The importance of co-founder due diligence

http://chrisjamieson.me/the-importance-of-co-founder-due-diligence

by jordn • 12 years ago

66 28 12 years ago

chrisjamieson.me

stormqloud• 12 years ago

People need to realize most things in business are a "numbers game".

A funnel.

You try 10 companies, 2 work etc.

You have 10 co-founders, each time you learn something.

Don't understate the value of luck and randomness. Even Bill Gates realizes he was just plain lucky as much as he was smart, had the tech, timing etc.

The more you try the more you can take advantage of randomness.

IE if you don;t play you can't win.

keeptrying• 12 years ago

This is my exact definition of entrepreneur. Someone who can solve many simultaneous and interdependent problems all of which take "n(i)" attempts where "n(i)" is "much larger than what most people imagine".

Ma8ee• 12 years ago

And if you do your homework you don't need to even start some of the failed companies. By check the references and ask the right questions you can avoid some of the failures before they even happen.

Of course you must try, but don't spend 18 months trying something that three days of research would have shown to be doomed from the start.

mikeho1999• 12 years ago

All very good points... but one additional thing to add: what is his/her reputation with former co-workers / companies that s/he has worked with?

I had one co-founder who (we thought) had a very celebrated career at a very large (e.g. publicly traded) eCommerce-based company, making his way up to Sr. Director, etc. Considering we were starting similar type of company, it seemed like a perfect fit to bring him in as our chief executive.

However, we never asked for contacts / references with people he had worked with, VPs he worked under, etc.

When it came time to raising an institutional round, we were in due diligence with a VC that did look up those references, and it wasn't pretty. Turned out he had gotten fired by the company because he was using insider knowledge to basically try and start a competing company. Through his time there, he lost the trust of most of his co-workers and alienated everyone around him.

As our VC had then told us -- our CEO was a poison pill. Any VC we would talk to in the valley would have connections at this company, and would definitely follow up with their contacts at the company to find out more about our CEO, and every VC will come up with the same conclusion, that he is not to be trusted.

Had we known about all of this at the beginning (including how detrimental his relationships and his reputation has become), we would've never co-founded with him.

Definitely a tough lesson learned.

avenger123• 12 years ago

This is highly relevant for any high-level hire, regardless of whether it's a startup or not.

In some ways, it's so much easier to bullshit now. LinkedIn definitely helps with this. Sometimes, the profiles with the most recommendations and glowing job descriptions are the most suspect to me.

Having worked with a few people that would be considered distrustful, conniving, etc. by the people around them and seeing their wonderful LinkedIn profiles makes me wonder about most of the profiles.

For people in the know, there's no gain in "exposing" the person unless they somehow cross paths and are asked an opinion. Even then, its a judgement call whether the truth needs to be said or not.

At the end of the day, it looks like the basics don't change. You still need to do real due diligence with the effort relative to how much damage the person can do if it doesn't workout.

The general business wisdom is that partnerships are bad and should not be done. I don't know why this seems to have changed for tech startups. I believe as in marriage, one should go into it with the possibility that it will fall apart. Knowing this possibility for a business partnership, two things should be considered. One, am I ok with this happening? Two, what are all the legal and contractual things I can do to get through it if it does happen.

If you are not ok with it, then don't partner up.

If you are OK with all going to crap since the perceived gain is so much higher, then by all means put together the best partnership agreement that you can that accounts for most of the possible scenarios.

UK-AL2• 12 years ago

Except most references are complete BS anyway. Normally good references are agreed upon before leave, regardless to if they were good employees or not.

Bad references are normally given because of political reasons(as good references are almost always given) not performance. I.E Employee exposed bad practices or made boss look bad, and a bad reference is used as retaliation.

I think there was some academic research that said references are the worst predictors for performance.

PakG12• 12 years ago

This is the problem we're trying to fix with my startup socialcheck.me. We're trying to make a safe environment to give full picture comprehensive reference feedback by ensuring privacy and anonymity after verifying relationships are real via social networks. Then we make the data easy to analyze and compare. But admittedly, it's been difficult to figure out even then how to get people to trust that we keep the feedback private and anonymous the way kids trust Snapchat to really delete messages. Good reference checks are hard and broken (which is why we're trying to fix them).

throwaway9850232• 12 years ago

I'm working for a startup where the primary founder did not perform enough due diligence on his co-founder and the results have been disastrous.

The co-founder constantly brags about his employment history at major tech companies in the area. Only later did we all learn that: 1) His roles weren't as important or high-ranking as he claims and 2) He was fired for non-performance from his last two positions. Both of those points are becoming big thorns in our fundraising as investors want to speak with both founders' former bosses.

This co-founder did work hard for a brief period when the company was started and managed to produce some good initial funding. But when the funding hit our bank, he became a victim of his own success and spent more time empire building than working on the company. Within months of our initial funding he was already working his way into adviser positions with local startups and spending our marketing budget on having a PR firm get puff-piece articles about him into major publications. I think he's spent less than a thousand dollars on customer acquisition and advertising for our product.

