Lesson: Picking Winners with Ullas Naik

Step #4 Tenacity & Integrity: The character of a backable founder

Entrepreneurship is very hard. It’s lonely. It’s grueling. It’s really not for the faint of heart.

The reason tenacity is important is that you’re going to face insurmountable odds on a constant basis. There’ll be some highs. There’ll be a lot of lows. So if you have the tenacity to battle through that and look at the silver lining, look for the silver lining on a constant basis, those are the best kind of entrepreneurs. They’re the ones with the highest odds of success.

A lot of people, unfortunately, get weeded out along the way because they just don’t have that fight, that tenacity. I’m currently involved with a company right now where it’s a really bright set of founders but they hit a funding bump and I could see them become frail and brittle. I was expecting more fight from them.

I have another entrepreneur that I’m involved with where he hit a similar bump and he became a driver and lift. That’s how he fed his family while he continued to fund the company with whatever little money he had. Enormous tenacity. Eventually, he ended up raising money at a 5x step up to his prior round.

That’s what I look for. I look for people who have that grit and determination to basically overcome insurmountable odds in order to make their vision and dream a reality.

Integrity’s critical and it’s hard to assess, especially if deal dynamics are where the deal’s moving fast, so you have to rely on a lot of things. I’ll come back to how you get to it, but the reason it’s important is at the end of the day I’m investing either my money if I’m an angel investor or as an institutional investor, my institutional investors’ money and I want to be able to sleep soundly at night knowing that whoever this person is is taking good care of the money.

There’s a lot of ways to do it. There’s some people who do background checks. I don’t tend to do background checks. What I do is I use the network and the ecosystem and I do a lot of reference checks on the person. For the most part, the reference checks as a methodology, having invested now in as many companies as I have, turns out to be sort of a good indicator. It may not be a completely 100% indicator but often it’s a good indicator of the person’s caliber or tenacity and integrity. So reference checks is the one mechanism that I use for the most part.

Often we have also co-investing. Even though I might not have invested in the entrepreneur myself but I’m investing with other people who know the entrepreneur and they wouldn’t be doing it — these are all credible people — they wouldn't be doing it if they did not have faith. But I wouldn’t just rely on that. I would still do my own reference checks.

I think there’s a predisposition to back people who come from market spaces that they really understand well and that’s important. It always increases the odds of success if they know the market, but sometimes the biggest, greatest companies come from entrepreneurs that are first-time entrepreneurs, have never done anything in that space before. All the great entrepreneurs that you can think of — Steve Jobs to Bill Gates to Zuckerburg and all these, they were creating markets as they grew.

That’s why I resist the temptation to only back people who know their spaces. I’m always willing to take a chance on somebody who has that inherent grit, tenacity, integrity and a feel for the market, even though they didn’t come from the market, but a feel for the market, and especially if it’s a nascent market.

First time entrepreneurs in nascent markets are very backable and it’s a risk worth taking. In mature markets, I think it’s better to back entrepreneurs who have an understanding of the nuances of that market.

In the case of BladeLogic, for instance, the founders were extremely tenacious. They were driven. They were extremely focused and they came from deep knowledge within that problem set that they were trying to solve. The market segment that they were targeting as well was very large. So both of those boxes were checked.

I did not know them well prior to investing in them so I did a lot of reference calling on their background and they turned out to have a huge amount of integrity. There’s companies that I invested in in the past when capital-light models were not in vogue and so it’s a different model that the company ended up executing on even though, actually, they ended up not raising much money anyway, despite having created a very big outcome.

Certainly in the case of BladeLogic that’s the case. In the case of Pyrus as well as GlassHouse, the markets they were targeting were large. The team was really strong and it’s the same set of criteria and they had a lot of integrity. In fact, some of the companies that I’ve invested in recently have exactly the same patterns where these are targeting very large markets with great founders with a lot of tenacity and integrity.