Traits of Founding Teams That Win — An IT VC’s perspective

By Christopher J. Rust, Founding Partner, Clear Ventures

I am often asked why some startups succeed in a world where most fail. Conventional wisdom is that three quarters of venture-backed startups fail and that under half of businesses make it to their fifth year. Why is consequential success as a new company builder so elusive and difficult? What are the big factors that are within one’s control to improve the odds of success as a founder/founding team member? Although there is no one-size-fits-all answer to this question, this article shares insights and patterns of success I have observed during two decades of early-stage technology venture investing in Silicon Valley. We also highlight a term we coined: the Clear Triangle and the traits of the three foundational members of a winning startup team.

How to Build a Great Company — Focus on Three Pillars: Market, Team, Product

In 1998, during my tenure as an entry-level investment team member at Sequoia Capital, the Sequoia Capital Founder Don Valentine told me that business success begins with market selection. He was coaching me to be careful and deliberate to understand the target markets that would be addressed by the companies I chose to champion for venture investment. Seems logical right? But what does this really mean? When I asked for clarification, Don explained further that small markets yield small outcomes and poor markets yield poor companies. He said that large markets must be vulnerable to disruptive innovation, but a displacement sale is often harder than being first to solve a pressing unmet need. Thus, the best markets often seem tiny when they are nascent, but quickly exhibit hyper-growth. Don always acknowledged that the world has a lot of smart people that will see an emerging need at around the same time. He believed, as I do now, that the key is to back the team that can emerge as the majority market share leader. The number-one company will be worth more than all others combined.

After a lot of reflection and observation I concluded the franchise companies, the durable winners that really mattered, needed a confluence of factors to align:

• High growth emerging market or large market that is ripe for disruption.
• Strong team with a compelling vision worth fighting for…as a tangible asset.
• A compelling product as an engine of a virtuous growth cycle.

Given my engineering roots, this caused a bit of a “ctrl-alt-delete” of my worldview.

• Great markets were chosen or even created, but not random.
• Great products were defined as a vehicle to address the target market and meet the needs of a specific target customer.
• High functioning teams with different and complementary skills must be built to marry a good idea with great execution.

Venture capital when done well provides funding and differentiated access to customers, talent, follow-on funding when dilution is a common enemy, and maybe some hard-earned advice on scaling. However, the burden of market selection, team build, and product realization lies squarely with the founding team. Around this same time the iconic venture capitalist and Foundation Capital Founder Kathryn Gould told me that the only decision that matters for VCs is who you write the check to. Kathryn was maniacally focused on the founding team. She was a keen observer of people. She strove to understand team chemistry, shared experience, the journeys, and motivations of everyone. Today, people call this emotional IQ or EQ. At the time, I’d not heard of this before. Since then, I’ve learned that EQ is what sets high performers apart from persons with similar technical skills and knowledge. According to a Harvard Business Review article, “The most effective leaders are all alike in one crucial way: They all have a high degree of what has come to be known as emotional intelligence. It’s not that IQ and technical skills are irrelevant. They do matter, but…they are the entry-level requirements for executive positions.”

A few years later while writing the thesis for my third master’s degree at the University of Colorado at Boulder the guidance from Don Valentine and Kathryn Gould were on full display in a questionnaire that I sent to 100 practicing VCs. Market and team were by far and away the dominant criteria for VC funding:

I drilled down deeper on what VCs as front-row observers of emerging tech companies were seeking in founding teams. The results were clear. A track record of success, especially in small company environments, and proven expertise in the target market were coveted.

All roads to success led back to the founder/founders as being of seminal importance. Yet, the skills that are needed exceed what can be found in any one person. It is not only the founders, but the founding team.

Again, Don Valentine shared wisdom in passing that revealed itself to me over time when he said: “The die is often cast with the single-digit badges.”

