Over 600,000 new companies are founded each year, with around 95% of that number closing down. This includes a wide array of businesses——not necessarily venture-backed startups. When it comes to venture-funded companies, the numbers tell a different story.
In 2018, 800 venture firms in the U.S. invested over $130 billion across nearly 9,000 deals. Will all of these “hot” ideas work out?
The common rule of thumb is that of 10 of these startups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that about 25% to 30% of venture-backed businesses fail completely.
Image: Space X
What the statistics don’t tell you is why. How many of these failures are due to a bad idea or faulty operations? How many are based upon a dysfunctional or incomplete founding team? Truth is the largest factor in a startup’s potential is the quality of the founding team (along with perhaps a measure of timing and luck).
I’ve been fortunate enough to both build and operate founding teams, as well as advise, mentor, or sit on boards. Over the years, I've gained a strong perspective on what makes a good team and why they are often built so inefficiently.
Think twice before you ask that friend or relative
Let’s consider how most founding teams are established could be an old friend, college roommate, or even a family member. This approach allows for little consideration of skill sets or interest in a startup culture. Also, it offers no thought as to the makeup of the team as a whole. With the average startup founding team including two to four people, it’s no surprise that within the first one to two years of a company’s life, a number of the original founding team members will leave the company before it even gains traction.
These early departures are due to a number of typical scenarios. Perhaps the individual didn’t have the appropriate skill set or the risk appetite for startup life. Perhaps they simply just don’t get along (bad cultural fit). It’s clear that avoiding such early disruption during a delicate period would provide a great benefit.
So what do you do? It begins with giving more thought to building a team better suited for both the stage of the business and the skills required. This helps drive cultural harmony during the early stressful growth, but also creates a greater likelihood of overall success.
Crazy goes a long way
What does it take to be a founder?
Probably the most prolific founder who comes to mind is Steve Jobs. What was it that made him so unique?
It all begins with passion, determination, and resilience. The road is difficult for any new business and without these core traits, it’s difficult to remain committed to the cause for the full journey. Along with these, creativity, agility and curiosity are a must to allow founders to think outside the box and iterate quickly determining what exactly will drive differentiation.
The softer requirements would then include a comfort with risk. It’s a given that any new business is a highly risky endeavor. The founder needs to carry this risk for a number of years before establishing any form of stability. Founders must also think big, as conservative thinking will only lead to unimpressive growth and limited opportunity in the long run.
It's also important to consider a breadth of skills and adaptability. Vertical specialists can have difficulty succeeding when there is no supporting mechanism in place for their contributions. Horizontal skill sets are far more effective in the early stages.
And last but not least, a founder must exhibit A LITTLE BIT OF CRAZY. This allows founders to think beyond perceived limitations, inspire their teams and break norms. It can be a double-edged sword, but I would argue, let the crazy be. It’ll introduce some genius that you don’t want to bottle up.
Founding team mantra: Complementary and diverse skills
Companies are not built by individuals, but rather a team. A great example is Microsoft, where founders Bill Gates and Paul Allen led a ragtag group to meteoric success.
Companies are generally founded with a team of two to four people. But the extended team can grow to the first 10 employees, all of whom will require some level of “founder characteristics” to be successful.
As a team, the three most important traits include being horizontally smart, someone who can get things done, and ultimately getting along (strong cultural fit).
It’s important that the team has a diverse set of complementary skillsreflecting the wideranging needs of the business in its early stages. The team also needs to understand what skills are essential to the core of their business and industry in which they're competing: a team is only as effective as it is fit to the task at hand.
Simple structure wins the day
Young founding teams need to operate in a simple structure. Complex hierarchies don’t work and all members should have a broad range of responsibilities with clear lines of communication. As such, an ad hoc/flat structure is most effective during this phase.
A lack of resources will require all team members to flex across the organization, participating freely in areas outside their core domain. The organization as a whole will therefore flex around core initiatives and problem sets to ensure maximum focus where and when it counts. As a result, there should be no titles or levels at this stage: the team is simply a partnership. A flat organization also allows for a critical componentradical candor. The best businesses are built through constructive disruption in thinking, which is generally achieved when all members have the ability to truly speak out and challenge the status quo.
Although internally there should be no strict lines surrounding roles and responsibilities, it’s important to provide an external perspective of ownership in areas of focus. This specifically facilitates investment and future planning around team and organizational growth. Recognize that not all founders are designed to scale. Some skill sets are more suited to one structure and are not effective as hierarchies emerge.
Culture early on
Finally, it’s important to set the tone of culture in the early days a good measure of long-term potential. To quote Tony Hsieh regarding founder intention and how it affects culture: “Chase the vision, not the money the money will end up following you.”
Companies are generally built in the image of their founders.
If you don’t lead with passion, but rather a desire for the outcome, the team you build will retain less passion for the business resulting in lower performance.
Divvying up the pie
Now that you have self-selected as a founder, built your team, set up your organization, and defined your culture, you’re ready to build a successful business.
A key decision includes how to split ownership or equity in your company. A first-time founder might assume an even split is culturally the right approach. However, this is not always the case. There are risks related to equity distribution that might not be realized until years after founding——and can cause problems down the line. Critically, is the treatment of equity for founders who decide to leave early and not follow through with the (four-year standard vesting) commitment made by the balance of the team? Consider a vesting structure (even for early founders) to ensure commitment to the end goal.
A team consists of varied experience and contribution levels all important to how the balance of equity is allocated. Key considerations to take into account:
Relevant expertise: Who brings vital credibility to the business?
Relative expertise: What is the marginal benefit of a specific individual?
Expectations: Commitment and responsibility each founder will take on? Is risk balanced?
Chemistry/motivation: Why and for how long is everyone committed to the business?
Sum of parts: How much better off is the team as a whole than any subset alone?
Once your team is in place and all ownership clearly outlined, you’re ready for your journey. The road is long and arduous, but I can truly say it may be the most exciting and satisfying experience of your life.
Building a strong founding team can lead to both success and harmony as you forge your path.
One founding dream … one founder team.