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ENTREPRENEURSHIP 2, 2.03 (V) 2.2 Goals and Motivations

So, last time we discussed the fact that 65% of the reason why VC backed companies fail has to do with senior management team issues. And probably even higher number of why founding teams fail at the very early stages has to do with senior management issues. So, I want to spend a few minutes talking to you about some of the critical issues you need to think about when founding your company. And the nice thing is, unlike a lot of other academic discussions, we actually have some answers to these with numbers to back them up. So, I want to address three really critical questions. First, should you found your company alone or should you found it as part of a group? Second, should you choose to work with people who are similar from you or people who are different? And then finally, what difference does this sort of personal value stuff actually matter when you're launching a startup company? So, these are critical things to think about as you assemble your team and I've got some answers for you. So the first question is, should you found alone or in a group? And the answer is a group. So, we actually have some numbers on this. Co founders succeed more and generally happier because they interact better. And, we actually have, as you can see on this chart, some indications from some of the work by which is backed up by other research work for other teams remaining and the valuation of the company. And the companies that have three founding team members left at the time when they raise venture capital or angel money, are the ones that have the highest valuation. So, just from a numeric perspective, that makes sense. And from a team dynamic perspective, three is a fairly good number because it allows you to have team breaking team split votes and still have clear decisions, so two to one. And it also lets you divide up roles fairly well into sort of a technical side, an operational side, a sales side. So, three founding team members is often ideal, but again, this is one way of handling things. There's certainly been plenty of successful companies with two founding team members, and plenty of successful alone founded companies. As you start to increase the founding team size, you also start to have a drop off in valuation, but there generally is advantage in being part of multiple team members. Again, one of the most common questions I get asked from people after their startup is running is, gosh, I need a co-founding team member. Will you help me find one? And that's often very hard to do because so much water's already passed under the bridge that it's hard to bring someone else on who was not one of the founding team initially. So, think through that issue and think about how you can build the team and not just alone individual. So, a second critical question is who you should found with. And ultimately this choice is about not just whether you're founding with friends and family or whether you're founding with strangers. But also, whether or not the team of people that you're founding with are similar or different from each other. So, whether it's a diverse team or homogeneous team. And when I talk about diversity, I don't necessarily mean ethnic, racial, or gender diversity. In fact, our research pretty much shows, at least on the gender diversity side where there's been more studies that having a diverse team is associated with higher rates of success. So having gender diversity, having ethnic diversity is generally a good thing. I'm talking about diversity of backgrounds. So, do you want everyone to come from the same sorts of job experience, have the same sorts of career backgrounds, come from the same company, come from the same school. So, would you like a team of all MBAs who have all gone to a place like Wharton, who have all worked in investment banking, for example. Or would you like a diverse team? A group where you have somebody who might have been an investment banker who got an MBA from Wharton, but you also might have a lawyer, and you might have an artist, and you might have a self taught salesperson. So, that's diversity versus homogeneity versus similarity. And the advantages and disadvantages of each team depends on your strategy. So, a homogeneous team, a team where everyone has very similar backgrounds, has some advantages over more diverse teams. The main advantage is that everyone already speaks the same language. So, you all are from the same set of cultures, same set of backgrounds, used to dealing with the same sets of problems. That means that when you run a meeting, everyone already understands how that meeting is going to operate and you can work fairly seamlessly to talk with each other. It means that if you use the same sort of language, it means that you use the same sort of way of talking about customers or understanding the world, and that makes that team operate more efficiently and quickly. And also makes it so, that it's easier to operate, and you're less likely to fall apart as a team. So, those kind of homogeneous teams are really good at operating quickly and exploiting an opportunity. So the exploitative strategy, one where you are copying other existing ideas in the market and trying to operate more quickly. You're not trying to reinvent the wheel. So, you're not trying to be the first fast casual Mexican chain, but you're trying to launch your own fast casual Mexican restaurant chain in your town. Having a team of people who are very similar with backgrounds in restaurant operations would be an advantage. But, the downside of this similarity is that you're much less innovative than diverse teams. So, a diverse team has more ways of solving problems and innovation comes from recombination of ideas. So, a diverse team when they encounter a problem, will be able to reach out to many different groups of people. Many different realms of experience and they're going to innovate more. So, homogeneous teams hold together better, but they are less likely to innovate. On the other hand, the diverse team is much slower to act, because people speak different languages, they come from different backgrounds, sometimes literally, but