I host an “open office hours” session every Saturday where I chat on calls with people from around the world who are looking to progress their startup to the next phase. (If you want to chat with me, you can schedule a slot at http://sean-sosv.youcanbook.me).
Even though these calls are not about funding requests, the most frequent question I get is something along the lines of “how do I get more financing?”
The answer I give surprisingly often is, “From professional investors, you can’t. Your founding team is fundamentally broken”.
Let me start by saying that there are lots of different types of startups, and even though the startup level of work commitment at the founder level is beyond most people’s desire or capacity, I strongly encourage more people to seize the day, seize their dreams, and get started making the world a better place by fixing the wrongs that they see in the world with their new startup.
The types of startups SOSV is involved with are technology startups: businesses that can scale by employing technology to enable disruptive change to markets. This doesn’t have to be a huge amount of brand-new, cutting edge technology — it could simply be a new type of e-commerce site for a new marketplace. E-commerce has been on the internet for 20 years, right? How hard could that be?
As anyone with any experience knows, even e-commerce technology is continuously changing, continuously improving, and the technical tools and expertise needed to improve yield and target the right customers through “growth hacking” are absolutely essential.
There is no free lunch in tech businesses. You can’t just buy everything off-the-shelf, or outsource the work for someone else to do your website once and expect your business to be able to adapt to the incredibly fast pace of a high-growth business.
And if your business is not a high-growth business, then you shouldn’t be looking for venture-type funding in the first place.
The appeal of creating a tech startup that creates some noteworthy new product or service is so broad that many people who have no background are drawn to the flame, seduced by the prospect of fame and fortune, tempted by the stories of college kids that have become millionaires or billionaires in just a few years. So, how hard can it be? (I actually was one of those college kids many years ago, launching MapInfo — but I’d been programming since age 12, for a total of 9 years, by the time I’d co-founded the company with three others.)
The people that come to me on these “office hours” calls are genuine, sincere and motivated people. They see gaps in the market that they feel the need to fill. They believe they can outsource the technical solution to some team in India, or perhaps hire a team of programmers if they get sufficient funding, and they aren’t silly enough to think that the technology is not crucial to their business. It is, after all, the way they expect to create the value.
I admit, I’m biased in favor of technical co-founders. Why do people think they can create value without technical depth on the founding team?
1. Ignorance and/or lack of experience
As stated before, if you are pursuing external finance (venture or professional angel money), you are building a scaleable business. It is likely a global business, so it likely needs to operate 24/7. If you haven’t built one of these businesses before, you are not likely to be aware that servers and related services go down on nights and weekends, unexpectedly, or a key customer is suddenly going to require you to make a high priority change to your manufacturing process, or a component that you designed your product around is now unavailable, or suddenly your business or service is going to need to change due to marketplace dynamics.
If you have outsourced your engineering, you are now out of business. Good luck in getting the contractor to do the work over the weekend, while they are now moved on to some other contract with its own deadlines. Good luck in even understanding whether the quote you are now receiving for the overnight turnaround of some priority is a good deal, or whether you are being ripped off because you don’t understand the costs of manufacturing or the technology stack your service is built on top of. Good luck in not having so many of these unexpected events that your business is continuously being bled by your contractor for the endless stream of “change orders”.
Investors don’t want to count on your good luck. No-one likes to invest in companies that don’t own or control their intellectual property. You can’t outsource your core competencies.
Essentially, if you are running a business, you must be fleet of foot, you must be adaptable, and you must be competent. Contractors tend to work on fixed scope projects for fixed cost in order to insure their profitability. These fixed scope projects are the exact wrong way to run a tech business, you’ll end up with “waterfall” design solutions rather than the “release every day” type of solutions that startups need to be responsive.
Investors know that top technical talent is expensive, and that’s why they are willing to have the majority of the company owned by a complete founding team — the founders take a big cash pay cut to salary over several years in exchange for earning their equity stake, which is ascribed a value of millions of dollars over many years.
2. The desire to “go it alone”
Congratulations, you are that singular founder who has a technical background and a unique view of the world and the chops to get your business off the ground by yourself. You want to be the singular hero who is viewed as the founder of a new industry, the Elon Musk, Mark Zuckerberg, Bill Gates or Michael Dell of your day.
The best reason, in my experience, is that you’ve already done it. You started with a labor of love or a passion project that got swarms of users and a community of customers around it before you even realized it was a company. You became profitable really early and you already have lots of good customers. You hit the magical goal of traction already, real traction with real revenues (or hundreds of thousands of daily active users if a consumer company). Okay, in this case maybe you’ll get a hearing as a singular founder seeking investment (but you’ll still need to set aside an ESOP program for others). If you are seeking funding without having a team and traction, though, you won’t get a hearing. Why?
Because you’re not a team player. No man is an island, and no company can survive with a CEO who thinks they can do it all. Teams are good for your psyche and they are good to complement the skills that you don’t have. If you’re going to build a company, you’re going to have to have trusted people who you delegate entire areas of responsibility to, important areas that are worth sharing with a commensurate level of equity of your company.
Oh, and by the way, Elon Musk, Mark Zuckerberg, Bill Gates and many of the other singular luminaries of our time did *not* start their first businesses alone. Yes, they were and are singular leaders, but Bill Gates had Paul Allen, Elon had the Paypal mafia, Mark had the Winklevoss twins and Sean Parker (just kidding). Sorry, my history here is coming from dull recollections of Hollywood movies, but even if the business of entrepreneurship can be a lonely business that idealizes the CEO founder over the rest of the team, the successful people in this business run it with great teams around them, and there’s great respect and equity sharing to the members of that team.
Because you’re greedy. As they say in the stock market, “bulls make money, bears make money, but pigs get slaughtered”. Enough said.