The Founding Team Matters Most

Iconic companies are often formed by, and associated with, the vision and passion of a single founder. Mark Zuckerberg and Jeff Bezos are among the most visible examples of such founders. The focus of this article is not on the founder but the elements of the founding team that need to be brought together. Based on our experience, we believe that assembling a strong founding team with complementary skill sets is one of the key ingredients that can set the stage for the long-term success of a startup.

The Founder

So, what is the difference between a founder and the founding team? A simplified definition of a founder would be the one who files the article of incorporation based on their vision. She or he take the very first step on the company-building journey, often with no more than a high-level notion of a problem to be solved. The founder will then need to convince others to join the journey to complete the starting lineup, to use a sports analogy, and persuade other stakeholders such as prospective customers, strategic partners, and investors. Many great emerging technology companies have a gifted product author among the founding team members. These founders based on their past experiences usually have a unique insight into an unsolved problem or marketplace challenge. One relatively recent example is Eric Yuan of Zoom. Prior to founding Zoom, Yuan helped create a market-leading product at Webex as the VP of Engineering. His nuanced understanding of the Webex product and trends in the broader market informed his decision to build the next generation of video conferencing services based on a new architecture. This new architectural approach delivers a dramatically better user experience and product performance across platforms. Yuan’s imperative was to focus on what he called “customer happiness” and to make video communications frictionless, especially on mobile devices.

In our interactions, we routinely meet with deeply technical first-time founders. Many have not gone through the process of vetting a new product concept in the market.

Also, they may have built and led an engineering team in the past, but not have built and led a company composed of many functional areas. Thus, a deeply technical product author will typically need to be complemented with founding team members who can:

• Validate the product with customers.
• Take the vision and assemble a team that can build the product or service efficiently.

In other words, the founding team needs to have complementary skills if they hope to marry a compelling product vision with excellent company-building execution. Oftentimes, the lack of execution can be attributed to a poorly balanced founding team. Which begs the question of what does it mean to build a balanced founding team?

Building a Winning Team — How the Clear Triangle Emerged

Having worked with more than 10,000 startups over the last two decades, we began to see some patterns emerge. It was clear that certain skill mixes ended up performing better than others. As an example, three engineers that were great friends but had similar skill sets didn’t do as well as founding teams that had complementary skills — even though those friends could have been extremely talented. Interdisciplinary founding teams that spanned different functional areas of expertise outperformed all others — and this notion was the genesis of what we today call the Clear Triangle as shown below.

At Clear, we believe that a successful founding team must bring together a mix of complementary skills.

The Clear Triangle

Here are the traits of the three foundational members of a startup.

• The Innovator: The product author or chief architect who is the driving force behind a tech-led product. She/he is well regarded as a gifted talent who is steeped in her/his domain and has graduated in the upper echelons of their undergraduate or graduate cohort. The Innovator invariably has an incredible passion for product development and has a unique insight into an unmet need in the market. They are often primary authors of the company’s product. Examples would be David Filo at Yahoo, Mohit Aaron at Nutanix, and Steve Wozniak (Woz) at Apple.
• The Validator: Typically, somebody with a product marketing or product management background. She/he acts as a bridge between the vision of the innovator and the target customers. Most commonly she/he has an engineering background but happened to be more extroverted and enjoyed having dialogues with customers. The Validator helps with understanding the buyer persona and identifies champions at lighthouse customers or early adopters. The Innovator will need to iterate on the product vision with the Validator to craft a product vision that is accepted by a broad cross-section of prospective customers. High functioning CEOs often come from the product management/product marketing ranks, as they interact with engineering, sales, customers, and see how the pieces fit together. Examples would be CEO Pankaj Manglik at Aruba, a Hewlett Packard Enterprise company. He started his career in product lifecycle management at Cisco and Alteon.
• The Implementer: The Implementer plays a crucial role in marrying a market-validated product with great execution. The Implementer can be a force multiplier for the product with her/his exemplary execution capabilities. The Implementer sources, screens, and selects candidates for the engineering team and manages the team. She/he needs to be a skillful communicator and negotiator who sets goals and objectives to extract an inspired effort from her/his team. As the saying goes: “Execution eats vision for lunch.” This is to not diminish the vision, but a great vision can be easily diluted or even killed by poor execution. The Implementer often assumes the functional role of Director or VP of Engineering. It is not uncommon for 75% of a startup’s operating expenditures budget to be invested in product development in the primary product realization push. Thus, the Implementer carries a heavy burden of delivering a minimum viable product (MVP), followed quickly by a minimum compelling product (MCP) or a true sales-ready product (SRP).