He rarely comes in to the office any more, and when he does he can often be found watching ESPN or Hulu in the conference room. He some times doesn't even bother to stop watching his sports games on his laptop with his headphones over one ear while he's supposed to be leading team meetings. It's depressing for the entire office, and we're losing people left and right over it.

The takeaway here is that a bad co-founder can easily sink your business. A bad co-founder isn't immediately obvious. In this case, the person in question is charismatic and persistent when necessary, and has a great ability to sell himself to others in the short term as long as you don't dig too deep in to his spotty past. This was great for securing our early angel funding and dumb money, but once the company tried to secure real funding from the big league VC firms the professional investors saw right through his BS.

thenmar• 12 years ago

Can I ask why you're sticking around? How can a company like this succeed?

throwaway9850232• 12 years ago

I'm actively looking for and applying at other companies. Most of my coworkers are looking for new jobs.

We've all stayed this long because we have fun working here. We're building a good product and we like working with each other and the primary founder.

Up until recently the co-founder has mostly been dead weight. He positioned himself as the money guy, and his early attempts at fundraising worked, so we put up with all of his bad behavior as long as we got a paycheck and were able to work on the things we loved.

Now that the money is running low and his attempts at fundraising are failing, we're all ready to abandon ship. The only hope left for this company would be if a generous (or dumb?) investor would invest in us for the product and then replace the bad apple co-founder with someone who could actually get the job done. That seems unlikely to me though.

liface• 12 years ago

Having the author's face peeking out at me from the bottom of the screen is creeping me out a little bit.

jamiesoncj• 12 years ago

Hey! Author here - it is a bit creepy, I suppose! Sorry about that. I might need to tweak the theme :)

rrhyne• 12 years ago

Emotional intellegence is a critical skill. Be clinical and ruthless in you culling of potential co- founders in this regard.

Do not make allowances for bad emotional behavior or lack of ability to reason properly, no matter how much you currently respect or like the person. The stress will make magnify every seemingly small issue 100 times. Try to imagine what the traits you observe early will be like under that kind if pressure.

nlh• 12 years ago

I can't possibly agree with this premise more strongly. Having the right co-founder chemistry is as critical (if not more critical?) than having the right chemistry in your personal relationships (there's a reason it's called FounderDating ;) )

I haven't been around that long, but I'd say a majority of business failures I've learned about (outside the Silicon Valley bubble) happened because of disputes and frustrations between partners.

I know a lot of people, and there are probably no more than 3 that I would ever start a business with.

tluyben2• 12 years ago

I have been very lucky with my business partners so far ; some of them I have never seen in person and yet have started successful business with them. So far (around 20 companies) I have not been wrong about my gut feeling I got when first talking to someone wether this would or would not work well. Unfortunately at a few occasions I ignored that feeling because it seemed like too good an opportunity to miss and I paid dearly for it. But that's only money so who cares. My biggest success has been with someone I knew I wouldn't be compatible with at all but he was so well connected and financially gifted that it didn't matter.

It is how I still start my businesses; I talk to someone briefly and if we seem to have align for the particular business in question, we just start. Personally I think people worry too much in general; there is no way to plan these things. You can be plainly stupid about it but if your intuition is that bad maybe you don't want to run a business anyway as you will have to be able to vet partners, employees, investors etc very quickly all the time after starting.

mingmecca• 12 years ago

Values matter. Ethics matter. If you're considering someone as a co-founder that believes the end justifies the means, or it is better to ask forgiveness than permission, then pass on that person and keep looking.

Personal anecdote: I wasted years of my life trying to get my multi-millionaire co-founder to be honest, but to his way of thinking there was no value in being honest all the time, so he wasn't. Consequently, because of the social isolation and loss of business contacts that comes from being untrustworthy (and just making bad decisions in general) this person went from have nearly 12 million dollars in the bank to having less than $500.

Karma is a bitch.

ChuckMcM• 12 years ago

Small companies are much more like families than like work projects. There is a lot to be said for this. I would be a bit careful about engineering to stressful a situation at first, often with much less stress you can get hints at what the response will be and test those. Full on stress can bring out things you don't expect so you need a good backup.