often just the way a lawyer understands the world is very different than an artist understands the world. And that can cause a lot of issues, it can also cause frictions and can cause teams to dissolve. On the other hand, these teams are much better at innovating. And those innovations actually have a real impact. So, for each diverse set of background experiences on our founding team, a research has found that you actually get about a 7 to 12% increase in the valuation of your company. If you're an innovative company trying to raise venture capital. So, there's a real financial impact in having diversity involved because it makes you more innovative, but it does make you slower. So, if you're trying to be exploited, you're trying to be a follower and act quickly in an industry, a diverse team can actually slow you down. But, if you're trying to do something innovative or new, diversity is your friend and will help you substantially. So, the final question I get asked is about this values stuff. So, values always seems kind of touchy feely. The question is what role does this have in hard-nosed business? And the answer is a lot. Aside from the fact that issues of values often can divide team members and ultimately cause them to split apart. So if somebody values money, someone else values fairness, that can be a very problematic set up. But values have an even more direct effect, which is when you start a startup, there's often two different goals that you're going to achieve. Everyone wants to try and get both of these, but that's very hard to do. So, one goal is what we call the king goal. And a king is somebody who wants to build a company for their own independence and control. They want to be in charge of their own destiny. They want to be able to shape an organization. They want to be able to solve a problem they think is important in the world. These people are kings. The other reason you might want to start a company is because you want to make as much money as possible. And unsurprisingly, we call these people rich. So, this is the tension between people whose goal is independence and that they want to maintain control, and people who want to make money. Why is that attention? Because over time, what ends up happening is people who want to be king end up having to make decisions to maximize their control. And that often means that they can't bring on as many senior employees who have experience, because those people also want to have control. So, you end up hiring more junior people who don't have as much experience. It means that it's harder to raise capital because venture capitalists and angel investors often want to take a controlling interest in companies or at least have some control over the organization. Kings tend to avoid that, so they often would give up financing, so they could maintain control over the organization. So, when they make a set of choices they consistently maximize their degree of control that often slows down their ability to grow and make as much money as possible. On the other hand if you want to follow that rich route and you want to maximize return, that means that you're going to bring on venture capital into investors or other forms of equity financing that will loosen you're control in the company. It means you want to bring in other senior advisors and senior level employees who may take equity stakes to your organization and maintains some control and that eliminates your control as well. So, these sets of choices that you're making often push you over time to either go with a rich approach or a king approach. There are a few select founders, many of the most successful that you've heard of, whether that's a Steve Jobs or Bill Gates, or the founders of Google, who've managed to be both rich and king. So, they've managed to maintain control of their organization and make a lot of money, and maintain a lot of equity stake as well. So, Mark Zuckerberg being one example. The interesting thing for us, in our research on this is that statistically those people are extremely rare. And generally it's very hard to aim for that. So, if your goal is to be the next Mark Zuckerberg that is generally not the pattern that startups follow. So, looking for just those outliers or trying to be Steve Jobs and Mark Zuckerberg and have it all. Be both king and rich tends to be a path for failure for most startups. And actually those rare exceptions that end up being the most successful startups in history. So, you have to decide whether you're trying to aim to be an outlier and try to maintain both control and get rich doing this or whether you're willing to sort of follow the mass of the market where this trade off is a very real one. And this trade off is not theoretical because, so this is not a theoretical concern. This has real implications for you as a founder. If you look at the chart below, it's actually graphing rich versus king tendencies in start ups. If you look all the way on the left side of the graph, you're going to see those start ups that gave up board control and CEO control for the founders. So, these are people who went all the way on the rich side, they gave up all the control over the organization they could. The next step up are people who kept the CEO position but gave up board control. Then you have founders who keep control of the board which is a little bit more powerful than just the CEO role. And then finally you have people who really maintain that king level position, they kept the CEO and board control over the organization. The vertical axis of the graph tells you the valuation of the company held by the founders in millions of dollars. And you'll see a really interesting trend. The people who gave up the most control, who went the rich path that we talked about are the ones who have the highest valuation even though they gave up those controls in the hands of the founders. In fact, the people who chose all the way to go down in this angle of being a rich organization, had give up as much control as possible. Actually helped twice as much value of the company's stock as the founders than those who kept as much control as possible and went down this king angle. So, that choice about you want to