2.01 (V) 2.0 The Importance of the Founding Team
Hello, today we're going to talk about founding teams and specifically, why it's so important to get your founding team right at the beginning. And founding teams are actually absolutely critical to the running of your business. They are a number one cause why businesses collapse. They are the number one cause why businesses succeed. And I want to talk to you today about some of the factors that are so important in making founding teams work. Just to show you why this is important, let's consider the most successful founding team in history. Which might as well be Steve Jobs and Steve Wozniak, the founders of Apple. And so Woz and Jobs, as they liked to be known, were both working together out of a garage in Silicon Valley. And one of the first products they worked on together that helped get them some of the money they needed to develop Apple and built their business relationship was building a version of the game you see in front of you, which is Breakout. So, you had to bounce a little ball back and forth. This was a exciting game at the time, believe me, and what happened was that Steve Jobs got a contract. He was a sales guy, unsurprisingly, and got a contract to develop a version Breakout. And Steve Wozniak created a very elegant programming solution. And Steve Jobs told him that they would split the proceeds from this game 50-50. Ten years later, on an airplane ride, Steve Wozniak finds out that Steve Jobs actually lied to him when doing this initial contract. Instead of just a few hundred dollars they split, Steve Jobs had made thousands and only given Steve Wozniak a small amount. Even though this was just a matter of hundreds of dollars, and they've both made millions since, working together at Apple. This was bad enough that it left Steve Wozniak in tears and actually had him questioning the whole basis of their business venture together as Wozniak had a bunch of other tensions with Steve Jobs and felt that this dishonesty was a real betrayal and actually helped lead to Steve Wozniak actually leaving Apple. So some of the most successful planning teams in history can be broken up over issues as little as a few hundred dollars and betrayals that happened ten years ago. You can imagine how common this is for other startups. It's so common that in our surveys from multiple kinds of sources, 65% of the reason why venture backed companies fail have to do with senior founding team issues. Only 35% is everything else we teach you in these classes, product development issues, functional development, marketing, the management of the day-to-day operations of the company. So 65% is due to senior management issues. So it's worth spending a little bit of time thinking about how do we address this concern, how do we go ahead and reduce the chance of your startup falling apart. Because it's not just that the 65% is a cause of company failure, but when companies fail because of senior management issues, those are the kind of concerns that make you miserable. So, if you make a good shot at producing product who doesn't succeed, that's fine. If you end up fighting every day you come in with your co-founder, that's going to make you very unhappy the entire time you run your startup. So, in studying founding teams, Noam Wasserman has come up with this really nice model called the three R's of founding teams. That's relationships, roles, and rewards. And your goal is to balance relationships, roles, and rewards. So, what are relationships? That's who the person you're working with is and how they relate to you. So are they your friend? Are they your coworker? Are they strangers that you're working with? And understanding what drives them and why you are working together to build this organization. Roles is all about the division of labor in the company. So in Apple's case, Steve Wozniack was the programmer. Steve Jobs was the sales guy. In your organization it may be different divisions of labor. But it helps to understand what skills people have and how they're going to develop the company moving forward. Also you need to know inside the organization who makes what decisions. So are people going to have decision rights over the entire organization or are they are only going to be able to decide technical matters or do things have to be decided by vote or consensus? All of those are critical role issues. The final thing you need to balance is rewards. This is how you're going to benefit from the company. Is it going to be equity slices? Is it going to be about compensation? Why are people doing this and how are they rewarded? So you have to balance all three of these issues to have a successful founding team. In balancing relationships, the first thing to realize is, most companies have co-founders. So 84% of the founder in high gross startup companies are founded with co-founders, not alone. When I talk to solo founders of companies, even those who are very successful, they often wish they had a co-founder to have someone who can split work with them, who can help sympathize with them during the more emotionally difficult parts of running a startup who have someone they can rely on if they need to go on vacation or kid gets sick or something similar. So cofounders can be very helpful. Of those that have cofounders, 50% of the cofounders are friends and family relationships. And 24% are former coworkers. The rest are other relationships or strangers. And what you need to think about when you decide who you're founding with, what these relationships are, is that different kinds of relationships have different pluses and minuses. So if you start a company with friends and family, you have the nice advantage of knowing these people already. That creates a high level of trust. High levels of warmth, and a lot of mutual support. So that can be very helpful. You don't necessarily have to worry about betrayal as much. You already have a relationship and somewhere to build on. But there's some negatives to friends and families as well. First of all, there's a higher rate of failure in friend and family foundings, and that's not always because friends and families are worse at running startups, but it means that if there ends up being a tension between maintaining the startup and maintaining the friendship or the family relationship, usually people choose the friendship or family relationship, and that means that the startup is often sacrificed. So if you're told by the board that it's time for you to fire your brother who is your cofounder, are you willing to do that? So that becomes a very tense kind of issue. And it can undermine friend and family relationships. And also can be difficult because you may not have open discussions about what you want to accomplish, because it's weird to have those kinds of discussions with friends or with family. So talking to them about their value system and how they relate to yours can be a very challenging thing to do. So those are some reasons why friends and family can be challenging. Another more settled problem with friends and family found in companies is homogenity. So, innovation and the ability to stop problems comes with