At a former job we hired a person I knew from a former company into a job that was too stressful for them and it brought out some addiction issues the employee felt they had conquered. Turns out not so much. It was challenging but we got the employee help and back into a stable situation, but it was not the experience we had expected or planned for.

loladesoto• 12 years ago

"Pay close attention — true motivations are revealed, not declared." ~ Naval Ravikant http://venturehacks.com/articles/pick-cofounder

tl;dr: either go with someone you know and launch something together. if strangers: brainstorm, hack something together in 48 hours and thoroughly go through their background. if they've done a startup before, ask them to walk you through PG's 18 mistakes and identify which they've made (and their plan for doing things differently).

it's actually a two-sided problem. how do technical and non-technical co-founders who are potentially strangers and often have wildly different skill sets evaluate each other?

i asked a few hacker-founder friends for their take. one (well-known) serial CTO said: "I don’t have negotiation skills and I’m afraid of talking to business people. They play this "wordsmithing" game and I can’t keep up. Before I know it, they talk me into accepting less than I deserve and I get screwed.”

turns out, being taken advantage of was a common theme among the technical founders i talked to. most have been burned. in some cases it turned them off forming partnerships altogether.

what about the other side? i was a non-technical founder when i launched my first startup, which failed partly due my inability to judge a good from a bad developer. i eventually realized that being non-technical put me in a foolishly helpless position so i did two things: 1. i taught myself to code (i started with Pygames, moved to Project Euler and wound up working on small Python projects and learning ObjectiveC); 2. i got lucky when i met a developer at a hackathon last year. we became friends and i asked for his help interviewing technical co-founders. he wound up being interested in the problem i was trying to solve and contributed to the project. when i wound down that startup and told him about my next one, he wanted to get involved.

but not before suggesting i quickly hack together an MVP, get some initial user feedback and even land a few potential customers first. :> i'm so glad i did and he was smart to ask for this. he now understands how i approach problems, saw my ability to hack something quick and dirty, and witnessed some serious hustle as i did all of that in 48 hours. the point is we have some shared history now and the net result is trust. we also understand each other's strengths and weaknesses and talk about them openly.

(note: i also did a post-mortem on my previous startup and identified which of PG's 18 mistakes i'd made. it was a great exercise and i recommend it to anyone who has had to wind down a startup before launching their next. do it for yourself but share it with prospective co-founders and team mates.)

digita883• 12 years ago

I used hackathons as a good type of way to network with other developers, see how we work under pressure etc. I think it works initially but start-ups aren't quick and dirty solutions. It'll be time that can dissolve a start-up!

apunic• 12 years ago

A friend said: cofounders are the biggest driver before getting funded and the biggest obstacle after.

jason_tko• 12 years ago

If your co-founder is not as equally a driver before and after an arbitrary business event such as a fundraising round, you picked the wrong co-founder.

digita883• 12 years ago

In my last start-up, I was the sole Founder and had a Partner which dealt with the development side (instead of a 'Technical Co-Founder') so even though I could do it myself I prefer building the organisation. This time around we are Co-Founders but one is more 'Technical' by way of formal education. With my last one, we have been together for several years. There was a bit of a stressful period last year which they could have easily cut me off but instead shrugged and went "Look, don't worry, if you have any further projects just let us know". That was several years after our first partnership agreement. With the current one, I called this person out, working on multiple other projects and felt like mine was being delegated down to "Unimportant" (although could have been communicated better). In terms of potential development loss not a big deal, won't be a start-up killer, but nonetheless a pain for me. I am willing to 'train' up this Co-Founder though and get them into a start-up state of mind as to not burn any bridges. I think that with Co-Founders you have to work on making things go smoothly, and it's the soft skills like: - Communication (Founder agreements, meetings etc) - Figuring out how to work as a team (ie who is doing what etc) - Expectations. I think that some people have a concept as to what it's like being a Co-Founder based on what they read on blog entries, on popular culture and so on and then when they actually do take on board this type of position at a start-up they get that big wake up call. I think that is where fall outs happen especially for first-time entrepreneurs. Some people may also realise that they would rather work for a company or for a start-up rather than run one, and that's OK. Some people may not handle the stress and again, that's OK.

I think it's important that, in the end, we all treat each other like human beings. We're not saving lives here - we're not surgeons, nurses, firefighters. Keep that in perspective.

digita883• 12 years ago

Also out of this experience, my other benchmark should I look for a new/another Co-Founder is whether or not they've had experience in start-ups, and I don't mean 'I published an app and a one pager website' but ACTUAL start-ups ie they have hired, done media/press/publicity, done partnerships, done funding, and so on.

tUrG0n• 12 years ago

If you can build it (ie if you're a techy), stop looking for a co-founder. I've seen early stage startup's team shatter due to co-founder breakups, including mine. I saw my first 4 startup die, because I either couldn't stand my co-founders or we just didn't have complementary skills.

Don't force getting a co-founder. Instead, LEARN TO CROWDSOURCE YOUR TEAM. Have as many 'advisors' as you can in as many areas as you can. They are your 'team'. They don't do the work for you, but they guide you. Hire the rest or do it yourself.

With a team, you risk having constant fights and eventually breakups. It HURTS. Your startup can't afford it. Solo, you face an attrition war, as it takes you more time to build it. Its survival of the toughest, and if you have what it takes to survive, you will make it.

I base this on the fact that I've been solo founder and bootstrapping Beepl (http://beeplapp.com/) for the past 7 months. I don't have to deal with other people's drama. I face my own depression and that's something that I can solve easily.

The importance of co-founder due diligence

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