adeo-ressiAdeo Ressi is best known as the founding member of TheFunded, the site where entrepreneurs can rate venture capitalists. Earlier this year, he got into the startup training business, with the launch of the Founder Institute. It’s not just a clone of better-known incubator Y Combinator. Ressi targets founders far earlier in the process, before they’ve even come up with an idea, and the Institute also introduced a new funding model, where investors in one company actually get shares in all the companies.

The Founders Institute just graduated its first class, with 66 people creating 54 companies — that’s more than any incubator I know of. I interviewed Ressi about the institute, his methods for predicting startup success, and about his plans to expand The Founder Institute geographically.

VentureBeat: Where did the idea for The Founder Institute come from?

Adeo Ressi: TheFunded takes about 200 CEO applications per day and as many as 80 or 90 percent of those applications are not really qualified to be contributing members of the community. They have a badly formed business or they’re not very sophisticated. So, I was looking for ways to help CEOs build better businesses — you know, I was thinking of making TheFunded Lite, which would be the lower-end version of the site, for up-and-coming entrepreneurs.

I realized that’s not only denigrating, but I’m not sure that it would really be helpful. I thought, what you really need to do is have a training program to help these founders build better companies. That got me thinking, well, how do you build a world-class training program? Thinking through that led to The Founders Institute.

VB: How close do you feel you came to achieving your goals for the first class?

AR: Well, the vision of the whole institute is to launch 1,000 companies a year. I set out with a macroeconomic goal, which was to help get us out of recession and go back to innovation by forming hundreds of companies in different geographies. Of course, when you model it out, you have to assume failure. You have to assume that not everyone who applies will get in, and you have to assume some people who get in won’t graduate, and you have to assume some people who graduate will fail. The model calls for maybe two companies out of 50 being wildly successful.

What’s interesting is, my whole mindset shifted when the sessions started. The rallying cry of the whole program is now, “Leave no founder behind!” If you go into the program assuming a failure rate, it would be like teaching a high school class and saying, “Well, you know a lot of my kids are going to be drug addicts. I can’t do anything about it.” You want to enter with belief and the vision that 100 percent will be successful. My view is, I will not stop at anything until 100 percent of everyone who finishes the program is successful. I don’t see failure as an option or an acceptable outcome.

VB: Well, how do you go about implementing that belief?

AR: This is one of the most interesting things. I’m a firm believer in testing, and not standardized testing in the classic sense. I had a researcher develop a blended personality, aptitude, and intelligence quotient test. It’s in five parts and each part tests all three of the desired metrics. It takes candidates about an hour to finish. All of the applicants had to take the test.

With this test, with greater accuracy than 95 percent of published social science research, we can predict the following two things: First, the quality of the idea that you will develop in the program — we don’t actually ask you for the idea when you apply, because everybody knows as an entrepreneur, your idea will change. And the second thing is how you will perform at building your business during the four months of the program, which we think is a proxy for how you will perform building your business. Some famous entrepreneurs have asked me to take the test.

VB: Wait, so how do you quantify idea quality? Or success at building a business?

AR: We tried to measure idea quality and of course performance, objectively, using a numeric scale. I’ll give you simple example. A few people dropped out of the course, so on course performance they got a 1. Idea quality and course performance are managed on objective metrics, and then we correlated those with the test results.

What this means, Anthony, is dramatic. There’s some early data that suggests there can be a test that can predict your success as an entrepreneur — not with certainty, of course. There’s always the unknown factors, like running into an investor who screws you. But it appears that a test can, in fact, identify the key traits and characteristics that may make you a successful entrepreneur.

We can find people who may be stuck in a day job at Pfizer or Microsoft or Apple or Google, and we can tell them, “You have the propensity to come up with a great business idea, and you have the great stamina and fortitude to build an entrepreneurial business.” I think we can do this today, and I think within a few years’ time, we’ll be able to additionally measure probability of building a successful business. But to be able to find the people who really could be great entrepreneurs, but are not, is astounding. That has a profound impact to investment strategy, and it has a profound impact on economic development.

I want or one or two more classes to validate the model and then we’ll talk about it more publicly. It’s potentially game-changing.

VB: Can you be specific about what kind of success you’ve seen so far?

AR: Seventy-nine founders entered the program and 66 people graduated, with a total of 54 companies between them.

So we lost a bunch of founders because of life circumstances — people got transferred or moved. There were some other reasons that we lost founders. A couple of them did not want to join the bonus pool and participate in the shared equity upside, and we don’t make that mandatory, you just drop out of the program. We lost, interestingly enough, a few founders couldn’t really develop a fleshed-out idea. If you really didn’t have an idea for a business at the end of the program, we didn’t feel it was fair for the founder to graduate.

VB: And you’re launching a new program in San Diego?

AR: I went down to San Diego; we had an informational meeting there. About 100 founders showed up, and so we’re going to launch the application process tomorrow. [Since the interview, the San Diego institute started accepting applications, as has a program in Washington DC.]

By the end of 2009, we are looking at least three more locations and as many as six. Since the goal was to launch a thousand businesses a year, the only way to do that is to be in multiple locations. And since the first semester was so successful with the graduation rates, the quality of the founders, the quality of the experience, we really wanted to strike while the iron’s hot.

Plus, we’re in the middle of a horrific downturn and it truly is a great time to start companies, because they will hopefully bear fruit as the economic conditions improve. As the economy gets better, these companies will grow.