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What Makes for a Successful Startup Founding Team?


Mike Chan

"No business is so good that the wrong people can’t mess it up. And no business is so bad that the right people can’t fix it…so if you don’t get the people part of the equation right, everything else is really immaterial.”
 
-Fred Wilson, Union Square Ventures
 
Ever since the failure of my first startup, Dokkit, due to team issues, I’ve always wondered how founding team composition and dynamics impact startup success. Now I have some hard numbers on this subject.
 
On January 23, Professor Jason Greenberg from my alma mater NYU Stern presented his research on “Co-founders and Startups: What Makes a Successful Team?” at NYU’s Washington DC campus. To accompany Professor Greenberg’s presentation and add some real-world texture to the data, I sat on a panel with Phil Rosenthal, co-founder and president of Fastcase, a legal research website, to talk about our founding team experiences.
 
Founding Team Failures
Did you know that founding team problems were the greatest source of VC-funded startup failure? According to Professor Greenberg’s research, 65 percent of startups fail because of founding team issues, as opposed to 35 percent due to product, marketing or function-based issues.
 
Professor Greenberg’s research focused on why these failures occur, and he broke down team issues into three buckets:
 
1. Relationships

 
The primary question here is: With whom should you start a business? Is it best to launch your startup with family members, friends, co-workers or strangers?
 
According to the data, founding teams of tech startups mostly consist of co-workers (~43 percent), followed by friends (~24 percent), then family (just over 10 percent), with the remainder consisting of strangers and solo founders.
 
Ventures that were started with co-workers had more than a 2x probability of business viability over those started with family, and over 7x probability of viability than those started with strangers or friends who never worked together.  That’s really powerful.
 
Phil’s and my real-world experiences confirmed this data. Phil started Fastcase with a law firm colleague and they’ve been running their company for over 14 years now. On the other hand, I started Dokkit with strangers and that didn’t end up well. But for my new startup Locatize, I’m working with someone who falls into the co-worker bucket (one of my consulting clients with whom I’ve worked with for over a year). Hopefully this is will contribute to a more positive outcome.
 
2. Roles

 
The next predictor of success was the roles that co-founders assumed in the startup.
 
Professor Greenberg found that the person who came up with the idea typically assumes the role of CEO of the company (this happens about 56 percent of the time). While that makes sense to most, it goes against the widely accepted startup mantra that “ideas are worthless.”
 
I came up with the idea of Dokkit and subsequently assumed the role of CEO before a team was even assembled. And because I was CEO and recruited technical teammates, I felt like I had to handle all of the business and marketing aspects alone, and my teammates were to handle development of the product only. In reality, they wanted to have a broad role across multiple functions, as founding team members should. I never should have assumed the CEO role so early nor should I have siloed the functions at that point in time.
 
While there isn’t a formula for role and responsibility allocation across a founding team, the data suggests that team members just have to be “in sync” and agree and be comfortable with who will do what. If the team finds this synchronization, the company is 4.5 times more likely to achieve business viability. 
 
3. Rewards

 
The rewards aspect focuses on how equity is distributed among co-founders. One of the trends that came up from the research was that more equity typically is given to the person who thought of the idea, again grossly overstating the value of coming up with the initial concept.
 
Many startup teams split equity equally among co-founders, especially if:
  1. The team consists of first-time founders.
  2. The founding team consists of friends.
  3. Equity is split early in the life of the startup.
  4. Founders have similar levels of industry experience.
 
While this is a simple solution, it’s very rarely the correct way to go.
 
What these equal equity splits don’t take into account are the contributions of each founder over time, which can be based on many factors like skill set, availability, size and quality of network and access to finances.
 
Phil split his equity equally with his co-founder as has yet to run into any major problems. And while we didn’t get far enough to incorporate Dokkit and allocate equity ownership among the founding team members, we did have many difficult but honest conversations about this and came to an agreement where equity was not distributed equally. It’s best to have these conversations early and often; they are sure to be tough and contentious, but coming to an agreement where equity is split fairly is an important step in moving forward and building your company.
 
Conclusion
The most important factor to startup success isn’t necessarily following a blueprint that the data suggests; rather, it’s more important to be in sync with your founders about each of these important aspects. While relationships are very much defined, roles and rewards may be in constant flux throughout the life of your company and you and your co-founders need to adapt to the many changes that come your way and reach agreements with which everyone is comfortable.
                                                                                                             
Have you run into similar issues when running your startup? Hopefully you made it through these problems; if so, how did you deal with them? I’d love to hear your story in the comments.
 

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