Early Stage Startups: The Biggest Killers

http://www.forbes.com/sites/hollieslade/2014/04/15/early-stage-startups-the-biggest-killers/

by katm • 12 years ago

73 42 12 years ago

jl2• 12 years ago

I found myself saying to the reporter over and over, "This may seem obvious, but..." and it's true that many of ideas don't seem like anything new. But because I see them happen over and over again, I thought they were important to highlight for anyone starting a startup.

technotony3• 12 years ago

Thanks for the really great advice. I'm interested in the unequal equity. We have a 60-40 split which seemed fair as I'd worked full time on the company and raised a significant Kickstarter funding before my co-founder committed 100%. Could you comment more on issues you see this brings down the line and how this plays out? Also, does this conflict a little with your next point about clear leadership?

hga2• 12 years ago

Are you interested in some abstract concept of "fairness", or in your company being successful over the next handful of years?

Unless your co-founder is strongly in the direction of a saint, there's a good chance you can choose only one. In the scheme of things, if your venture is successful over the coming years, the details of the original starting positions of the two of you isn't all that big since you're now both 100%; you say so yourself, 60-40....

johnrob• 12 years ago

I'd give yourself a gift for getting the company off the ground. 5% seems right, but I suppose 10% is not out of the question. Then split the remainder with your co-founder. This process would lead to 52.5/47.5 and 55/45 splits respectively. 60/40 is a 20% gift; I think that's a little high but it could be justified if significant progress has been made. Also, your vesting should of course have an earlier start date.

jl2• 12 years ago

This article was of course a distilled version of a much longer conversation. The uneven equity split that causes problems is usually along the lines of 75% vs. 25%-- or worse, when one founder gets 10% or less. We see this happen quite often (and advise against it if we're not too late). The founder with 10% often becomes resentful and doesn't feel properly incentivized when he/she is working just as hard as the founder with 85%. A startup is so much about execution-- usually over a long period of time that the argument of "it was my idea" isn't very compelling. (60/40 is usually totally reasonable though, especially in a situation like yours.)

golergka• 12 years ago

There's no such thing as an "objective" fairness, and if it would exist, it wouldn't matter anyway. It only matters if your partner sincerely thinks if it's fair or not, and whether he will think so in the future.

mbesto• 12 years ago

Totally, thanks jl!

re: even equity split - I'm interested to understand a little better how this is a killer? I understand the rationale that is posed in the article, but it seems to be a pretty blanket statement not applicable to all situations.

Either way, I've had lawyers (in SV specifically) suggest a slightly uneven split (i.e. 51/49), because there is nothing worse than hitting a stalemate on founder decision making. Additionally, I've yet to see a recent tech S-1 filing where founding members have had a complete 50:50 ratio. (Twitter, Facebook, Trulia, Box are just some that come to mind)

alain940402• 12 years ago

You can try out my co-founder equity calculator (http://foundrs.com). While it's not biased, I hope it never gives a 50/50 split. There are many reasons why 50/50 is bad.

The obvious one is that it kills decision-making. One day, the two co-founders will disagree, but since no one can overrule the other one, the company will drift and possibly die.

But there is a much more interesting problem (that they don't teach you in you MBA class): founders going for 50/50 is a sign that the company doesn't have a real leader. Rather than have a very unpleasant conversation about why you, the alpha CEO, should be the ultimate boss, no one feels comfortable having that discussion. You sit one evening around the table discussing how to incorporate, you sort of shyly say "what about 50/50", your co-founder stares at the floor and nods. Done. You have a 50/50 split, and a huge red warning sign of future company failure.

Source: I wrote the calculator below and had detailed discussions with 100+ founders about how to split their equity with their co-founders.

scobar• 12 years ago

In the essay, "The 18 Mistakes That Kill Startups" at http://www.paulgraham.com/startupmistakes.html , PG mentions single founder as #1 in the list.

I am searching for a co-founder for two main reasons; startups are a lot of work for a single founder, and a brainstorming partner can provide a different perspective or tell me when I'm wrong.

My devotion to my family, and a promise I made to my late father will keep me trying to move forward no matter what. I've been through the highs and lows of the emotional rollercoaster of entrepreneurship, and I understand the willpower necessary to keep moving forward during those lows. I'm very reluctant to choose a co-founder I wouldn't be willing to join in a fox hole.

In your opinion, what is the most important reason that a single founder has such a disadvantage, when it relieves the company of facing other startup-killing issues you mentioned in the interview?

robomartin3• 12 years ago

I am going to go out on a limb and say that a lot of what PG and the like say is far more applicable to 20-something non-entrepreneurs who fresh out of school (while still in school) want to start a company. I don't mean to diminish PG or his always-valuable advise. I am merely pointing out that a lot of these points are far more applicable to a certain class of entrepreneur.

If you take a single 18 to 25 year old "kids" with no business experience whatsoever and a life experience mostly devoid of struggle I'd be the probability of failure is absolutely huge. Entrepreneurship can test you in incredible ways. It can take you to the deepest and darkest moments of your life. And, if you are alone and are not "built" for it you will crumble.

Anyone with a good amount of business experience has a far greater probability of success if only because they've done it before and understand the game. You can hire people for the other functions that need to be performed.

