Naval: With first-time founders, you must test their ability to learn. Are they fast learners? Will they learn how to run a company? Will they adapt and grow?
This is different than asking: “Are they coachable?” I believe coachability is overrated.
Test repeat founders for passion
With repeat founders, you should test for passion. When the going gets tough, will they see the company all the way through—or will they go start the next thing? Do they have conviction? Do they have the humility to go through it again, starting from scratch?
Repeat founders often don’t want to start over with four or five people crammed into a tiny space behind wooden desks. They want to start with a lot of money, a big bang, a big office and a big team.
That can work when there’s mostly execution risk, which is often the case in enterprise sales and software. It doesn’t work as well when there’s invention risk, which is the case with consumer, social networks and deep technology development.
First-time founders take on market risk
Nivi: So, first-time founders take on market risk, which explains why they tend to have the biggest outcomes. It also explains why most of them fail. While repeat founders take on execution risk, which explains why they deliver more consistent results. It also explains why the returns aren’t huge: They’re not betting on a market insight.
Naval: That’s a deep way of summarizing it. First-time founders take on market risk and create new markets as a result—or own entire markets—and repeat founders take on execution risk.
There are also some blends. For example, when you’re developing a new technology, it can create a new market. That requires deep expertise, which favors a first-time founder. But it also requires raising lots of money and addressing things like manufacturability and distribution of something new, which might require a repeat founder’s resources.
Sometimes a sweet spot emerges: a repeat founder with previous success that wasn’t so big that they lost their first-time founder mentality.
Let’s say you have a team of people that builds robots. They failed because they were too early and the market wasn’t quite ready. But they made a good attempt, and they did it with little money.
The team comes back later and still wants to build robots. They tell you the timing is finally right and they’ve brought on a few younger people with access to new technology. Now they’re in a position to raise more money—and they’ve got a big chip on their shoulder, determined to prove this space can work. Those kinds of bets can be very interesting.