With limited data, how does an early-stage investor know which founders to back?

With limited data, how does an early-stage investor know which founders to back?

Investible co-founder Trevor Folsom.

"My number eighth investment was in Canva's first round of capital. Would Investible be around today without that investment? It's probably unlikely! A lot of people start investing and don’t get to that 20th portfolio company – it’s very difficult, it's time consuming, and it can be very underwhelming when you don’t get success in five or six years," says Investible co-founder Trevor Folsom.

Entrepreneur-turned-early investor Trevor Folsom readily admits that luck and "gut feel" have played their part in the value generation experienced at Investible over the years, having backed such companies as Canva, Car Next Door, CIM, Mastt and more.

But early on in the journey there was an understanding that data, no matter how limited, needed to play an integral role.

"The hard part about investing in first-time founders in the early stage is there’s not a lot of data available," Folsom said at the E2E (Entrepreneur-to-Entrepreneur) Summit in Sydney last month.

"You can have coffee, that’s one data point. You get a resume and get references, and they always give you good references...so we had to build something."

This led to the development of the Investibility Index that analyses various aspects of a business and its vision, with a heavy weighting towards the founders themselves. But how do you quantify such a qualitative measure as a founder's potential? 

Part of the answer for Investible was working with and backing Folsom's business coach Michelle Duval in her company Fingerprint for Success (F4S) - a tool that is not only used for the index, but is also utilised by the likes of Atlassian, KPMG, SAP, Verizon and others.

"We use it to get a better understanding of the founder’s desire and motivation in the workplace. Everyone’s probably done Myers-Briggs and all that. It's not Myers-Briggs; it's about your perfect environment that you want to work in or aspire to create, so as a founder it’s a great tool, and it’s equally great for us as investors to get a better understanding and therefore ask more relevant questions," he said.

He said there were 240 units of data that Investible could collect to make an investment decision, although most of them were gathered throughout the business growth process post-raise.

"You can’t collect it in the first round of capital; there’s about 80 units that we collect and that’s the science," the Investible co-founder explained.

"The great thing from founders is most of them tell us it was awesome to go through that because it sets them up, and [they] learn a bit about themselves. We ask them questions that they may not have thought of, and they can quickly scurry and build that in and have those answers."

Investing in the humans behind the business

Folsom, who co-founded Investible with Creel Price after they exited their software business Blueprint Management Group for a nine-figure sum 15 years ago, said the team tended to invest in approximately one company out of every hundred they saw.

"In this much more competitive landscape, some founders come to you and you don’t have time to do three or four weeks of work with them. Some other investor might bring them to you and you’ll have to use your art, your gut feel," he explains.

"But we try and limit that, because if we backed everything from gut feel, especially with other investors' money, it can be pretty dangerous."

When asked what he looked for in founders, Folsom said he took into account their true aspirations, noting it was necessary to have a clear connection between the business model and what they're trying to solve.

"You can read pretty quickly if they’re just aspiring to be financially successful, whereas we tend to look for real opportunities that the founder can demonstrate that they are qualified to be the leader of that solution," he said.

"They are competing globally now to solve either a problem or capitalise on an opportunity. There are plenty of cases of successful founders that do that, but the ones we like to back are the ones who give us confidence that they can build and rally a team, and that team will be the most successful entrepreneur as opposed to an individual.

"We believe if you pick the right founders, add support, be credible investors and support them in their highs and lows, maybe it's not the investment they make today that's going to be their success; it might be the one they make in a few years’ time, and we’re very proud of the quality of humans that we invest in."

Speaking at the E2E Summit in Sydney, Folsom shared some of his personal stories about the early days with Canva before it was the Canva we know today, and Car Next Door well before it had any prospect of a buyout from global rideshare company Uber.

He first met Canva co-founder Mel Perkins in Perth when she had an online school yearbook concept Fusion Books.

"I didn’t run into Mel again until we met in Silicon Valley, and one of our partners – a club member that’s still today – he found Mel and said 'I’ve just done due diligence on this, I really like it but I’m really worried that they're not going to have any Australian investors'," Folsom explained.

"Literally I was flying out that day, and so we met at the airport, and pretty much she convinced me," he said.

"What resonated in her pitch for me was she was really able to articulate all the different industries and companies she was going to disrupt along the way. Even if she didn’t achieve what Canva is today, there were definitely plenty of other opportunities for that business to either exit or raise money and have some success."

He said the relationship between Perkins and co-founder Cliff Obrecht was identified early on as a potential risk, but they were both open to addressing the issue as per the advice of investors. In addition, the pair were open to recommendations to bring on another co-founder, who ended up being Cameron Adams.

Folsom explained Canva co-investor Lars Rasmussen, who was also a co-founder of Google Maps, was "diligent in just turning everybody down until he recommended Cameron to come into the team, and the advisors around all supported that".

As Canva's growth trajectory took off rapidly, Folsom laments that Investible didn't have the capital already behind it to keep investing significantly in later rounds.

"In Canva’s case it was a case of they just kept raising, and if we had enough capital to keep backing them we could keep doing that," he said.

"Investible wasn’t big enough at that time to do that. It is now. So the next time we find a company that has four, five, six rounds of capital and they’re doing well, our model is to continue to back those founding teams right through to the end of the journey."

"Sometimes we say no"

Folsom's account of early stage investing with Car Next Door reflects his admiration of founders who demonstrate both grit and receptivity to advice.

"Sometimes we say 'no', and that doesn’t mean you give up," he said.

"With Car Next Door, Will [Davies] we said 'no' to first up and what really got our attention is he didn’t give up, he kept us updated, and then we set him a challenge. He hit that challenge and we were sort of obliged to invest, even though we knew it was going to be a very tough business to crack.

"His resilience and his desire to prove to us that he was investable was there, and that was a good trait."

He clarified that not all startups would be able to reach such highs, but one benefit of the very early stage investment model is that more modest valuations can still yield good returns.

"We’ve got lots of others that are climbing the ladder and some of them may never meet that unicorn-only status, which we’re okay with because we’re investing so early that suitable returns are achieved at a lot lower exit valuation," Folsom said.

"What I learned in that early discovery phase of becoming an investor, there always is a lot more capital at a later stage. There’s less at the really early stage that are prepared to really back founders.

"We knew it was tougher and obviously open to more failure, but it was something that we still hold strongly today – all of our future plans are still about how do we build new models or products or funds to help the early stage, which is now becoming a trend. Everybody’s getting into the early stage, which is great."

He added that any past failures from founders did not give them a negative weighting in the index, but rather the opposite; if they'd learned from the experience, understood what went wrong, and had developed ideas of what they'd do differently next time, that's a plus.

"Australians aren’t necessarily that good at that – they tend to want to hide behind their failures and put them into the closet," Folsom said.

He said less than 10 per cent of founders Investible saw in Australia were repeat founders, but the share was on the rise.

"We’re finding second and third-time founders a lot more in the last 18 months – prior to that it was very light," he said.

He concluded that in the current environment good businesses with the right fundamentals will be able to attract capital, and those with valuation declines ought not be discouraged because very often the price tags announced in raises are not necessarily aligned with what would be paid by the market if founders had to sell the next day. 

"We don’t see this as a slowdown phase; we see it as an increase phase, and we've just got to continually be looking out there for the next company that’s going to complement our portfolio," he said.

"Innovation’s not going to change – this is a machine, a rocket jet that is going, and there are so many more areas of the world that could benefit from software and this innovation that’s happening. We’re more bullish."

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