Also, my thoughts below are focused on the attributes of the initial team – the one that is going to take a business from concept to the first $1,000,000 in revenues. Teams and leadership for businesses that have more than 20 employees, or more than $1,000,000 in revenues, need some distinctively different attributes from a start up team. The same team can do both, but there are differences. The largest differences center around organizational development and management. Most entrepreneurial businesses won’t scale without skills in those areas, but that is a story for another blog post.
With that in mind, here are the characteristics that I believe are essential for a good start up team.
Entrepreneurial Attributes. While each member of the team does not necessarily have to be an entrepreneur, as a group the team must have the collective characteristics of a good entrepreneur. I tend to think of a good team as having almost a hive mind – where the strengths of each are amplified (forgive the pun) through the group’s dynamics. Therefore, I expect the team to be entrepreneurial. What types of characteristics am I particularly looking for? Resilience, optimism, leadership and the ability to fail upward are entrepreneurial characteristics that I think are particularly important for any start up team.
Cohesion. Building a start up is incredibly stressful and will have many ups and downs. The more that a team can stick together, and not let the group dynamics become an impediment, the more likely that they will be successful. Prior experience as a team, proven through tough times, is a hard attribute to ignore. Lacking that a first time team should focus very clearly on putting together a team of people that share similar decision making approaches, senses of ethics, humor and the other human characteristics that make a group function well.
Good Group Dynamics. This concept builds in part off cohesion (and vice versa). There are many studies that show well integrated groups are smarter than their individual members, and non-functional groups actually obscure the intelligence of individual members. In other words, teams that have good respect and communications tend to outperform not only dysfunctional teams, but also the individual members of a well functioning team. There is truth to the phrase “two heads are better than one,” provided that the two heads are not trying to bang into each other.
More than One Member. This may seem a bit silly – how can you have a group without more than one member. What I am really getting at is that a start up should have more than one person who is really in the soup if things go wrong (or sharing the rewards when things go well). Starting a company is lonely. Having at least one true partner makes starting a business more fun and less stressful. That doesn’t mean that a successful business can’t be started with one principal and a group of employees. But, founders in that situation should find a good investor, devoted advisor or great venture lawyer right away. Everyone needs someone to talk to about the stress of starting a businesses. Employees are not the place to go with those feelings when you are the boss.
Domain Expertise. Since teams start and grow businesses, they must have the domain expertise necessary to start their businesses. There are many reasons why this makes sense. Some of the obvious ones are knowledge of technology allows a team to commercialize it and knowing market participants makes it more likely that early sales will occur.
Limited Overlap. Assuming a well functioning group, there is much more to be gained by having a team with complementary not duplicative skills. It also helps avoid turf battles and over focusing on specific issues where there is lots of team concentration. For instance, if the team is primarily marketers then the start up’s marketing plans may be very developed, but its sales achievements very limited, or its product development over budget and behind scheudcle.
Smallest Team Possible. This may be an obvious point but founder stock is very valuable – it’s cheap and will be worth a great deal if the business is successful. Every effort should be made to limit the initial team to people who are going to be impactful and drive the business. As the business grows, new people will be added with ancillary skills and they will undoubtedly want equity (if the business is exciting), so the less the founders hand out to others at the beginning, the happier they will be with this later dilution.
Team Based on Merit Not Affiliation. This is very important. There should be only “A” players on a start up team. Every member should be on the team because of their domain experience, cohesion and so forth. Having a team member who is a weaker player, merely because of a prior relationship is a bad idea. Having too much founders stock in the hands of people who are not valuable (to an investor or to the founders) dilutes the economic interests of the people who are creating value. The bottom line is that all team members should be the “best choice” on an objective basis.
Clarity on Equity Split. I have seen a number of teams fall apart when they are asked who owns what. The conversation about equity split is a difficult one at times, but a well functioning team should be able to get through it honestly and without residual resentment. Investors are very interested in this issue, both to make sure that the right people have the correct ownership (they will have an opinion on that, trust me) and also that there is no dormant anger on the team. Equity split issues that are unresolved often come back at the absolute worst time – say a venture round or a sale of the business – and must be cleared up before bringing in outsiders. A corollary point to be made – every founding team should put vesting agreements in place (even if investors don’t ask for them) in order to avoid the situation where a founder leaves and the remaining founders are working to make the departed founder wealthy in the same proportion as if they well all still in the company. While the attraction of winter in Boca might be attractive to a founder when times get tough, the other founders shouldn’t subsidize the time away.
Clarity of Roles and Organizational Structure.
Early in a company’s life there is a tendency for team roles to be shaped more informally, indeed that is one of the hallmarks of a good founding team. But, corporate law will drive a company to have a President or CEO and other officers. Often this creations an issue among founders depending upon their viewpoints. Titles matter in a corporation – there are rolls and responsibilities. Investors gravitate towards the CEO. This is all fine if the founding team looks at the CEO as their actual leader. It works much less well when there are differing perceptions between title and how decisions are actually made. In other words, if the team expects that decisions are all made democratically regardless of title, then a traditional corporate structure will be highly discordant. What often happens is that horizontal multileader structures might work for a start up, but won’t work for very long. Decisions need to be made, and investors want there to be a leader. The team needs to be ready for that, and be comfortable with who the leader is and what lines of authority will be created.
Prior Experience With Start Ups. It shouldn’t be surprising based upon what I have covered so far that there is a lot of things that goes into creating a great businesses. An appreciation of the ups and downs and sand traps makes the journey more likely to be successful. Therefore, an experienced team will always be more appealing to investors. Short of uniform experience, at least some members should have prior start up experience. It is very difficult for investors to finance a team that is completely inexperienced, unless they can add their own members to the team.
The Team is Not Just Founders. Allies matter. All start up teams are judged by the company that they keep. The higher the quality of the advisors, whether the Board of Advisors, or outside service advisors, the more interesting a team will be to investors. Note that with respect to allies they need to have “skin in the game.” That means that BOA members that are not investors, and don’t actually devote any time to the start up are less likely to be impressive to potential investors. And, a lawyer who has not signed on to represent a client is a less meaningful barometer.
Initial Investors. In a corollary to your selection of advisors, a team should pick their intial investors carefully. Downstream investors will be interested in knowing who the first investors are. They can be a source of validation, or a warning sign. Also, it is an important signaling opportunity for the start up team. Who you pick and how can signal to others your desirability as an investment, your discrimination between investors and your ability to sell.
I hope that these points are useful to those of you that are thinking of starting new businesses. Just remember that the most important thing for any team is to appreciate each other and support each other. Starting a company is one of the most fun and rewarding things any person can do – choose who you share this journey with carefully and you are more likely to enjoy the ride.