How Can Investors Judge The Tech Competence Of A Founder?

Artificial intelligence and machine learning have become hot, and lots of startups claim to have unique expertise in this domain. They all say that they are using proprietary algorithms in order to solve business problems in their specific domain.

It’s very easy to pepper your pitch with words like natural language processing (NLP), semantic analysis and deep learning, but when the founder says he is an expert in this area, how does this translate into a competition edge? How is he any better than his competitor just because he has a PhD in artificial intelligence?

It becomes very hard for an investor with limited technical competence to drill down and test his depth of knowledge. Is he just using buzz words in order to raise money?

Investors Are Skeptical Of Technical Buzz Words

If he has a patent, this helps us to conclude that he has unique intellectual property (even though we know that IP is usually never defensible in the real world).

Similarly, if has paying customers, we assume that he must be competent – after all, if someone is willing to pay him for his product, this means his algorithms work in real life. However, even this can be misleading, because he using algorithms which someone else has developed, and he may not be willing to share this information with you.

We also request the founders of our portfolio companies to pitch in, because they have technical expertise, and understand much more in this space. If the founder has been introduced to us by someone we trust, this helps a lot, because trust is contagious – especially if the mutual friend is also co-investing in the round .

Here’s A Tip For A Technical Founder

A question you need to answer when making your pitch is – what makes your algorithm better than someone else’s? If you can explain this convincingly, you are much more likely to get funding.

As an investor, it’s helpful to see how well he answers the questions you ask about his technology. Someone who doesn’t know much will try to bamboozle you by using obfuscatory jargon. This looks impressive, but he is using buzzwords as a cloak to mask his ignorance.

On the other hand, a true expert will start from the basics. He will begin from first principles, and will hold your hand, so you can understand what differentiates him from the competition. He will respect your intelligence, and not assume that what he’s doing is so complicated that you will not be able to understand it. I am much more likely to respect such a founder, and trust him with my money.

How Investors Make The Final Decision

When making the final decision, we try not to get hung up on the technical niceties of the algorithm. We know that technology advances all the time in this hyper-competitive space, and our assumption is that if he is competent, he will remain one step ahead. We also know that depth of knowledge does not equate to business success.

While it’s true that his technological edge is his magic sauce, we acknowledge that this is a black box which is hard for us to assess, given our limited bandwidth. This is why, instead of focussing on the technology, we drill down into how well he is able to commercialise it.

Doing reference checks by talking to his competitors and his customers is very helpful, because we can then see how intelligently he is applying his tech to make money.

Are his customers as excited as he is about how effectively he is solving their business problems? How many customers refused to sign up and why did they say No to his solution? Do his competitors respect his solutions?

Since we invest in so many different areas, we have to use surrogate measures of success, since we are completely out of our depth as regards our ability to judge the founder’s technical skills in most domains.

We acknowledge that we invest from a position of informed ignorance, but are confident that if we follow a disciplined process, we can screen startups intelligently.

[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]

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