This article is the first in a series of three articles about building a team that will help you raise $10M+ in Latin America.
As we wrote in our underestimated founders guide to raising VC, the two biggest reasons a VC will pass on a high traction founder is some variation of:
“We love you, but your team is terrible” or “We can't trust you with the keys to fly a multi-million dollar airplane.”
Imagine having amazing traction, great unit economics and a low burn, but when it comes time to raise a big round of funding, you’re either not getting offers, or the valuation is much lower than you anticipated.
It happens more than you’d think. And the main reason is almost always that while the founding team is great, the rest of the team is not there yet. It’s too junior or not fit for purpose. It might be a great team to go from 0 to 1, but it might be filled with people who are not ready to help you scale.
As rounds get bigger, the due diligence gets deeper. At pre-seed and seed, most VCs only will meet with the founding team. By the time VCs are writing $10M+ checks, they generally want to make sure that not only is the founder great, and that the unit economics make sense, but also that there’s a strong team around the founders who can help grow the business at least 10x from today. You need to show you’ve leveled up since your last round.
For example, when we lead a Series A, we generally talk to 10+ people on your team, including founders, C-suite, and some of the C-suite’s direct reports. Talking to other senior team members helps us understand your company better, hear the good, the bad, and the ugly, and spot any inconsistencies in what the team tells us. Founders often try to control everything in the fundraising process, but most funds will dig deeper during DD.
A weak team might torpedo your round, or cause offers to come in at much lower valuations than you expected. When that happens, it's extremely painful. Most founders don’t react and invest the time and money they need to truly improve their team until they get bad news. This mistake is completely avoidable. We hope this article will help founders avoid the pain of lower valuations or being unable to raise a $10M+ round because they didn’t invest in their team.
You can brute force growth from 0 to 1, but at some point, you need to have a great team around you in order to continue to scale. As Mark Suster says, venture capital is about human capital. Hiring a great team is one of the quickest ways to get VCs to trust you. Many funds use the team as a proxy for the founder’s ability to tell a story, recruit, and inspire people.
What a top team says about your company: Attracting top talent to join your mission, when they could work anywhere they’d like, signals to VCs that you have something special. Founders who build, develop, and retain a great team are the best at fundraising because they excel at getting people who could be doing anything with their lives to believe in their vision. This advice doesn’t mean you should go out and hire really expensive people with fancy titles just to impress VCs. Over-hiring and finding people who don’t actually do work is not the answer.
What a mediocre or bad team says about your company: If you don’t have a top team today, you are sending a negative signal about your ability to recruit A players. VCs will ask themselves “If they haven’t hired top talent now, why will they be able to after I invest?”.
Top talent looks at these signals too. We once introduced an A player Harvard MBA candidate to 5 portfolio companies. One of those companies had amazing traction, but had not invested in improving the team and also struggled to hire top talent. The candidate accepted a job at one of the other companies for a 60% lower salary than what he asked from this portfolio company. I call this the "uncertainty tax," a penalty startups pay when they aren't good at recruiting and storytelling. This tax forces companies to offer higher salaries to attract candidates and receive lower valuations or no deal at all from VCs.
We aren’t saying you need to have a fully formed, A-player-only team before the round. Part of the fundraise is almost always to improve the team. But you need to have at least a few strong A-players in place that will give VCs the peace of mind and confidence to trust you with $10M+.
Founders often wait too long to upgrade their team, even if they have the money to do it, making it much harder to raise big rounds. When you wait too long to uplevel your team, you accrue people debt: you have inexperienced people in charge of important problems that they can’t handle. If you plan on waiting until after you raise money to upgrade parts of your team, you’ll likely struggle to raise money on good terms in the first place.
One of our portfolio companies had a great salesperson who helped the company grow rapidly. He was the most senior salesperson on the team, so during the fundraise, he was the person that VCs interviewed. He was great at closing sales, but didn’t manage the sales team. His sales strategy, which worked well up to then, was “I take people to dinner and convince them and they buy from me.” That worked through Series A, but at Series B, the prospective investors wanted to know how he would direct a team to scale the business. He couldn't give a good answer. They interviewed one of the other senior sales guys, who couldn’t give a good answer either. It was part of the reason the round fell apart.
Founders make three common team-building mistakes, and each has a simple solution:
The first step to building a team that VCs are comfortable backing is identifying who your top performers are who can take on more responsibility. Use different frameworks like our A, B, C player framework, Danny Meyer’s 4 Types of Employees, Keith Rabois’ Barrels and Ammunition, or the 9-box grid to better map who your standout team members are.
Figure out who your top people are, then give them more responsibilities. Founders often don’t give top performers enough responsibility to prove themselves or go too far and overwhelm them with too much responsibility without support, setting them up to fail. Give your best people more important problems to solve until their performance starts to dip. Eventually you’ll have to turn your team and start hiring senior leaders, but you want to make sure you don’t miss out on the one or two stars on your team who are ready for senior leadership roles.
Once you know what your existing team can handle, you need to figure out which senior hires you need to make. Do our 4 quadrant exercise to figure out what you’re doing that you shouldn’t be doing, and what roles you need to hire a senior autonomous leader for.
Then build your hiring roadmap: prioritize in what order you need to make your senior hires. For example, you might need to hire a CFO, a Head of Sales, a Growth Lead, and a Head of People. Rank the roles in terms of most important to least important, and then start recruiting for those roles. Think about hiring your biggest need first. It’s either something that nobody on your team is good at, or something that one of the founders is good at, but probably shouldn’t be doing anymore.
Your hiring roadmap will help you even if you don’t have a full team in place when you fundraise. Elad Gil says founders raising a Series A should be ready to answer, “Who are the 2-3 key hires you need to make for the company?” Building a hiring roadmap shows investors you are self-aware and know your company's gaps.
Most first-time and underestimated founders struggle to pay top talent market wages because they have gotten this far with scant resources and just can’t bring themselves to spend the extra money. They delay, and wait too long to hire top talent. Without top talent who you can delegate to, you accrue people debt, have too many direct reports, and are more likely to burnout.
It can be extremely hard to pay someone more than you’re making as a founder/CEO. But it's worth it if you can get someone good. Hire someone great and you’ll be able to delegate more, execute better, and be more likely to raise your round and do it at a higher valuation.
Remember, you own the largest share of equity, so you stand to make the most if your equity’s value skyrockets. You are running a marathon, not a 100-meter dash. You shouldn’t overpay for all new hires you make, but if you find top talent who can move the needle for you, pay them what they are worth.
Several Magma portfolio companies have not been able to raise money because of their team. Most of these companies were good enough to survive not raising, but it slowed down their progress and they raised rounds 12-24 months later, wasting valuable time to grow faster and take market share.
Raising $10M+ is really hard in Latin America, so you need to build a team that investors are confident betting on. Get better at managing your team, push your top performers, develop a clear hiring roadmap, and start investing in top talent. If you want to go deeper, check out what funds look for in top startup leaders and strong startup teams, and our pre-due diligence exercise, which you can use to start assessing your team today.