Because you are a psycho. With over 300 companies that SOSV has invested in, we’ve come across the occasional narcissistic psychopath. Experienced investors will hopefully catch this, because if you are one, you should be put in prison before you hurt anyone. Just in case you are wondering whether the odds are more likely that the singular founder is a psychopath or a singular genius, my experience is that the singular founder is much more likely to be a psychopath than a singular genius. Narcissistic psychopaths are something like 1% of the general population in the United States, although it approaches 10% of the population on Wall Street.
Because you’re a control freak, which means that you’re not likely to listen to your customers, your management team, your board or your investors. Your future is already sealed. Control freaks are a large percentage of the general population, perhaps 5% (and I’m making this up). Enough said.
3. Inability to find a co-founder
If you cannot find a co-founder, all is not lost. You can network your socks off until you become exposed to the right co-founder.
If you are a superstar who has already successfully started a company and exited it well previously, numerous venture capitalists will give you an office and offer you to be an “entrepreneur in residence”, where you can hang out in a co-working space and/or accelerator and mix with some of the exciting opportunities and people coming through. SOSV does this. Set up a time with me or one of our investment partners on our office hours and we can chat.
If you have significant business experience, you can volunteer to mentor at an accelerator program. Again, this assumes you have some level of key business or technical experience that could be useful to others. Contact a local accelerator program in your community and get involved. Being a volunteer and becoming engaged in the community is a great way to learn rapidly from the lessons of others. And you may find that another mentor or some startup in the accelerator program would be a great match for you.
There are numerous events like Startup Weekend, Startup Grind, Slingshot, Startup Salad, etc., that are geared towards meeting other founders. Go out there and mingle. You’ll meet some great people, develop respect and connections in the community, and possibly even find some team-level talent if not actually co-founder talent.
Join a co-working space. A co-working space can be like the old TV show Cheers, where everybody knows your name, and they will often have networking events, birthday parties, host talks and career development sessions. Plus you just get to hang out with people at the watercooler. You won’t find a co-founder until you get out of your house.
It’s not likely that you’re going to find a great co-founder at a single event. You must “date around” before “getting married”. Start a project, see how well the other prospective co-founders keep their promises, and deliver what they said they’d do.
4. Inability to convince someone to do it with you
Sorry, if you can’t get a co-founder to believe in the market, forget about finding sufficient numbers of customers that will believe in you or investors that will believe in you. If you can’t build a team, it’s possible that you are the problem. You haven’t passed the “laugh test”. No investor will hold your hand to help you recruit people to build and run your business. That’s your job, founder.
Although this is perhaps the least of the reasons, many people feel that the idea itself is what is worthwhile…and that the talent that implements that idea is a hireable resource.
Bullshit. Ideas are a dime a dozen. Execution is what makes ideas magical, and any business needs a team of people to execute the pants out of the business. While one founder is overseeing the technology, another is needed in fundraising, or marketing, or operations. These co-founders, and key staff, have the right to be co-owners of these businesses, as long as they are producing at the insanely productive level that they are expected to produce at.
An example: there were numerous taxi dispatch software companies before Uber and Lyft came along with a completely superior business model. Uber and Lyft executed extremely well, and were willing to do things normal businesses wouldn’t do, like operate illegally until they were able to get legislation on their side, and subsidize rides and drivers to create market share. Sheer balls. And there were taxi-sharing companies years before Uber-pool and Lyft-lines, but these guys leveraged their taxi business into another potentially lucrative area that has transformed the taxi marketplace and provided better options for consumers than what was previously available. Execution is everything. There were hundreds of companies in this space that had pieces of the solution, but not the whole solution. You may argue with their methods (I did), but credit goes to them for their success, which has positively impacted huge numbers of people with jobs who never before would have considered being a taxi driver, and by improved quality of taxi services in many communities. It took teams of highly capable people to do all this work. It started with the visions of the founders, and it worked its way into lots of staff, many of whom have options that are, at least for now, worth many millions of dollars.
Investors want to see founders that are committed to the success of the business, rather than the self-centered view of the success of the founder. Most investors have some control and information rights, but few investors in the tech world have a controlling interest in the business. Thus, if a founder appears to want the whole pie for themselves, that same founder is more likely to find ways to disadvantage his/her investors and management team over time. It’s like your mother told you: play nicely, and share. Piggish founders normally defeat themselves before they’ve ever achieved any success for themselves or their investors.
Find Ye a Technical Co-founder
If you are in this situation, ye must find yourself a technical co-founder. Preferably someone that you’ve known for years, that you can count on to get amazing amounts of work done, who is self-sufficient and a do-er rather than just a manager. Founding teams need to be do-er teams. You can hire managers later, after you get a bit of traction and a proof of concept implemented.
What makes this harder on you is that investors are also going to want to see that you’ve spent time together with your co-founder, that you aren’t just in a honeymoon period, that you’ve worked together with your co-founder through thick and thin, figured out how to work productively together and deal with their idiosyncrasies. Lots of co-founders met at previous work experiences, or in college, etc. New partnerships of convenience will often fail (another important reason to have founder vesting).
How do you know you’ve got the right founder? You both see the world as being unacceptable the way it is, you know that together as a team you can make it better, and you are both willing to spend the next seven years trying to make this vision come true, even as your friends who work for bigger companies are making more money and buying better houses and cars than you can, as you plow your earnings and your learnings back into the business. You watch each other’s backs. You support each other and respect each other. You play nicely. And in general, you love their perspective and their advice. They help make you grow as a human being and as a leader. You trust them.
100% commitment to the job is not enough. True co-founders are people you’d bleed for. When they suffer, you suffer. And their joy is your joy.
Success in this game of entrepreneurship is not just success in the world of business. It’s success in learning how to be a better human being.
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Originally published at sosv.com on February 15, 2016.