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We spent some time with the Spark Team last week talking about what we look for in our entrepreneurs.  Unsurprisingly, there is no magic formula.  For every example of an attribute of a successful entrepreneur, you can easily find a counter-example.

Afterwards, we did a training session with some ex-CIA agents on how to read people and identify questionable actions or behaviors.  It was fun, but may have only trained us enough to be dangerous to ourselves

It did get me thinking about how we evaluate entrepreneurs, especially the first time we meet them.  In addition to evaluating the merits of a business idea or market, we have to make relatively efficient judgements about the founding team.

These judgements happen very very quickly – for better or worse. Passing the first sniff test is important – ultimately, most VC’s will dig in and really evaluate the team.  But you don’t want to crater your chances by throwing up red flags early on -you do want to deliver positive bias going in by making a strong first impression.

Here are a few general “do’s” and “don’t’s” that I think can help entrepreneurs pass the sniff test.

Do:

1. Demonstrate a High Output : Input Ratio. One question every VC thinks about is how well an entrepreneur will use their money. In addition to being generally frugal, we want entrepreneurs to invest decisively in the areas that are most important to the business. We want high output for every dollar of input.  Entrepreneurs can begin to show evidence of this no matter what stage the company is in.  Whether it’s from recruiting an excellent team or group of advisors, to scraping together resources to build an early version of the product or detailed wireframes, or finding a way to start building a business relationship with potential customers.  The concept of 2 guys and a plan does work, but most of the time, there is real value created beyond the PowerPoint that points to a high output:input ratio.

2. Show Evidence of Liquidity events. There is nothing that perks up VC’s like an entrepreneur that has made money in the past.  Even if it’s on a small scale, if you can show that you have given an investor a good return on their capital (or on your own capital) that’s a positive.  Association with a company that has made money is good too.  Even if you weren’t the top guy, having been an instrumental player in a company that generated a meaningful return is pretty attractive.

3. Bring together a founding team. This is one of those rules that does have counter-examples.  But generally speaking, it’s helpful to see a passionate pair of cofounders or at least a very tight knit early team.  It’s helpful for two reasons.  First, one person can’t do it all, and I feel better about having a high output:input ratio if there are a few very strong people on board who complement each other well. Second, one of the most important jobs of a CEO is hiring, and the early team is evidence of the founder’s judgement, standards, and ability to attract excellent talent.

4. Show Aggressiveness and Honesty. Different personalities click with different VC’s, but I think aggressiveness and honesty and two attributes we all look for, but might be exhibited in different ways.  Startup CEO’s have to deal with all the challenges of managing a tiny startup, and can can only win if they move faster, are more persistent, and make better decisions than everyone else. This looks different for different people – sometimes we meet with an entrepreneur and it’s clear the person is a “force of nature”.  Other times, it’s less obvious, but past successes demonstrate the person’s aggressiveness. Honesty is probably even more important.  We need to know that the entrepreneur is ethical, and also will be transparent enough about the business and provide enough timely information for board members to feel informed and empowered to help.  There are a lot of ways to demonstrate this in a short meeting.  Answering questions directly and with few caveats is probably the best.  Being honest about setbacks and challenges to the business is another.  Ultimately, we will do our own due diligence, but it’s encouraging when the entrepreneur is realistic about the risks of the business and is making a concrete effort to address those risks.

Now, a few quick “don’ts”

1. Don’t oversell or be overly complimentary.

2. Don’t use buzzwords.  Good entrepreneurs are usually very precise about what they want to say or do, and buzz words are usually a cop out.  Also, please don’t throw this back in my face if I use a buzz word!

3. Don’t be unstructured.  It’s always nice to be conversational rather than going through a formal presentation.  But either way, try to have some structure to the meeting.  Get to the point quickly and immediately answer “who are you?” “what problem are you solving” and “what are you hoping to get out of the meeting”.  An unstructured or circular conversation is worrisome.

4. Don’t evade questions.  Answer them directly.  It’s natural that not everything is figured out, but do show that you’ve thought deeply about the questions that matter.

Parting thought – When it comes down to it, personal relationships matter a lot and the investor and entrepreneur need to have chemistry and feel like they can work well together. It’s a long relationship and you have to feel good about it.  But I wouldn’t worry so much about chemistry the first time you meet.  There should be a lot of time in the diligence process and in subsequent meetings to get to know one another better and assess whether there is a good fit.  Make the most of the time that you have and pass the sniff test!