I guess my point is that a co-founder is not some kind of a magic pill that will auto-magically make things better. Teaming up with someone with limited or no business experience and you hardly know is a formula for disaster. If both of you are newbies and you have some external coaching (YC) then, yes, things could be better.

I had a situation with someone who wanted to partner-up for a mobile app. I flat-out refused to partner (in the sense of company co-ownership). We put together a revenue-sharing agreement (50-50 was fine for this case). Control and all business decisions remained with me. I would eventually learn this was a great decision when this person went off the rails half-way through development.

It sounds like you have solid business experience. Don't buy into the SCV mantra of having to have a co-founder. Do it your way. Now, if you have to play on their turf then it's their rules. Outside that, there's no reason you couldn't be successful. Not one.

BTW, I don't buy YC/SCV statistics because they do not include the millions of solo-founder businesses that are launched every year. There's everything from lunch truck operators to restaurants, web design shops and tech companies. I am going to go out on a limb and say that if you looked at that data you might see that solo founders have a far greater probability of success than the SCV crowd mantra paints.

Again, if you are taking business virgins out of college to start businesses, yes, absolutely, get two, four or six of them because they are very likely to commit business seppuku if on their own. Also, VC's need insurance if they are going to make an investment. Multiple green founders is safer than one green founder.

Here's an example of what I am talking about (and it looks like no VC money):

http://www.forbes.com/sites/hollieslade/2014/01/24/after-her...

gms2• 12 years ago

It's striking that choosing a cofounder one barely knows is a common problem. I'm trying to get something going with my best friend (I've known him since we were six years old), and people we meet will sometimes ask us if we would consider bringing on some guy they know as a third cofounder.

The people who band together for a startup after having known each other for a month would never marry someone they have only known for a month. Clearly the message that startups are a big deal for any relationship hasn't sunk in as it has with marriages.

dmk23• 12 years ago

It is an obviously foreseeable problem because the whole "startup echo chamber" keeps pressuring everyone to have co-founders for sake of having co-founders.

Better to be a single founder covering for everything than sign on "co-founders" you cannot get along with or do not see pulling their weight or having significant disagreements on how the company should be run and the rewards distributed.

balls1872• 12 years ago

Choosing your best-friend isn't a guarantee that you won't have co-founder issues either. One of you has to be the CEO, and if you are both used to being equals, the one who isn't CEO has to deal with the fact that their role is less than the CEO.

There will be times where the demands for your time will be greater than theirs, and vice versa, and if one of you is strongly technical, while the other isn't, you may see an imbalance of work, especially when you're building your MVP.

Business & startups in particular, come with an enormous amount of stress, and may put you two at odds with each other, which can be tough, as the two of you, under different circumstances, might have been each others coping mechanism.

gms2• 12 years ago

You are absolutely correct. I made a mistake in not mentioning these potential pitfalls.

ilamont• 12 years ago

I like Jessica, but it would be nice to get a perspective outside of the Y Combinator philosophy on starting a company.

the_watcher• 12 years ago

It's very easy to. Plenty of stuff from First Round shows up on the HN first page. So do stories from all kinds of sources. There are regularly articles on bootstrapping, as well.

balls1872• 12 years ago

This article mirrors what is considered conventional wisdom du juor w.r.t. startup success.

Running out of Money.

Co-Founder Issues

Lack of Traction

Those are the startup failure trifecta.

funkyy• 12 years ago

IMO biggest issue - creating a product no one really wants. How many startups create "next Facebook or Google" that no one really needs/use.

Theodores• 12 years ago

Regarding the co-founder problem, time for a music analogy...

As a student there is this idea that you should be in a band, making music. Getting there needs lots of brainstorming to come up with the songs, lots of practice, jamming sessions, rehearsals, going out to try and get gigs, musical collaborations, partnerships with DJ's and support acts, getting gigs and publicising the gigs. Then there is the dream of getting signed by a record label.

The idea that you could do all of this on your own is quite laughable, isn't it? Even solo artists usually have a producer or a song-writer that is in effect a 'co-founder'.

Yet some get there on there own. Take for example Cliff Richard. The Shadows were his band but also mere hired hands with no equity. Cliff Richard didn't even have to write songs, those could be acquired somewhere else much like how a developer can pick up frameworks and make them their own.

In music there is an understanding that an artist can be solo. Just because they are not in a band does not mean nobody believed in them. Record labels don't tell them to go away and come back when they are in a band, if the talent is there then they will sort out whatever is needed, whether that be session musicians, songwriting or production.

This music analogy may appear a long way off software MVPs, however, it isn't. Another thing to learn from the music industry is that people don't expect a product (a song) to be number one on the hit parade for eternity. New shiny things on the web should be seen that way too, expected to be popular for a while in the 'top 40' and then to 'sell' consistently as back catalogue.

logicbox2• 12 years ago

Long time music biz artist manager here and I agree, the parallels are striking.

robomartin3• 12 years ago

You seem to be confusing "solo founder" with "single person company". A solo founder can go and hire ten people, build an amazing team and knock it out of the park. A "single person company" is severely bandwidth limited across all required disciplines. That's the case of your music example.

Early Stage Startups: The Biggest Killers

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