The more that I work with tech startups and scale-ups, the more I recognize the critical nature of the composition of the founder team – having one or more co-founders, and the right co-founders. I’ve seen many companies fail to advance because they were led by a sole founder, and a smaller number that blew up due to founder problems.
Early stage investors weigh team and team stability very highly. It is not unusual for investor scorecards to assign 30% to 40% of the rating to team-related matters. That shouldn’t be surprising – no matter how much they may like the tech and business concept of a business, these investors are extremely focused on team-related execution risk.
In my experience, founder failings and disputes are one of the biggest reasons that otherwise-promising businesses fail. Why should this surprise us? We’ve all seen that leadership and related business culture issues are also a key contributor to value destruction in Fortune 500 companies. Remember Enron? And what about Theranos?
So what are the key things to consider?
1. Start with a co-founder
Many investors that I know, including most venture capital investors, will not consider investing in a startup unless it has co-founders. Having now worked with startups for five years, I think they are right.
First, building a tech startup is really hard. There are lots of demands and challenges on a number of fronts. Dealing with those is really tough, but it is particularly hard if all of the burden falls on you.
Second, a single founder is unlikely to have all of the skills necessary to build the startup. While some of these functions can be outsourced at early stage, relying on outsourcing for key functions, like management of tech development, is hazardous.
Third, a key part of building a startup is challenging one’s assumptions, and a single founder will find it difficult to find someone who provides appropriate challenges.
Fourth, diversity matters, and there is nothing less diverse than a single founder. Having co-founders with different backgrounds and experiences reduces the risk that blind spots will be ignored.
This is not simply a matter of gender diversity, although that is part of the issue. The broader objective should be to have co-founders (and ultimately a broader team) who bring a variety of backgrounds and experiences to bear.
Thus, we need more founder diversity not just because we are otherwise ignoring talent and engaging in discrimination. Startups need it because diverse founder teams perform better.
It is understandable that you may not have a co-founder when you initially start the business. Most businesses start with an entrepreneur’s passion about an idea or need, and initially you may not share that passion with the right team. However, I would suggest that finding the right co-founder should be an early priority.
2. Consider carefully before co-founding businesses with family members or personal friends
It makes sense to found businesses with people that you know well. This may incline you to co-found with family members or personal friends. It occasionally works – more often, though, it is a really bad idea.
First, disagreements about the business can have a highly negative effect on personal relationships. Do you really want to destroy a relationship with a spouse, sibling or personal friend over a business disagreement or a series of business-related tensions?
Second, personal connections make it very difficult to address the failures of individuals to perform in business roles. This problem grows as the business scales and incumbents may fail to grow with the business in the roles that they hold.
Conversely, firing a family member or friend, or moving him or her into a different role, is likely to undermine family relationships and destroy friendships.
3. Know your co-founder
It is great if you can co-found a business with someone with whom you have worked extensively in a business setting. Not only will you know a lot about that person’s personality, skills and experience, you also should have insight as to how that person complements your own strengths and weaknesses, and whether you are able to work in harness with that person.
Choosing a known business colleague isn’t always possible, though, and consequently you may be looking for someone with complementary skills with whom you haven’t worked before. Both of you should do a lot of mutual due diligence, speaking to current and former business associates, friends and others. This is not simply a matter of finding someone with the right business or technical skills. You critically need to build the right company culture, and the starting point for that is the nature of the co-founders themselves, their emotional intelligence and self-awareness, and their commitment to building a team.
Good leaders want to be challenged. They want to hire people who are smarter than they are, who have skills and experience that they don’t, and who can come up with ideas, and do things, that they can’t. Nothing is more destructive to businesses, large and small, than a leader who lacks self-awareness and fails to build a team to compensate for his or her own gaps in knowledge, talent or experience.
Unfortunately, there are a lot of narcissists and sociopaths around. We all know these people; we run into them on a daily basis, in public and social settings as well as in business. Beware – they frequently are very charming. However, they start with an exaggerated sense of entitlement. People who put their own personal comfort, convenience and success first are not team players. In leadership roles these people frequently damage or blow up businesses (or countries), even if one can point to exceptional circumstances where they are successful, at least for a time.
Also, choosing someone who has the same substantive background as you, no matter how clever and compatible, doesn’t address the basic reasons for having a co-founder in the first place. You may both be brilliant engineers, for example, but that doesn’t fulfil your need for a brilliant marketer, product-focused specialist or operations/finance person, and vice versa. Consequently, part of your diligence effort is to assess the skills of the potential co-founder in the areas in which you are weakest.
4. Finding a co-Founder
So how should you find a co-founder if you don’t already have one?
- Identify the substantive areas where you need support, and rank those areas in order of importance. Most startups will need, at a minimum: (a) a business-focused person, who is able to address business and operational issues; and (b) a technical person, who can address/lead on the company’s technical side. Depending on the area of focus, one or the other of these may be the logical starting point (e.g., the science-focused founder may drive the initial formation of a “deep science” company), but both sets of skills are needed. One of these individuals also needs to be effective at sales, both in terms of selling to potential customers but also for the purposes of “selling the dream” to potential investors.
- Use your existing network to identify potential candidates. These might include, for example, former business colleagues, fellow alumni, individuals that you have met in incubators or accelerators, or people you have met in meet-up groups or other organizations. Reach out to people whom you trust, including mentors and angels, for recommendations.
- Consider how you could best expand your network to meet others who are likely to be a good fit, perhaps by joining or becoming more active in groups where potential candidates might be found.
- Once you have identified interested candidates, spend time getting to know each other. As discussed above, each of you should do due diligence on the other. Confirm that you like and respect each other, that your work styles are compatible, and that you share common goals for the business.
Finally, don’t enter into co-founder relationship with someone who seems otherwise perfect but where you have the slightest doubt about your ability to get along. Any niggling concerns that you have about the other person’s behavior are likely to become magnified over time. There is sometimes a temptation to assume the best – either that you will be able to change the elements that bother you or that you will come to tolerate them. That rarely works in personal relationships, and it doesn’t work in business either. It takes a substantial amount of time to build a startup, and founder disputes and separations will at best set-back, and may destroy, the business.
It may seem odd for a lawyer to write a blog focused on co-founders and leadership. You might think that this is not a core area of legal expertise. However, I’ve spent most of my career working at board level, and seeing what goes on behind the curtain. Additionally, it frequently falls to lawyers and other professionals to sweep up after the elephants when businesses fail.
Also, this stuff seems too simple and obvious to write about, doesn’t it? Yet, while startup and scale-up (and broader business) failures may be attributed to fundraising issues, technology, market movements or other causes, I usually find there is a human element at the core of the problem.