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As an investment partner with Google Ventures, I am often asked how I decide which startups to back.

An encounter in a tiny San Diego office in mid-2004 helps illustrate my answer. There I met Paul, Brett, Jack, and Scott, the scrappiest and most creative founders I had ever seen. They constructed their own office furniture to save money. To increase awareness of their product, they would sneak into trade-show parties sponsored by well-funded competitors and bribe bartenders to distribute hip-looking decals. Without much money in the bank and under heavy competition from a dominant market leader, they proved themselves able not only to survive but to thrive. They had created a service that was well designed and had immense potential. They knew exactly how to adapt their product to handle 10 times as many users when success came, but they built it without spending on expensive equipment to serve users they had not yet acquired.

Six months later I led the acquisition of their startup, Urchin Software, which became the inspiration and foundation for one of our most successful products, Google Analytics. But for all its founders’ good points, acquiring the company was not the obvious choice. Skeptics inside Google pointed out that Urchin was not the market leader or even the best-known among the 30 analytics providers we considered. I had to pound my fist on the table in many meetings, declaring that this was the right horse to back.

When people ask why I was so certain, my response harks back to that meeting in San Diego. Urchin’s founders, who are all still with Google, may not have had the best-performing startup, but they were the best founding team around. Great founders need the technical aptitude, motivation, and personal skills to make a product take off. They proved they had all that when, 72 hours after it launched, Google Analytics was overwhelmed by demand. Paul and his team rapidly recruited and motivated new talent to rearchitect the service’s back end. Analytics opened shortly afterward with the capacity to handle an order of magnitude more traffic. Great founders understand how to deal with unprecedented issues and come out ahead.

They also use feedback from users and the market to dramatically increase their product’s growth. For example, we decided to offer Analytics free of charge when we realized that this would allow Google to engage online advertisers it hadn’t been able to reach before.

So how do I invest at Google Ventures? When I fund a company, I’m looking for people with the kind of potential that Urchin’s founders displayed: extraordinary entrepreneurs who can build game-changing products.

Wesley Chan is a partner at Google Ventures, the company’s venture capital investment arm. He is one of the 2010 TR35.

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Credit: Nick Reddyhoff

Tagged: Business

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