Infinite Beta: Being a founder isn’t about accepting risk. It’s about mitigating it wherever you can.
There’s no question that starting a Company is a risky undertaking. There are countless risks associated with building a technology or a product or service, getting it to market, and ultimately convincing people to use (not to mention pay for) it. Layer on financing risk, disagreements with co-founders or the board-of-directors and difficulties in a founder’s personal life that results from such a tumultuous existence, and we can quickly see that launching and attempting to grow a startup is an exercise mired in risk.
Many believe that founders simply accept that risk and focus entirely on the upside potential that their business has for them, their investors, their careers, their employees, and their families. However, the reality is that the most effective founders aren’t blind to risk – rather they are extremely thoughtful on how they mitigate it. Below, I highlight a few particular lessons from the Companies I have invested behind, worked on, and supported over the last few years:
1. The founder agreement: The business that co-founders have in their heads at the time of ideation or even after several months of exploring the business’s potential will almost always fundamentally differ from the business that is ultimately created. The human resource needs of the actual business as well as the contributions of each of the co-founders will also undoubtedly change over time. At its core, the founder agreement is a tool designed to mitigate the risk of a skill mismatch or a waning of commitment on the part of the founders. It can also mitigate the risk of gridlock that can occur should there be significant disagreements among the founders that stem from changes in the business that will naturally occur time. Ownership, vesting schedules, role definition, and board structure all help create a structure for mitigating “co-founder risk” in ways that the majority of founding teams don’t even think about. This document is a difficult one to draft. However, it’s a must-do once you realize this is a business you want to get serious about forming.
2. Outcome-based hiring: Hiring is among the most important activities a company must undertake at any stage. However, in a startup context, effective hiring can be the difference between the growth of the business and its demise. A recent HBS paper by Housman and Minor (2015) demonstrates that hiring a toxic worker can erode much more value than hiring a superstar can create. As a result, managing the risk associated with the asymmetric information (and asymmetric return profile of hiring that this paper points to). Geoff Smart and Randy Street’s Who in which a hiring process begins with the creation of a clear set of outcomes that the new role is designed to fill. The interviews, reference checks, and work samples that follow can then be matched to these outcomes vet the probability that a candidate is able to achieve them in this new role. However, at the end of the day, you have to trust your gut – checklists cannot possibly help you when it comes to fit, team dynamic, and personality. Outcome-based hiring can get you 95% of the way there, but the last 5% is just as important.
3. Managing to employee biology: At the end of the day, we are all programmed and primed with a sympathetic nervous system. We respond to stress, volatility, and uncertainty in visceral ways that make us human. Each of us also responds to these stimuli differently. I see three particular lessons with respect to this managing biology. First, to effectively lead through this volatility, a founder/CEO (or any manager for that matter) must be aware of both how he/she responds to such stimuli. Failing to do so and wearing one’s sympathetic nervous system on his/her sleeve can signal the wrong message to employees about the true nature of how the business is doing. Second, a founder/CEO must know how his/her people respond to different forms of stress and mitigate the risk that an employee is triggered in a detrimental way to his/her productivity and to the business’ culture. Third, it’s essential that founders do not shield their people from all adverse stimuli to portray the business as doing perfectly well, especially when it isn’t. Delaying a more extreme triggering of stress that comes when a failing company has to close its doors is not an acceptable solution for dealing with a team’s biology.
There are dozens of other important learnings on the importance of mitigating risk as a founder and there is no question that founding a company involves a great deal of risk no matter what one does. However, the reality is that starting a company is not the equivalent of blindly jumping off a cliff with the objective (and confidence) of assembling a parachute before one hits the ground. Rather, if done properly, it is a set of conscientious and intentional decisions designed to mitigate as much risk as possible. Next time try bringing a parachute.
 Michael Housman and Dylan Minor, “Toxic Workers” HBS Working Paper 16-057, 2015, http://www.hbs.edu/faculty/Publication%20Files/16-057_d45c0b4f-fa19-49de-8f1b-4b12fe054fea.pdf, Accessed 5 December 2015