Prof. Noam Wasserman on Understanding Founder’s Dilemmas

Professor Noam Wasserman’s talk on understanding Founder’s Dilemmas from BoS USA 2012.

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Summary

Startup Failures

Most startups fail. Let’s accept that. However, there are things we can learn about these failures that can move the chances in our favor. Looking at the failures in VC portfolios will give us some insight.

35% of failures are due to product development, functional management and market problems. 65% of failures are due to people problems. For example, tensions between co-founders or between founders and employees.

Those people problems are the ones Noam would like to explore. How can we help startups avoid them? Without a roadmap, founders will end up following gut feelings or rules of thumb that may sometimes be misleading. The Founder’s Dilemmas book has three dozen case studies, and data on over 10,000 founders, which show how various decisions led to either success or failure.

Phases of core dilemmas

The phases of core dilemmas:

• When to Found
• Building the Team
• New-Venture Hiring
• Beyond the Team
• Exit Dilemmas

Founding team dilemmas

How are you going to build the venture? Once you decide that you want to build a startup, the first choice you will make is whether to go solo or recruit a team.

Within the US data set, the core of startups are tech related. Only 16% of tech startups in the US are solo-founded. The overwhelming majority of startups build a team, and building a team introduces choices. These key decisions when founding are Relationships, Roles and Rewards.

Relationships

Should you hire your friends and family? This is a common practice. More than 50% of the startups in Noam’s dataset hired friends/family. This is like playing with fire. Co-founding a startup with your romantic partner is like playing with fire – it can go either way. If you decide to go this route, build firewalls to protect yourself.

Or should you hire professional relationships?

Roles

Co-founding with professional colleagues can be like living in Neverland – everyone gets a vote, or a part in the decision. Alternatively, there’s the Zeus model – Zeus is on top and makes all the decisions.

The Neverland model is not good for scaling. If you choose the Neverland model, you should think about if and how you should transition to the Zeus model. The transition from one model to the other can cause problems.

Rewards

The highest tension part of building the founding team is equity splits. Equity splits within the team need to be considered in advance.

73% of startups split equity within a month of founding. The majority of those early equity split decisions are set in stone, and most are equal splits. Setting equity splits early can be risky if you haven’t figured out how the work will get done. On the other hand, it gets the issue out of the way. Early equity decisions can become a major albatross around your neck if only one of the founders does the actual work.

The question is, should you have a static or dynamic equity split?

• Is our strategy stabilized?
• Is our business model set?
• Are our future skill requirements known?
• Are the future roles set?
• Is each founder 100% committed throughout?
• Are there any personal uncertainties for anyone?

If you don’t have answers to these questions, a dynamic split will likely reduce tension and increase the chance of keeping a great team.

Founding team tensions are heightened or reduced by decisions regarding relationships, roles and rewards. If these decisions are made individually, it can cause problems even if they’re the ‘right’ decisions. Don’t let the enemy of the perfect be “do nothing.” Don’t punt relationship discussions. Understand the pitfalls, and figure out how to act and avoid them.

Investor dilemmas

What are your capital requirements? Should you bootstrap or raise funding? This decision leads to a ripple of other decisions. For example, if you decide to raise funding: Who will you get it from? How does that affect roles?

• Smart money vs. dumb money: Who are you taking the funding from? What do they know? Do you want to take money from a knowledgeable investor that will steer your business (even if it’s not in the direction you would want), or do you want to take money from someone who doesn’t understand your business and will stay out of the way?
• Roles and control: Do you want to give up control to a board? Who is going to be CEO?

You’re not a legitimate founder if you don’t want to keep running your startup. But there are significant challenges to getting there. About 75% of original founders are fired by their board. On average, founders who give up control ultimately have companies that are worth roughly twice as much. The world’s best speedboat captain can’t necessarily pilot an oil tanker.

Rich vs. King: Do you want to be king by having more control over a small company, or do you want to be rich by having less control over a big company?

Here’s a 5 minute self-assessment Noam put together to help diagnose your potential (or past) founder’s dilemmas.

[I’d like to thank Bill Horvath, founder of DoX Systems, for sharing his notes with me. Justin Goeres also has a good summary of Noam’s presentation on his blog.]

Noam Wasserman

Professor Noam Wasserman is professor of Business Administration at Harvard Business School and the author of the recently-published Amazon bestseller The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.

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