What You Need to Know Before Investing in a Startup

Due diligence should start with identifying the behavioral traits of the founder.

Startups are engines of innovation and economic transformation, and their potential can be extremely attractive to investors. But it doesn’t take a lot of research to uncover the fact that most fail early on, despite early positive indicators.

Studies continue to suggest that 75- 90% of startups fail.

So, investors have to dig deeper than the financials, market positioning, and business model as they carry out their due diligence. Often, the most critical factor is the natural behavioral style of the founder and those of the supporting leadership team. Let’s look at some stats.

Top Reasons Why Startups Fail

According to Startups.com and various studies, the top reasons startups fail are:

• No Market Need (42%)

• Running Out of Cash (29%)

• Not the Right Team (23%) – Including Leadership and Culture Failures

• Competition (19%)

• Product and Business Model Failures (17%)

• Timing (13%)

Here’s the good news. If nearly a quarter of failures are people-related, we can help you predict which teams are best equipped to help get the business off the ground, scale it over time, and keep it running long into the future. So, you can take that risk factor out of the equation.

How to Identify Successful Founders

Entrepreneurs are typically charismatic and brimming with excitement about their products and ideas. That’s important in the early stages of business development, but less so as a business grows. So, you need to know what else might be a natural part of their behavioral makeup that will keep things going at full speed.

DNA Behavior’s founder, Hugh Massie, discussed this topic with Rich Hagberg, co-author of Founders Keepers. They agreed that it’s not the age or background of the individual that is key, but rather who they are.

When it comes to identifying successful founders, personality is more important than biography.

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The research in Hagberg and Tzuo's book highlights the need for founder-led companies to have the following three leadership capabilities:

1. Visionary Evangelist
2. Relationship Builder
3. Execution Manager

Here’s how they map to the DNA Behavior model of behavioral styles:

Leadership Capabilities Mapped to Behavioral Style

The issue is that no person is strong in all three of these capabilities. So, a business needs to have co-founders, partners, or key executives in place who can round out the leadership team from a behavioral perspective.

How Founders Can Unleash Performance

Founders Keepers does a great job of explaining the predictable failure points for founder-led companies and how they must work on themselves to unleash performance. It requires self-awareness, adaptability, and trust in every team member.

Here’s what to be conscious of:

• The Founder’s Paradox – Strengths like vision and passion can become liabilities in the absence of adaptability. The founder must be able to accept well-informed feedback on their product so it can be adjusted to meet market needs.
• The Shift from “I” to “We” – Scaling requires founders to move from solo heroics to team-based leadership. They must learn how to work through people to grow the business.
• Systems Over Heroics – Enduring firms run on replicable systems and processes (OKRs, KPIs, governance), not founder willpower.
• The Genius Jerk Myth – Emotionally reactionary “visionary” founders without personal grounding destroy trust and culture, undermining long-term scalability.
• Self-Awareness as the Ceiling – The growth of the founder limits the growth of the business. Founders should demonstrate that they prioritize their personal growth in order to unleash business potential.
• The Second Founding – The founder’s ultimate legacy is building a self-sustaining enterprise that thrives beyond their direct control, so they must be willing to share responsibilities and decision-making.

Behavioral Traits of Successful Founders

It’s the founder’s responsibility to create value for the shareholders, so you want to know which behavioral traits will make them most likely to succeed. The research we conducted in 2017, based on 500 founders who had built businesses to annual revenue over $1 million, paints a solid picture.

We found that the most important behavioral traits of founders are:

• • Resilience (Fast-Paced trait)
  • Risk-Taking (Risk trait)
  • Creativity (Creativity trait)
  • Work Ethic (Pioneering trait, including the Competitive trait)
  • External Charisma (Take-Charge and Outgoing traits)

Top Traits of Successful Founders


*Notice that, as the business grows, Work Ethic becomes more important than Creativity.

In general, the DNA Behavior Initiator style will be the most common for successful founders, since they typically have strengths in the first four traits above. Strategists and Influencer styles are also common among founders. In any case:

A well-balanced leadership team is essential because no founder has all the traits to succeed on their own.

Learn more about the core behavioral traits of successful founders: Mastering Entrepreneurial Talents

Getting Answers With Psychometrics

Over the last two decades, we have learned that there are some very specific things you need to know about a founder before committing to an investment. The behavioral insights uncovered by our psychometric assessments provide some of those answers. You can use them as a guide for in-person follow-up.

You need to know:

• Do they have a passion for a cause?
  The founder must have a cause they get out of bed every day to fight for, beyond just making money. That cause becomes the driver, fueling their resilience and other behavioral traits.
• What is their financial value creation capability? The founder and leadership team must have a combination of financial goal drive, innovation focus, and fiscal control. Explore the research: Pegasus Ratings Report
• Do they have a clear vision?
  A founder should have clarity of mission and big “exponential” thinking.
• How high is their Authority Bias?
  When too high, authority bias leads to excessive control, poor delegation, and resistance to adaptation. Awareness of this bias's impact is crucial for growth.
• Can they balance results and relationships?
  Improved results are achieved through building enhanced relationships. That means prioritizing the employee and client experience. Read Hugh Massie's book to learn how to find that balance: Leadership Behavior
• Will they build a psychologically safe culture?
  Teams thrive when there is an atmosphere of trust, so they feel safe to voice opinions and admit mistakes. Emotionally reactive, results-only founders undermine innovation and inclusivity. Research from Franklin Covey shows that when trust is present, innovation increases by 11x and organizational energy is 106% higher.
• Are they prepared for implementation?
  A founder needs to have the ability to start small and scale big through designing systems and processes supported by an engaged team.
• Are they coachable?
  Founders must be open-minded and curious, prepared to develop their emotional intelligence, and be accepting of coaching and mentoring guidance.
• What will their role be as the business grows?
  Usually, a successful founder is the soul of the business because they are the keeper of the magic that exists in the culture. They have a vision for the products and for how they are delivered. However, the founder must be able to make role and control pivots as the business grows. Even if not as CEO, it is crucial that they maintain some decision-making power in key areas.
  
  

Investor Due Diligence Using DNA Behavior

As you undergo your due diligence process, remember that the human factor is just as vital as financial metrics and product validation. Authority bias, a lack of psychological safety, and founder transition issues are often at the root of startup failures.

So, in your analysis, consider utilizing the DNA Behavior web app. Founder and team assessments will tell you what you need to know about their natural talents and financial behavior styles.

You can test:

• Resilience
• Competitiveness
• Decision-making
• Leadership Financial Behavior
• EQ
• And More

Startup failure is not random. It reflects market misalignment, financial errors, and especially founder psychology and culture. We can help you understand the people behind those promising ventures, so you can make informed and profitable decisions.

Book a Call with one of our experts!