In a world of Pauls, be a Jessica
The importance of assessing character while evaluating early-stage founders
If you work with early-stage startups, chances are you’ve heard of Paul Graham – a programmer par excellence, a successful founder, a disruptor in venture investing, and a prolific writer. Among his many accomplishments, perhaps the most notable is the setup of Y Combinator (YC), a startup accelerator that ushered in a new era of early-stage investing.
While Paul did play a significant role in making YC what it is today, the contribution of one of the other three co-founders tends to go unnoticed – that of his wife, Jessica Livingston. Known as ‘the social radar’, Jessica’s contributions underpin a very important aspect of early-stage investing – the ability to judge character. While many highlight how crucial the pedigree, network, past experiences, and communication skills of the founding team are, their character is often less discussed.
With this in mind, I set out to see how successful venture capitalists (VCs) assess character. To my absolute surprise, very little has been written on the subject. A quick change of keyword from ‘character’ to ‘personality’ and suddenly you’ll find thousands of articles and takes on personality traits of successful founders. A 2024 Columbia Business School study concluded that conscientiousness and neuroticism were the two personality traits that had the largest impact on startup success, highlighting the importance of planning, resilience, and emotional stability.
Echoing similar thoughts, Marc Andreessen included a somewhat less discussed trait when asked about the psychology of successful innovators – ‘high in disagreeableness’, arguing that those who could be easily dissuaded tend not to be able to stand firmly behind their ideas. “If they’re not ornery, they’ll be talked out of their ideas”, he says. Flexibility, grit, and confidence are some of the other personality traits that find a mention in other material on the subject.
Why is assessing personality traits not enough?
A common thread in most writings on the subject is the archetype portrayal and projection of a successful founder as an out-of-the-box thinker, a person brimming with confidence who sets out on a mission to change the world and does not take no for an answer. A look at the most popular tech leaders of our generation (think Elon Musk, Steve Jobs, Sam Altman) reinforces this image and characterization. But recent times have shown that the search for tech demi-gods with a cult-like following can also yield personalities such as Travis Kalanick, Sam Bankman-Fried, Adam Neumann, Do Kwon, and Elizabeth Holmes.
One could argue that these instances point more to the rudimentary diligence by venture firms than to out-of-control personality types. Even then, when it comes to replacing founders or stewarding sinking ships, venture firms no longer enjoy the absolute power that they used to till a decade ago.1 Reduced legal rights, retention of control by founders, and diversified funding sources mean that unless there are massive breaches and a complete breakdown of trust, venture firms are unlikely to step in or garner the support needed for a coup. The potential for long-drawn-out legal battles is another strong deterrent.
A more reasonable argument would be that VCs, who play a key role in defining the controls and culture of early-stage companies, are disincentivized to put guardrails on hypergrowth. When late-stage investors decide to enter this party, they are essentially buying into the growth story, worrying less about the company’s governance module, and more about the potential for sustained growth. These misaligned industry incentive structures only serve to reinforce the outsized role that founder selection plays in the growth (or fall) of a startup.
In every successful startup founder’s journey, there comes an inflection point. Different periods in business history would point to a different stage when this transfiguration occurs – achieving profitability, ‘unicorn’ status, IPO or even the passing of reigns to non-founders. Simplistically put, a startup becomes a company. And the CXOs who steer the company through this monumental phase must position themselves as ‘leaders’. This is when it starts to get interesting. Search for traits of great leaders and you’ll find words such as empathy, empowerment, humility, cooperative, transparent, and trustworthy – representative of one’s character, and not personality.
So, if a strong character is a sine qua non to become a great leader and ensure the sustained success of a venture, why does the assessment of character traits only become relevant at a later stage? Would an equal emphasis on assessing the character of an early-stage founder not serve to better filter startups for a venture investor, resulting in fewer instances of bust-ups, frauds, and shutdowns?
