Why this VC thinks you shouldn’t start a company with someone you know

Over two decades in Silicon Valley, Andy Chen, co-founder and managing partner of Outcast Ventures, learned how to spot a bad founder team from the very first pitch.

“They break up because you can see that they’re talking over each other or they have too much of a similar background. Is that really the best thing for the company?” Chen recalled to Founder Brew.

After studying common factors held by successful founder teams, Chen and his Outcast Ventures co-founder Amy Lin launched Catalyst earlier this year. The first cohort of founders finished up the program this spring, and the second cohort begins in September.

Catalyst is an eight-week incubator in San Francisco that brings together 40 to 50 aspiring founders biannually and tries to put them into perfect teams. Founders who don’t know each other meet, work together, and decide to combine forces or find new partners throughout the process.

If you think it sounds a little bit like a reality dating show, Chen’s already heard that. He broke down how the whole thing works for Founder Brew.

This ‌interview has been edited for length and clarity.

Last year, your firm set out to study every $1 billion startup in the last two decades. What were you looking for?

We looked at every single IPO and acquisition over $1 billion in the US in the last two decades…This took four-and-a-half, five months itself. Every night from 9pm to 1am, I was just manually researching: How did the founders meet? Did they go to school together? Did they work together?

The biggest thing was that people who did not work together [in a previous company] create companies that are bigger in value.

Did that surprise you?

I was delightfully surprised.

So this year, you launched Catalyst, an incubator that promises to turn strangers into co-founders. Who’s the right candidate for this?

Every single person in the program has worked at a startup company or founded a startup company and has seen it scale, because we believe seeing a company go through that growth period is so important to building a company of their own.

The makeup of the batch is about half technical, half nontechnical, roughly. I would say half the group has an idea that they feel strongly about. The other half doesn’t really.

The program runs for eight weeks. What should those selected expect?

The first few days are what we call “the shuffle.” It’s like co-founder dating…15 minutes of shuffling around, meeting different people, highly orchestrated, and then we go into presentations and small groups where the founders share the ideas that they’re looking to build or projects that they’re interested in.

The last five weeks are all three-day to one-week work trials, where it’s double opt in. Every single week—and actually every midweek we do check-ins—they rank the 10 people they want to do work trials with. Then on the other side, 10 people rank the 10 people they want to do work trials with, and when there’s a match, we actually match them up for a week.

Do you watch Love Island? Because this sounds very familiar.

I have never seen Love Island, but 1,000 people have said that I should…We honestly didn’t want to watch it because of this reason, because we didn’t want to take everything from it.

What’s the final step of the program?

At the end, we have what’s called revisit week, where you visit who your strongest matches are, and then you just continue building, however long it takes to start a company, and then when the moment you decide, like, “Hey, this is my co-founder now,” however long it takes, we are your first check into the business.

Do you take equity in the companies?

It’s split into two parts. One is the moment you incorporate, we ask for 1% from each founder that you found in the program…Then when they are ready to to raise and accept money for a pre-seed, then we put in $500k for 5% of the business, roughly, and that’s our investment piece of it itself. I would say the dilution is somewhere between 7% and 8% of the business, all told.

Why do you ask participants to quit their jobs before they start?

Let’s say you’re looking for a co-founder, and you’re talking to someone and they’re still employed by Meta. Let’s just say you hit it off after eight weeks, and you’re like, “Let’s start a company together, let’s do it.” The other person is like, “Great!” They go to resign, and they’re like, “We’re going to triple your salary.” You just spent the last eight weeks jamming on ideas—a complete waste of time.