maintain control or whether you want to maintain as much wealth as possible as a real one for most organizations. So, you need to think about what is your personal goal, what makes you happy. Do you want to be a king? Does it matter that you're in control? Is that why you're starting the organization? Is that independence? Or is it because you want to make as much money as you can? And that choice is often a very difficult one. And there's actually some evidence that there's cultural aspects of this as well. So, this is results of a OECD survey of entrepreneurs asking why they wanted to start companies. And the dark green are people who started companies because they wanted to increase their income. And the light green are people who started companies because they wanted their own independence. And what you'll see in France everyone wants to be king. So, people start companies not to make as much money as possible, but because they want control over their own destiny. And on the other side we have Belgium, where most people seem to start companies because they want to make as much money as possible and they don't care of they may control. United States is somewhere in the middle. So, the idea here is that this is a individual feeling that you have, and you need to make a choice because the world will force you to think about whether or not you want to be rich versus or king. And you also need to think about your co founders. What are their real goals? Is it to make as much money as possible? Is it to maintain control over their own destiny? And if you have a conflict with them, and that could be a problem. And so, do you need to to talk it out frequently and work through. Because the rich versus king divide is a real one. So, what are the answers to the questions? So, should you found alone or in a group? The answer is usually a group. Both for your own sanity sake and because that's seems basically to do better. Should you choose to work with people who are similar from you or people who are different from you? The answer is if you want to innovate a different diverse group is advantageous. If you want to execute quickly, then you might want to work with a more similar group of individuals. And again, this is about backgrounds. This is not about other kinds of diversity such as ethnic or racial or national origin or gender, where the results are much more unambiguously that diversity is advantageous. And then, how do values end up mattering? Well, your own goals and values matter a lot because that's what you're trying to maximize as a startup. So, thinking about how your team matches in that dimension is important. And you also need to think about this rich versus king decision, that choice between are you maximizing control or maximizing income? And so, these are critical questions you need to be able to answer about your founding team. If you don't have answers about the number of people and why you've chosen that, about the diversity of the team. And if you're not thinking consciously about values and the rich versus king decision, you are likely to run into trouble later on.



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So, last time we discussed the fact that 65% of the reason why VC backed companies fail has to do with senior management team issues. And probably even higher number of why founding teams fail at the very early stages has to do with senior management issues. So, I want to spend a few minutes talking to you about some of the critical issues you need to think about when founding your company. And the nice thing is, unlike a lot of other academic discussions, we actually have some answers to these with numbers to back them up. So, I want to address three really critical questions. First, should you found your company alone or should you found it as part of a group? Second, should you choose to work with people who are similar from you or people who are different? And then finally, what difference does this sort of personal value stuff actually matter when you're launching a startup company? So, these are critical things to think about as you assemble your team and I've got some answers for you. So the first question is, should you found alone or in a group? And the answer is a group. So, we actually have some numbers on this. Co founders succeed more and generally happier because they interact better. And, we actually have, as you can see on this chart, some indications from some of the work by which is backed up by other research work for other teams remaining and the valuation of the company. And the companies that have three founding team members left at the time when they raise venture capital or angel money, are the ones that have the highest valuation. So, just from a numeric perspective, that makes sense. And from a team dynamic perspective, three is a fairly good number because it allows you to have team breaking team split votes and still have clear decisions, so two to one. And it also lets you divide up roles fairly well into sort of a technical side, an operational side, a sales side. So, three founding team members is often ideal, but again, this is one way of handling things. There's certainly been plenty of successful companies with two founding team members, and plenty of successful alone founded companies. As you start to increase the founding team size, you also start to have a drop off in valuation, but there generally is advantage in being part of multiple team members. Again, one of the most common questions I get asked from people after their startup is running is, gosh, I need a co-founding team member. Will you help me find one? And that's often very hard to do because so much water's already passed under the bridge that it's hard to bring someone else on who was not one of the founding team initially. So, think through that issue and think about how you can build the team and not just alone individual. So, a second critical question is who you should found with. And ultimately this choice is about not just whether you're founding with friends and family or whether you're founding with strangers. But also, whether or not the team of people that you're founding with are similar or different from each