having lots of different perspectives brought together one place so the people could examine a problem from multiple kinds of angles. If you work with your friends and family, those people are more likely to be like you and as a result, you're not going to have a lot of diversity inside your organization among your founding team. So if you encounter a problem, it's likely you and your friends, or you and your family will try to solve it in similar ways. And that can actually lower the level of innovation inside a startup, something that we'll return to on the next talk on founding teams. What about founding with strangers? Well obviously one of the issues of founding with strangers is that you don't know these people so there's a lot less trust, there is a lot less sort of emotional support. You may not even like these people long term, and there isn't a lot of evidence that necessarily you need to be friends that you found a company with in order for it to be kind of successful in that way. You could also have some advantages, though, in working with strangers. One advantage is that you can actually work to find the people who will help round out your team. So, if you're a technical person, you may find a business person and that person may not be like you. They may not be from your circle of technical friends. They may not be from your family, but they can be a powerful part of the team, because they can help you complete the set of roles that you bring to the picture. So there isn't necessarily a right answer to whether you want found with friends and family or found with strangers, but each has their advantage and disadvantage and, either way, you need to be clear-eyed going into this that there's going to be tension on you ether way. Founding a company is a stressful experience for most people so you have to decide whether you want to rely on friends and family to help mitigate that stress, but whether you're willing to deal with the tensions that may result from this. So that's relationships. A second part of the three Rs is roles, and roles, you need to make sure that you think through the kind of roles you have inside the organization. One thing to recognize is you're going to need to have certain goals that people outside the organization will understand. Roles like CEO, so when you interact with other organizations, people are going to expect you to have a CEO. It's very hard to get through your organization not assigning that role because you don't want to make somebody too much in charge. So figure out who's going to be CEO. Make sure that you have that for external purposes, even if decision making is shared internally. You also need to think about having a clear division of labor. It's a real danger to start out with a substantial overlap between different people in the organization. So making sure people have clear roles and responsibilities is important. At the same time, when you start your sort up, you have no idea about how things are going to revolve. And so you need to be able to rebalance the roles. It may turn out for example that you think there's going to be substantial intellectual property angle. So you have a legal person as one of the critical roles of your organization. But you later decide to file no patents. And this legal person's role is no longer that important. You need to rebalance the organization to make sure that all the founding team has the appropriate roles for the effort they're putting in. Outside of the actual roles of the tasks of what people do every day, you need to think about decisions. How are people making decisions inside your organization? Is it going to be by some sort of voting mechanism? Is it going to be by consensus? But you need to have a clear decision structure and think about what happens if the team starts to break apart, how you're going to make decisions in this case. One way to do this what we call unequal equality. Everyone is technically has equal positions inside the organization but you assign decision rights to some individual in some case. So, if it's a technical problem, the final decision is made by CTO. If it is a problem of operations, the final decision's made by the COO. The CEO gets to override decisions if it involves outside organizations. We'll talk more about this in a future talk, but thinking about how you balance both roles in terms of who does what in the organization and then how you make decisions is absolutely critical. The final of the three R's is rewards. And rewards is how you get compensated for this. Especially with friends and family, talking about money can be awkward, and you may be tempted to push off these sorts of conversations until later in the process, but that's a mistake. You need to be able to talk about money. If you can't talk comfortably about money you probably should be founding an organization with this person. So you need to be thinking about money early on, but at the same time you need to realize that whatever you're setting up for today is going to matter much more in the future, because you're going to work together hopefully for a long time, and during that time roles and positions and time will evolve. So you need to leave flexibility for the future. You need to create incentives for people to work. One kind of incentive is vesting, which is something again we'll talk about in a little more detail in a future talk. But how you divide up equity among your founding team members and then how you vest that equity over time is critical. And then remember that everyone's goal is not necessarily money. So people start organizations to get rich but they also start them because they want to be independent, because they want to have power, because they want to get famous, because they want to change the world. So thinking about what the underlying goals are and having an honest conversation about the goals and underlying values of your cofounders will help tailor the rewards so they matter to them and make sure that you avoid conflict later on when you have a discovery like the one that the wasn't reacted. That he was betrayed early on that can undermine everything that you do. So to give a how you have this open honest conversation throughout the expand organization will increase your chance of survival. Increase you chance of success. So when you think about your founding team, make sure you're thinking about the three Rs and explicitly having a conversation about them. What are the relationships between you and the fellow members of your founding team? What roles are you occupying? What positions are people doing? What tasks will they do every day? And how will you decide things inside the organization? And finally, how you're being rewarded. What combination of money, equity and other kinds of rewards are coming into play? And how do you balance those out so everybody is as happy as possible? And not matter what, build trust as you do this. This is the beginning of a set of conversations you need to have over and over again in your startup to keep your founding team balanced and happy and avoid being one of the 65% of companies that fail because of senior management team issues.