Intuitively, the answer should be a yes but in practice, this is rarely the case. Perhaps the volume of applications and aggressive deployment targets (most venture funds deploy ~75% of the raised capital within the first 15-18 months of a fund cycle) make assessing character, in addition to personality, just purely impractical. Especially since character needs to be gauged in out-of-process interactions – for instance, how founders conduct themselves before and after a pitch presentation, or how they treat their salesforce (think, Byju’s), and not just how they grow revenue.
How to assess character?
Understanding the importance of character assessment is just the first step, then comes the big question – how does one assess character? And what are some character traits that can and should be assessed while evaluating early-stage founders?
“Personality is what we wear to the gym and character is how hard we work out.” Decoding this commonly used phrase gives us important clues – your personality (read, tenacity) might help you reach the gym, but it is your character (read, work ethic) that will help you achieve your daily fitness goals. Long-term, adjudging that one is more important than the other defeats the point – you need the tenacity every day – to get out of bed and hit the gym. Once there, it is your dedication and hard work that will inch you closer to your goals. One without the other is futile.
When I started my venture career, the lesson that hit me the hardest was that there was so much beyond the numbers that one had to gauge find investable companies. I once heard a partner say, “the founder is the custodian of your money – give it to someone who will use it responsibly.” It’s not just about picking founders who can be successful, it’s also about picking the ones who are good people – these are the folks who wear your badge in their network and among other founders.
A 2017 Harvard Business Review article made some important observations – first, more than it is let on, perceptions about character and trustworthiness outranked judgments on a founder’s competency while evaluating interest in a start-up. While skills can be acquired by learning or hiring, character is more permanent, whether good or bad. What this shows is that a founder’s reaction to being put on the spot (whether they get defensive or are receptive and smiling) is probably more important than their ability to provide correct answers.
Different stages of venture investing call for enforcing different parameters and standards to gauge character. At an early stage, when very little objective performance data is available, subtle cues such as conduct during interviews (is the founder open-minded or defensive when put under the spot), earnestness, resilience, and adaptability can be extremely useful. At a later stage, a founder’s ability to steer and motivate people, and strong corporate governance and ethics (do they say that a partnership or customer is under contract when it is in fact still in negotiation) can evidence a strong character. In India, there has been an emerging trend where companies report ‘Adjusted EBITDA’ or suspiciously conflate GMV and revenue. On the face of it, there is nothing wrong with either, but when you see these same firms manipulate their marketing and fundraising efforts using such numbers, it can be strong evidence of a house of cards.
Regardless of stage, a nuance that always lends useful clues is the relationship between co-founders. Some common follies are lopsided equity allocation, one co-founder dominating and overshadowing the other during investor presentations, and an unclear division of responsibilities.
All-in-all
The criticism against VCs that they care too much about financial returns is unfair (would you invest in a firm that did not generate attractive financial returns?) but their criticism for not doing enough to prevent instances of fraud and misrepresentation is just and warranted.
It was not long ago when India was wrought with stories of financial irregularities in startups such as Trell, Zilingo, BharatPe, GoMechanic and Broker Network and every Paul in our industry was advocating for better corporate governance without reflecting on their own evaluation practices. As we enter an era of responsible investing, it is not enough to say, ‘how could we have known?’ and absolve ourselves. We must recognize what each of us can do better. Until then, let’s appreciate and learn from the Jessicas around us.
Bonus
I asked some of the leading AI models “what is more important while evaluating venture founders, their character or personality?” and the answers are the least bit surprising!
Claude: “While both character and personality play important roles, I believe character is ultimately more crucial when evaluating venture founders.”
Meta AI: “For a founder, character matters more.”
ChatGPT: “If forced to choose between character and personality for a founder, character might be considered more crucial.”
Gemini: “For a founder, both character and personality are crucial, but character often takes precedence.”
Venture shops like Founders Fund (started by Peter Thiel) are set up with the tenet that they will never vote out founders