other. So, whether it's a diverse team or homogeneous team. And when I talk about diversity, I don't necessarily mean ethnic, racial, or gender diversity. In fact, our research pretty much shows, at least on the gender diversity side where there's been more studies that having a diverse team is associated with higher rates of success. So having gender diversity, having ethnic diversity is generally a good thing. I'm talking about diversity of backgrounds. So, do you want everyone to come from the same sorts of job experience, have the same sorts of career backgrounds, come from the same company, come from the same school. So, would you like a team of all MBAs who have all gone to a place like Wharton, who have all worked in investment banking, for example. Or would you like a diverse team? A group where you have somebody who might have been an investment banker who got an MBA from Wharton, but you also might have a lawyer, and you might have an artist, and you might have a self taught salesperson. So, that's diversity versus homogeneity versus similarity. And the advantages and disadvantages of each team depends on your strategy. So, a homogeneous team, a team where everyone has very similar backgrounds, has some advantages over more diverse teams. The main advantage is that everyone already speaks the same language. So, you all are from the same set of cultures, same set of backgrounds, used to dealing with the same sets of problems. That means that when you run a meeting, everyone already understands how that meeting is going to operate and you can work fairly seamlessly to talk with each other. It means that if you use the same sort of language, it means that you use the same sort of way of talking about customers or understanding the world, and that makes that team operate more efficiently and quickly. And also makes it so, that it's easier to operate, and you're less likely to fall apart as a team. So, those kind of homogeneous teams are really good at operating quickly and exploiting an opportunity. So the exploitative strategy, one where you are copying other existing ideas in the market and trying to operate more quickly. You're not trying to reinvent the wheel. So, you're not trying to be the first fast casual Mexican chain, but you're trying to launch your own fast casual Mexican restaurant chain in your town. Having a team of people who are very similar with backgrounds in restaurant operations would be an advantage. But, the downside of this similarity is that you're much less innovative than diverse teams. So, a diverse team has more ways of solving problems and innovation comes from recombination of ideas. So, a diverse team when they encounter a problem, will be able to reach out to many different groups of people. Many different realms of experience and they're going to innovate more. So, homogeneous teams hold together better, but they are less likely to innovate. On the other hand, the diverse team is much slower to act, because people speak different languages, they come from different backgrounds, sometimes literally, but often just the way a lawyer understands the world is very different than an artist understands the world. And that can cause a lot of issues, it can also cause frictions and can cause teams to dissolve. On the other hand, these teams are much better at innovating. And those innovations actually have a real impact. So, for each diverse set of background experiences on our founding team, a research has found that you actually get about a 7 to 12% increase in the valuation of your company. If you're an innovative company trying to raise venture capital. So, there's a real financial impact in having diversity involved because it makes you more innovative, but it does make you slower. So, if you're trying to be exploited, you're trying to be a follower and act quickly in an industry, a diverse team can actually slow you down. But, if you're trying to do something innovative or new, diversity is your friend and will help you substantially. So, the final question I get asked is about this values stuff. So, values always seems kind of touchy feely. The question is what role does this have in hard-nosed business? And the answer is a lot. Aside from the fact that issues of values often can divide team members and ultimately cause them to split apart. So if somebody values money, someone else values fairness, that can be a very problematic set up. But values have an even more direct effect, which is when you start a startup, there's often two different goals that you're going to achieve. Everyone wants to try and get both of these, but that's very hard to do. So, one goal is what we call the king goal. And a king is somebody who wants to build a company for their own independence and control. They want to be in charge of their own destiny. They want to be able to shape an organization. They want to be able to solve a problem they think is important in the world. These people are kings. The other reason you might want to start a company is because you want to make as much money as possible. And unsurprisingly, we call these people rich. So, this is the tension between people whose goal is independence and that they want to maintain control, and people who want to make money. Why is that attention? Because over time, what ends up happening is people who want to be king end up having to make decisions to maximize their control. And that often means that they can't bring on as many senior employees who have experience, because those people also want to have control. So, you end up hiring more junior people who don't have as much experience. It means that it's harder to raise capital because venture capitalists and angel investors often want to take a controlling interest in companies or at least have some control over the organization. Kings tend to avoid that, so they often would give up financing, so they could maintain control over the organization. So, when they make a set of choices they consistently maximize their degree of control that often slows down their ability to grow and make as much money as possible. On the other hand if you want to follow that rich route and you want to maximize return, that means that you're going to bring