The Spark and The Flame

Why venture capitalists want to back entrepreneurs and not just founders.

Not all founders are entrepreneurs. We use the terms “founder” and “entrepreneur” interchangeably, but there is a distinction that becomes more apparent and meaningful over the lifetime of a startup. While most individuals who create a startup adopt the founder label, experienced venture capitalists actively seek out the entrepreneur. Here’s why. Investors want to back a leader that can not just create the initial spark, but who can produce it repeatedly throughout the startup journey ensuring a steady flame of innovation and drive.

The founder designation reflects an objective fact about an individual’s role in establishing a company, manifested by receiving common shares at inception at par value. Regardless of whether this individual’s contribution was seminal or incidental, enduring or fleeting, a founder’s status can never be revoked or denied even though the founding act was a passing moment in time.

Not all founders are entrepreneurs. 

The entrepreneur label reflects a subjective observation about an individual’s pioneering temperament and personality in the context of building a product and business. Entrepreneurs are innovative and audacious by nature, consistently exhibiting an eye for opportunity and an extraordinary tolerance for risk. To earn this designation, an individual must demonstrate the traits associated with the entrepreneur over a sustained period of time. 

A key reason entrepreneurs can innovate and iterate consistently over time is that they readily acknowledge and embrace the uncertainty that is going to accompany them throughout the startup journey. Moreover, they recognize that there is no template for startup success and that they must find their own way. Entrepreneurs are stubborn about succeeding, not about their original plan or vision. Said differently, they don’t allow self-confidence in their abilities to become overconfidence in their plan.

Most early-stage venture capitalists seek out the entrepreneur because if there is one thing we can be certain of at the early stage, it’s that the plan is going to change. And when changes are certain, we want an entrepreneur at the helm.

When something isn’t working, it is the entrepreneur who will be the first to revisit all assumptions and advocate for a bold change. If a better opportunity or idea becomes apparent, it is the entrepreneur who won’t hesitate to toss out the idea that got them funded in the first place. And when an entrepreneur implements the inevitable change in product or strategy, he/she does so with the same determination and excitement as when the company started. 

In contrast, founders who are not entrepreneurs often find that their capacity for innovation and risk-taking peaked around the time of the company’s inception. They may have come up with a compelling product idea and secured funding, but they don’t have the fortitude and determination to navigate the inevitable ups and downs of the startup journey. As complications to the original plan arise, these founders are challenged to reproduce the innovative spark that launched their startup. Faced with adversity, they can be seized by apprehension, fearful of making a mistake, and overly concerned about how their actions will be perceived. 

Other founders who are also not entrepreneurs are what I might refer to as incidental founders. Incidental founders are those individuals who primarily become co-founders as a consequence of being friends or colleagues of an entrepreneur who needed a partner and collaborator. These founders are “incidental” because without the entrepreneur’s initiative this individual would likely never have taken the initiative to create a company of their own. There is still considerable career and reputational risk involved in devoting oneself to the creation of a new company, so they deserve full founder credit. Additionally, a good entrepreneur knows how to identify those cofounders who bring complementary skill sets necessary for success. But it is often the case that an incidental founder’s marginal contribution at founding presages a marginal contribution going forward. This ends up being sensible collaboration if at least one of the cofounders is the perennial entrepreneur.

What are the signs of an entrepreneur?

At the earliest stages, it is hard to distinguish the entrepreneur from the founder, but there are several credible signals I look out for (entrepreneurs won’t necessarily exhibit all of them).

Entrepreneurs demonstrate an insatiable curiosity.

  1. Entrepreneurs tend to care more about success than money, which is not to say they don't care about money or dilution, but rather that their drive for success eclipses everything else. For instance, entrepreneurs take certain basic steps on their own before seeking funding, such as leaving their jobs, working “in the garage,” forgoing salaries, and even tapping some personal savings. In taking such steps, they ultimately improve their ability to command a premium valuation.
  2. Entrepreneurs demonstrate an insatiable curiosity and uncanny ability to learn from every interaction. I can sometimes see the gears turning in their head as the plan evolves from one meeting to the next, showcasing the dynamism and self-confidence of an entrepreneur. They want feedback not because they need reassurance, but because they genuinely want to know if there is something they might be missing or can improve. This is also why co-founders play such a crucial role as a counterpoint for entrepreneurs.
  3. Entrepreneurs show leadership in good times and bad. They don’t allow initial success to lead to complacency. They energize their teams even as they preside over cutbacks or disappointing results. They set the tone for employees and the board room. Of course, leadership isn’t the same as management, and entrepreneurs know how to hire great managers if that’s not their strength.
  4. Finally, entrepreneurs exhibit one of several signals associated with an “owners’ mindset.” As much as they dream big, they approach everything with a healthy dose of skepticism. As a result, they often have a pattern of under promising and over delivering because “owners” know they are only deceiving themselves by overpromising. An owner’s mindset is also what makes the entrepreneur roll up his sleeves and get his or her hands dirty. They don’t hire their way out of a problem or shift blame to subordinates.

In the current market environment, many companies are discovering for the first time whether they are led by entrepreneurs or mere founders. They need someone who can revitalize stagnant growth, launch a groundbreaking new product, and be willing to tell their investors and employees they’ve climbed the wrong mountain the past three years. They need an entrepreneur.

Every company starts with a spark, but not all can maintain a flame. Whether you are starting a new company with friends or considering an early-stage investment, make sure there is an entrepreneur in the room. Only they have the resilience, perseverance, innovation, and ownership mindset necessary for long-term success.