Naval: One of the biggest red flags for an investor is when a team raises money before building any kind of product.
Business founders or sellers will say, “Hey, if you give me money, I will go and recruit the builders.” But if the team hasn’t built anything, what makes you think raising capital will allow them to do it?
This is why having a product as the team’s resume is so important. These days it’s easy to build some kind of a prototype and prove out a few things before raising capital. This is especially true for software; it’s sometimes the case in hardware.
In a technology business, product is everything. If you don’t have a builder or product to evaluate, how are you supposed to invest? It’s possible to invest without a technology team, but then you’re not investing in a tech company.
Take technology and execution risk over market and team risk
I’ll take technology or execution risk over market or team risk all day long. You can calibrate execution and technical risk by using the product as the team’s resume.
On the other hand, it’s hard to change the core team once you get started. If you don’t think the team is great but you love their work and then their work goes off track, you’re stuck with a team you don’t like.
Market risk is often outside of your control. It’s difficult to predict how markets are going to develop—it’s in the hands of millions of people in a complex network deciding how to adopt things.
Instead of betting on a new market to show up, you’re better off saying, “If this product existed today and worked as anticipated, then lots of people would want to use it and would pay for it.”