on venture capital into investors or other forms of equity financing that will loosen you're control in the company. It means you want to bring in other senior advisors and senior level employees who may take equity stakes to your organization and maintains some control and that eliminates your control as well. So, these sets of choices that you're making often push you over time to either go with a rich approach or a king approach. There are a few select founders, many of the most successful that you've heard of, whether that's a Steve Jobs or Bill Gates, or the founders of Google, who've managed to be both rich and king. So, they've managed to maintain control of their organization and make a lot of money, and maintain a lot of equity stake as well. So, Mark Zuckerberg being one example. The interesting thing for us, in our research on this is that statistically those people are extremely rare. And generally it's very hard to aim for that. So, if your goal is to be the next Mark Zuckerberg that is generally not the pattern that startups follow. So, looking for just those outliers or trying to be Steve Jobs and Mark Zuckerberg and have it all. Be both king and rich tends to be a path for failure for most startups. And actually those rare exceptions that end up being the most successful startups in history. So, you have to decide whether you're trying to aim to be an outlier and try to maintain both control and get rich doing this or whether you're willing to sort of follow the mass of the market where this trade off is a very real one. And this trade off is not theoretical because, so this is not a theoretical concern. This has real implications for you as a founder. If you look at the chart below, it's actually graphing rich versus king tendencies in start ups. If you look all the way on the left side of the graph, you're going to see those start ups that gave up board control and CEO control for the founders. So, these are people who went all the way on the rich side, they gave up all the control over the organization they could. The next step up are people who kept the CEO position but gave up board control. Then you have founders who keep control of the board which is a little bit more powerful than just the CEO role. And then finally you have people who really maintain that king level position, they kept the CEO and board control over the organization. The vertical axis of the graph tells you the valuation of the company held by the founders in millions of dollars. And you'll see a really interesting trend. The people who gave up the most control, who went the rich path that we talked about are the ones who have the highest valuation even though they gave up those controls in the hands of the founders. In fact, the people who chose all the way to go down in this angle of being a rich organization, had give up as much control as possible. Actually helped twice as much value of the company's stock as the founders than those who kept as much control as possible and went down this king angle. So, that choice about you want to maintain control or whether you want to maintain as much wealth as possible as a real one for most organizations. So, you need to think about what is your personal goal, what makes you happy. Do you want to be a king? Does it matter that you're in control? Is that why you're starting the organization? Is that independence? Or is it because you want to make as much money as you can? And that choice is often a very difficult one. And there's actually some evidence that there's cultural aspects of this as well. So, this is results of a OECD survey of entrepreneurs asking why they wanted to start companies. And the dark green are people who started companies because they wanted to increase their income. And the light green are people who started companies because they wanted their own independence. And what you'll see in France everyone wants to be king. So, people start companies not to make as much money as possible, but because they want control over their own destiny. And on the other side we have Belgium, where most people seem to start companies because they want to make as much money as possible and they don't care of they may control. United States is somewhere in the middle. So, the idea here is that this is a individual feeling that you have, and you need to make a choice because the world will force you to think about whether or not you want to be rich versus or king. And you also need to think about your co founders. What are their real goals? Is it to make as much money as possible? Is it to maintain control over their own destiny? And if you have a conflict with them, and that could be a problem. And so, do you need to to talk it out frequently and work through. Because the rich versus king divide is a real one. So, what are the answers to the questions? So, should you found alone or in a group? The answer is usually a group. Both for your own sanity sake and because that's seems basically to do better. Should you choose to work with people who are similar from you or people who are different from you? The answer is if you want to innovate a different diverse group is advantageous. If you want to execute quickly, then you might want to work with a more similar group of individuals. And again, this is about backgrounds. This is not about other kinds of diversity such as ethnic or racial or national origin or gender, where the results are much more unambiguously that diversity is advantageous. And then, how do values end up mattering? Well, your own goals and values matter a lot because that's what you're trying to maximize as a startup. So, thinking about how your team matches in that dimension is important. And you also need to think about this rich versus king decision, that choice between are you maximizing control or maximizing income? And so, these are critical questions you need to be able to answer about your founding team. If you don't have answers about the number of people and why you've chosen that, about the diversity of the team. And if you're not thinking consciously about values and the rich versus king decision, you are likely to run into trouble later on.


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