What about the CEO?

The CEO is curiously missing from the Clear Triangle. This role evolves the most as the company grows. The best CEOs are often founder CEOs as they bring a level of passion that is difficult or impossible to replicate by someone who is brought on later as a “scaling CEO.” Yet in our experience, the demands placed on the CEO change significantly as the company scales from an early-stage venture to one with a few hundred employees in a late-stage company and eventually one that may be a public company with thousands of employees.

Our preferred outcome is that the founding team we write the check to still runs the company 20 years later. Having the founder CEO evolve and grow as the roles and responsibilities of that position grow over time is what we work hard to achieve at Clear Ventures. We seek to do that by bringing in coaches and mentors to help not only the company be successful but also the founder CEO be successful. If we look at successful businesses, we see examples of iconic talent that have been able to meet the challenge of evolving with the business. Bill Gates, Mark Zuckerberg, and Jeff Bezos are well-known examples of the evolution of the founder CEO. Our advice for startup CEOs is to be exemplary listeners and actively seek out coaches and mentors that have achieved the level of success they aspire to achieve.

Key Takeaways on a Winning Team

There is no “one size fits all” rule that characterizes the startup teams that win from everyone else. Yet, as we have said, there are patterns or elements critical for a winning startup team. With that said, here are some final things to consider:

1. The world rewards outsized growth, fast time-to-commerce, high gross margins, capital efficiency.
2. These are extremely difficult to execute if a founding team mistakenly targets a low/no growth market opportunity.
3. Companies that win often begin conducting commerce quickly — as in quarters, not years. Before they begin conducting commerce, they demonstrate an ability to identify: the narrowly defined problem they are solving; who they are solving the problem for; what that target customer’s choices are to solve their problem; and why the new company’s proposed solution is unique and compelling.
4. Success takes a village, meaning a mix of different but complementary skills are needed early on.
5. The founding team must create a compelling vision that others embrace as their own and are willing to really put their all into fulfilling.
6. Any company mission or vision that is not tested against the needs of the target customer is at risk of being flat wrong.
7. Having a good idea that is validated through customer interactions is not enough. This good idea must be married with great execution, and differentiation that clearly positions a company apart from the rest.

The “Clear Triangle” is a simple tool for those that aspire to build a large company that matters. We think it forces startups to truly think about the skills of the founding team. Who is the innovator, validator, and implementer? And think back to what the late Don Valentine told me many years ago: “The die is often cast with the single-digit badges.”

About Christopher J. Rust

As a founder and General Partner of Clear Ventures, Chris has more than 30 years of experience in management/business development, engineering, and operations and has been the lead investor in more than 35 companies. Prior to closing Clear Fund I in 2016, Chris spent 14 years as an early-stage technology investor at Sequoia Capital and USVP. He also spent 12 years in operating roles as a development engineer, network architect, and product manager.

Chris was a co-founder and Lead Architect of broadband access pioneer Roadrunner, now known as Time Warner Cable Internet. Roadrunner grew to 14 million subscribers, over $4 billion in 2015 revenue, and is the key driver of Charter Communication’s $56.7-billion acquisition of Time Warner Cable.

He earned a B.S.E.E. with distinction as a Massachusetts Board of Regents Honor Scholar and an M.S.E.E from the University of Massachusetts Lowell, and an M.S. Telecommunications Engineering and an M.E. Engineering Management from the University of Colorado, Boulder. While at the University of Lowell he was the recipient of the President’s Medal.