Here's the secret to valuing a startup investment like a venture capitalist

Dow Jones

19 May

MW Here's the secret to valuing a startup investment like a venture capitalist

By Lori Rosenkopf

Early-stage bets are, more than anything, bets on leadership. This is what to look for.

How do you evaluate a startup when all you've got is a pitch, a few metrics and a founder interview?

As more retail investors gain access to early-stage companies - commonly through equity crowdfunding platforms and angel networks - they're getting a front-row seat to the most exciting part of the innovation economy. But that opportunity comes with a challenge: How do you evaluate a startup when all you've got is a pitch, a few metrics and a founder interview?

Most investors zero in on the product or the market. But in my research I've found that the best early signal isn't what the startup is building - it's who's building it, and how.

Investors' blind spot: the team behind the tech

Venture-capital firms invest enormous time evaluating startup teams. Retail investors rarely have that luxury. Instead, many are left guessing - relying on headlines, hype or surface-level traction.

But early-stage bets are, more than anything, bets on leadership. And in studying and working with hundreds of entrepreneurs, I've found that the ones who outperform share three key traits: They've had broad, versatile careers; they balance purpose with performance; and they build strong, scalable teams.

Amy Errett, founder and CEO of Madison Reed, is a good example. Her story highlights the qualities that separate ordinary founders from leaders who can break into crowded industries, scale businesses sustainably, and ultimately generate value for customers and investors alike.

Errett didn't follow the standard tech-founder path. After receiving her M.B.A. from the Wharton School, she went on to work in finance, led a private-equity fund, became a venture capitalist and served as chair of a nonprofit before founding Madison Reed, a direct-to-consumer hair-color company, in 2013.

Hair color isn't a typical "disruption" category. It's crowded, low-margin and dominated by beauty-industry giants. But that's exactly the kind of space where unstoppable entrepreneurs thrive: industries with high customer frustration, little innovation and entrenched players.

Errett saw a chance to reinvent the experience. She combined salon-quality products with a tech-enabled delivery model and a brand rooted in trust, inclusion and customer service. Today, Madison Reed is a national brand with retail, salon and online channels. But it started with Errett's vision - and her ability to build a team that could execute it.

Three founder traits worth betting on

1. Unconventional career paths: Top founders often have diverse professional backgrounds. They've worked across industries and roles, giving them perspective and adaptability.

Errett didn't take a straight line to entrepreneurship. Each chapter of her career- from leading a nonprofit to investing in other startups - gave her insight into leadership, operations and customer needs.

Compare Errett's journey to that of Groupon $(GRPN)$ founder and CEO Andrew Mason, who popularized the concept of online group buying, a novel approach to e-commerce during its IPO in 2011. Mason scored high marks for creativity and innovative thinking, but his lack of experience in finance, operations, scaling a global workforce and managing investor expectations became apparent. Unable to successfully navigate the complexities of the company, he was ousted by the board 15 months after Groupon's IPO.

Mason's struggles reveal what can happen when founders aren't battle-tested. Retail investors should instead look for leaders who have proven themselves across different challenges, because breadth isn't just a bonus - it's a safeguard.

2. Mission-driven, metrics-smart: Great founders lead with a sense of purpose - but they also run tight, disciplined businesses. Founders who combine values with business rigor are better positioned to scale and to weather challenges.

3. Team builders, not solo geniuses: The best startups are team efforts, not one-person shows. Yet the solo-founder myth still dominates headlines. Errett is known for building strong leadership teams and creating a culture of trust and inclusion. Madison Reed has invested in DEI from the start, and its culture reflects that.

Retail investors should pay close attention to how a founder talks about the team behind the brand. Do they share credit? Do they attract experienced talent? Are they building a foundation for scale?

How to evaluate a founder from the outside

Even without insider access, retail investors can spot early signs of strong - or shaky - leadership. Here's how:

-- Listen to founder interviews or podcasts. Look for clarity, accountability and substance - not just charisma.

-- Review team bios. A strong early team often signals thoughtful hiring and leadership maturity.

-- Check employee and customer reviews. Culture and customer care often show up in public feedback.

-- Avoid overhyped narratives. Vision is important, but so are humility and an ability to delegate.

Betting on the right people

Markets shift. Products pivot. But the right founder and the right team can navigate change and come out stronger.

Errett didn't invent hair color. But she reimagined how it could be delivered, branded and experienced. That's the kind of leadership retail investors should look for - not just big market potential but the ability to operate with discipline, empathy and vision.

Lori Rosenkopf, vice dean of entrepreneurship at the Wharton School, is the author of "Unstoppable Entrepreneurs: 7 Paths for Unleashing Successful Startups and Creating Value through Innovation," (Wharton School Press, 2025).

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Here's the secret to valuing a startup investment like a venture capitalist

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