The Four T’s: a PM-turned-VC’s framework for evaluating startups, part one

This is part one of a series on the Four T's. Check out part two here.

Evaluating startups is part dark arts, part science. No two companies are the same, and certain traits just can’t be quantified effectively. But like any (former) product manager, I’ve put together my own framework that has helped me to assess startups in a structured and straightforward manner. I call this framework The Four T’s: Team, TAM, Tech, and Traction. This week we'll start with Team and TAM.

Note that I'm not the first investor to use one or more of these T's, nor will I be the last. So why write this up and throw into the depths of the internets? I recently read and was inspired by Bloomberg Beta’s Criteria for Investing, which provides a concise yet comprehensive description of how that firm evaluates companies. Similarly, I’d rather entrepreneurs are able to put their best foot forward during the pitch and focus on what makes the company a great business and a good fit for partnering with myself and Mayfield. Outside of an investment context, this framework could also be useful if you are considering joining an early-stage startup and need a way to think through evaluating the company.

This framework comes with a couple of caveats:
  • A focus on enterprise early-stage. And primarily series A raises at that, though with different weightings it works for seed and series B. I’m an enterprise guy through and through, and sometimes consumer trends like Snapchat, Tik Tok, and Youtube reaction videos confuse the heck out of me. That said the 4 T’s do work in consumer, but need to be applied very differently (e.g. what to look for in the Team, what Traction means for a consumer product, etc.).
  • Opinion, not gospel. The beginnings of this framework came from my evaluating startups to work with Docker’s enterprise platform, and has matured considerably at Mayfield from working with some truly exceptional founders, listening to a lot of pitches, and the mentorship of some very experienced investors. Ultimately though, keep in mind that this is just my opinion and may not necessarily reflect the views of others at my firm or other firms in the Valley and beyond. 
Let's get on with it.

Team



Team is the single most important component of evaluating an early stage startup. Let me repeat: This is the most important part. You might think as a former product manager I’d be most concerned about the technology and product differentiation. You’d be wrong. As discussed in my last blog post on building empathy, product management is ultimately about deeply understanding people--their dreams, their motivations, their capabilities--and leveraging that to drive the business forward. Venture isn’t really all that different. As Mayfield’s founder Tommy Davis once said, “People build products, not the other way around.” Markets, industry trends and product directions can change, but a stellar team will navigate these challenges and figure out how to get stuff done.

Here are some of the core capabilities I look for:

Superpower. Every successful founder has a superpower (and on occasion more than one) that separates them from their peers and drives forward the mission of the company in a significant way. This could be a skill, past experiences, personality trait, or some combination thereof. Some examples:

  • Domain knowledge or insight into a problem or industry that few others have
  • Incredible technical vision or expertise in a complex field
  • The charisma, network, or track record to attract strong talent to the company
  • A Juggernaut-level unstoppable determination or Rocky-like resiliency
  • Compelling storytelling that translates to salesmanship and go-to-market excellence
Self-Awareness. On the flip side from superpowers, it’s important to see if the founders recognize their own shortcomings and where they need to seek help. Building a startup is hard, and there’s a tendency to “front” to avoid signs of weakness. I connect better with entrepreneurs who are confident in their strengths but open about what they don’t know or can’t do. Even among self-aware founders, there is typically a distinction between those who see a shortcoming and try to solve the problem themselves, and those who know when to bring on others to help shore up that weakness. One of these tends to be more successful in creating a big company.

Team Dynamics. Co-founder drama is one of the biggest causes of startup failure. Part of the evaluation is to study how the co-founders interact, how their strengths and weaknesses complement each other, and their level of trust and honesty with each other. And while founders don’t need to necessarily be best friends, as Jason Lemkin of SaaStr mentioned on Quora a few weeks ago, finding co-founder who you want to catch up with regularly can be helpful to combat the lonely mental grind of running a startup. I've seen this positive dynamic in action successfully across our portfolio and great companies beyond. Checking for this is done in part through carefully watching interactions during the pitch, and in part through references and backchannels during due diligence.

Company Building. Good founders focus on building a product. Great founders focus on building a company. This is the hardest trait to quantify, but ultimately I assess how the founders think beyond the basics of product and go-to-market and understands the key hires, processes, and values needed to build and run the company at scale. A big part of this is a focus on the founders’ core values and how they will drive the company in the long term. From my time at Amazon, I know that their Leadership Principles are deeply embedded in the DNA of the company and a guiding light for process, decision-making, and org structure. And this isn’t just a thing for startups--take a look at Mayfield’s Beliefs and you might see why I weight the Team component so heavily, as it is that “people-first” mentality that has kept our firm in the game for 50 years.

Ultimately from the above I am trying to assess the following: Is this THE team that has the necessary characteristics to build a large, sustainable business?



TAM





When I say TAM (Total Applicable Market), what I really mean is the higher-level subject of "Market", but unfortunately that doesn’t start with a T. Bear with me...

By now most founders know why and how VCs assess and prefer “large markets.” Almost every deck I see has a TAM listed in the billions, tens of billions, or occasionally a more ludicrous number. Most of the time I ignore this because either it's a generic eye-candy that vaguely fits the subject area of the startup, or it doesn't really represent opportunity the startup could capture in the first place.

That doesn’t mean large markets aren’t important. It’s true that fund returns generally depend on outlier large exits, and I am looking for founders with the potential to build billion dollar companies. However, smart founders and investors know that market categorizations and sizes vary widely and wildly over time. When Lyft (disclosure: Mayfield portfolio company) and Uber got started, there was no perceived market for ridesharing. When AWS got started, there was no perceived market for public cloud. Hunter Walk of Homebrew has a classic post on this subject where he effectively asks what is the size of the problem you are solving, and how does that translate to a large market either now or in the future? Thus, a large existing TAM in and of itself is not as important as understanding the overall growth potential of the startup and the overall market.

Market size is one piece; how you will actually access that market is another. Thus, Go-to-Market strategy is a critical component of this discussion. This probably one of the most underserved areas in early stage pitches, and a more in-depth look at top-down and bottoms-up GTM will have to wait for another post. As it relates to TAM though, I’m looking for a couple of key GTM pieces:

  • In a crowded market, how will you rise above the noise of the competition?
  • In an entrenched market, how will you open up chinks in the incumbents’ armor?
  • In a new market, how will you communicate your value proposition and expand the pie?
Certainly if you are attacking an existing huge market that is interesting (and if so, what is your initial execution plan?). Alternatively, do you have the potential to expand an existing market into the a large one (and if so, how will you do so?). Can you create a market category that doesn’t even exist yet (and if so, why is now the time?).

Ultimately I am assessing this: what is the size of the problem you are solving, and how will you reach the potential market in order to build a large, sustainable business?

Two down, two to go


That's it for the first half of the 4 T's--Team and TAM. Stay tuned for a discussion on Tech and Traction in a follow-up post. Questions or comments? Feel free to reach out.

Image Citations: beebeed.com/project/four-t/, despair.com/products/teamwork, memegenerator.net. Yes, I make memes.

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