“The Founder’s Dilemma — Anticipating And Avoiding The Pitfalls That Can Sink A Startup”
Want to learn the real reason why most startups fail? Noam Wasserman, Noam Wasserman, Associate Professor of Business Administration at Harvard Business School, shared some insights on the long-term effects of decision-making by startup founders with entrepreneurs at the MassChallenge Boston 2015 Boot Camp. Here are 3 key takeaways from his engaging lecture:
Most companies fail, yet the primary cause of such failures may surprise you.
- “It is an ubiquitous fact that startups often fail, yet a vast majority of early stage companies crumble due to irreconcilable frictions between the founding team rather than a faulty product or lack of funding.” In Wasserman’s study of 6,000 startups, 65% of those who shuttered their doors did so because of “people problems” compared to 35% with product, functional or market problems.
- “Most early ventures lack a detailed “roadmap” for future operations and thus important decisions are often made in spontaneous fashion — this can lead to a ripple effect of internal issues.” As the visionary Steve Jobs exclaimed, “Follow your heart, but check it with your head.”
Key Takeaway: Simply relying on blind passion and gut instinct is a critical mistake that can derail your company quickly; combining intuition with rationality will allow for critical checks and balances between founders who most likely have equal passion but different personalities.
Be aware of the “Core Dilemmas” which all founders must deal with by having honest conversations with your family, fellow founders and anyone else directly affected by your decision making.
- Understand the 3 types of circumstances inherently tied to starting your own company:
- Personal circumstances — Are you a first time founder? Are you comfortable with extreme shifts in your work/life balance?
- Market Circumstances — Is your company simply a passion project or do you have a sustainable business model, realistic addressable market and known market demand?
- Career Circumstances — Do you have the necessary skill set? Do you have necessary experience? Does it make sense to leave the security of your job to partake in the trials and tribulations of an early stage venture?
- “If you are co-founding (84% of startups), finding the appropriate cofounder can be an extremely arduous task; you must seriously consider the pros and cons of choosing a personal relationship versus a business relationship.”
Think about if you value interpersonal trust/warmth over professional capability; a personal relationship can turn into a compatible business relationship and vice versa, but this is not always the case.
- Interestingly, while over 50% of founding teams are comprised of family and friends (versus 24% comprised of prior co-workers), the study shows that non-friend founding teams have historically stayed intact longer.
Key Takeaway: The assumptions you make now can make or break your future success. Weighing out both “personal risk” and “people risk” should be a top priority if and when you decide to launch your company.
Being an adaptable leader is of hallmark importance in the long-term success of your startup as you scale, take on new hires, and make important financial decisions.
- Wasserman expanded upon this startup axiom by incorporating the polar pop-culture icons — Peter Pan and Zeus — to establish an easily digestible dichotomy of leadership styles. The former leads his/her team with a friendly sense of equanimity and believes in an egalitarian corporate structure, whereas the latter rules over his/her minions in totalitarian fashion, maintaining a strict hierarchy where important decisions are unilaterally expounded from the precipice of Olympus.
- Which “ruling” style is better? The answer is not either/or, but a hybrid of both, as circumstances will surely change as your team grows.
- “Inherently, we are conflict-averse, yet kicking the “problem can” down the road is toxic for a young company. Make sure to emphasize both honesty and transparency when making executive decisions.”
One of the inevitable decisions you will have to make early on is how to divide up equity between founders — proceed with care. Negotiating equity splits based on a time/incentive model is one of the most effective methods of measuring expectations, as each founder’s commitment to the company should be directly proportional to their respective equity stake.
Key Takeaway: Combining flexibility with rigor will allow you as a founder to make conscientious yet deliberate decisions that will have a positive long-term effect on your team’s quality of life.
- James Maynard, MassChallenge Marketing
Originally published at masschallenge.org.