who can coach a team and can be seen as their trusted 3rd party mentor.
Sometimes things are just not salvageable. In this type of situation, how do you disengage? Are there good ways to “fire” a co-founder?
If you get to a point that a relationship has become irreconcilable and it’s simply never going to work, the founders have to make a change. This is unfortunate but it happens. It’s actually preferable not to have to experience this as an investor because it’s actually easier if a team stays in place and gets it right than to have to find a replacement of a key person, which takes time, money, and involves substantial risk. That said, teams cannot be accepting of dysfunctional situations and they need to confront non-working scenarios head on with alacrity. Of course, transitions don’t have to be completely acrimonious. For example, entrepreneurs can be magnanimous with separation packages. Continuing to cause tension is not in the best interest for anyone. I’ve seen in my career that if you handle yourself well during rough times, good karma returns your way. I’ve been working in the Valley for over 30 years and one thing that I have learned is that people usually come back into your life and career. It’s never worth burning a bridge.