Building Great Founding Teams

There’s been a lot written about the individual characteristics of what makes a great founder, but a lot less about what makes a great founding team and how that’s different from a great founding  CEO

founders

I think we’ve been imprecise in defining three different roles. In doing so we’ve failed to help founders understand what it takes to build a great founding team.

Here are my definitions.

Founders – the idea
A Founder is the one with the original idea, scientific discovery, technical breakthrough, insight, problem description, passion, etc. A founder typically recruits co-founders and then becomes part of the founding team involved in day-to-day company operations. (However, in some industries such as life sciences, founders may be tenured professors who are not going to give up their faculty positions, so they often become the head of a startup’s scientific advisory board, but aren’t part of the founding team.)

A couple of caveats about founders with “ideas.”  It’s important to differentiate between ideas that have been or can be patented and ideas thought up late night in a dorm-room. One of the hardest concepts for my students to grasp is that “an idea is not a company.”  The reality is that in most cases, without the company to commercialize it, the idea is worthless (except to a patent troll.)

Even if they become part of the founding team, it’s not a given that the founder, having come up with the idea has a “guaranteed” leadership role (CEO or VP) in the new company. For some entrepreneurs this idea that the founder is not necessarily the CEO, is a surprise. When I hear, “What do you mean I’m not CEO? It’s my idea!” I get nervous that the founder is clueless about what makes the founding CEO special, and what else it actually takes to build a company. (Read on to see the difference in the roles.)

Founding Team – the rock on which to build the company
The founding team includes the founder and a few other co-founders with complementary skills to the founder. This is the group who will build the company. Its goal is to take the original idea and search for a repeatable and scalable business model– first by finding product/market fit, then by testing all the parts of the business model (pricing, channel, acquisition/activation, partners, costs, etc.)

In web/mobile startups the canonical view is the founding team consists of a hacker, a hustler, and a designer. In other domains, the skill sets differ, but the key idea is that you want a team with complementary skills.Band of Brothers

There’s no magic number about the “right” number of founders for a founding team, but two to four seems to be the sweet spot. One of the biggest mistakes in assembling a founding team is not thinking through the need for skills but instead settling for who’s around. The two tests of whether someone belongs on a founding team are: “Do we have a company without them?” and, “Can we find someone else just like them?” If both answers are no, you’ve identified a co-founder.  If any of the answers are “Yes,” then hire them a bit later as an early employee.

Key attributes of an entrepreneur on a founding team are passion, determination, resilience, tenacity, agility and curiosity. It helps if the team has had a history of working together, but what is essential is mutual respect. And what is critical is trust. You need to be able to trust your co-founders to perform, to do what they say they will, and to have your back.

Most startups that fail over team issues fail because co-founders hadn’t dated first, (spent time together in a Startup Weekend, worked together in an incubator, etc.) but instead jumped into bed to start a company.

Everyone has ideas. It’s the courage, passion and tenacity of the founding team that turn ideas into businesses.

Founding CEO – Reality Distortion Field and Comfort in Chaos
Idealistic founders trying to run a venture with collective leadership, without a single person in charge, find that’s the fastest way to go out of business. Speed, tempo and fearless decision-making are a startups strategic advantage. More often than not, conditions on the ground will change so rapidly that the need for immediate decisions overwhelms a collective decision process.

The founding team CEO is the first among equals in the founding team. Ironically they are almost never the most intelligent or technically astute person on the team. What sets them apart from the rest of the team is that they can project a fearless reality distortion field that they use to recruit, fund raise, pivot and position the company. They are the ultimate true believers in the company and have the vision, passion and skill to communicate why this seemingly crazy idea will work and change the world.

In addition, the founding CEO thrives operating in chaos and uncertainty. They deal with the daily crisis of product development and acquiring early customers.  And as the reality of product development and customer input collide, the facts change so rapidly that the original well-thought-out product plan becomes irrelevant. While the rest of the team is focused on their specific jobs, the founding CEO is trying to solve a complicated equation where almost all the variables are unknown – unknown customers, unknown features that will make those customers buy, unknown pricing, unknown demand creation activities that will get them into your sales channel, etc.

They’re biased for action and they don’t wait around for someone else to tell them what to do. Great founding CEO’s live for these moments.

Henry V

FIgure out who you are
Many founding teams fail because they’ve never had the conversation about founder, founding team and founding CEO.  Spend the time and take stock of who’s on the journey with you.

Lessons Learned

  • Founder, Founding team, Founding CEO all have word “founder” in them but have different roles
  • Founder has the initial idea. May or may not be on the founding team or have a leadership role
  • Founding team – complementary skills – builds the company
  • Founding CEO – reality distortion field and comfort in chaos – leads the company

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An MVP is not a Cheaper Product, It’s about Smart Learning

A minimum viable product (MVP) is not always a smaller/cheaper version of your final product. Defining the goal for a MVP can save you tons of time, money and grief.

Drones over the Heartland
I ran into a small startup at Stanford who wants to fly Unmanned Aerial Vehicles (drones) with a Hyper-spectral camera over farm fields to collect hyper-spectral images. These images would be able to tell farmers how healthy their plants were, whether there were diseases or bugs, whether there was enough fertilizer, and enough water. (The camera has enough resolution to see individual plants.) Knowing this means farms can make better forecasts of how much their fields will produce, whether they should treat specific areas for pests, and put fertilizer and water only where it was needed.drone over farm

(Drones were better than satellites because of higher resolution and the potential for making more passes over the fields, and better than airplanes because of lower cost.)

All of this information would help farmers increase yields (making more money) and reduce costs by using less water and fertilizer/chemicals but only applying where it was needed.

Their plan was to be a data service provider in an emerging business called “precision agriculture.” They would go out to a farmer fields on a weekly basis, fly the drones, collect and process the data and then give it to the farmers in an easy understandable form.

Customer Discovery on Farms
I don’t know what it is about Stanford, but this was the fourth or fifth startup I’ve seen in precision agriculture that used drones, robotics, high-tech sensors, etc. This team got my attention when they said, “Let us tell you about our conversations with potential customers.”  I listened, and as they described their customer interviews, it seemed like they had found, that – yes, farmers do understand that not being able to see what was going on in detail on their fields was a problem – and yes, – having data like this would be great – in theory.

So the team decided that this felt like a real business they wanted to build.  And now they were out raising money to build a prototype minimum viable product (MVP.) All good. Smart team, real domain experts in hyper-spectral imaging, drone design, good start on customer discovery, beginning to think about product/market fit, etc.

Lean is Not an Engineering Process
They showed me their goals and budget for their next step. What they wanted was a happy early customer who recognized the value of their data and is willing to be an evangelist. Great goal.

They concluded that the only way to get a delighted early customer was to build a minimum viable product (MVP). They believed that the MVP needed to, 1) demonstrate a drone flight, 2) make sure their software could stitch together all the images of a field, and then 3) present the data to the farmer in a way he could use it.

And they logically concluded that the way to do this was to buy a drone, buy a hyper-spectral camera, buy the software for image processing, spend months of engineering time integrating the camera, platform and software together, etc  They showed me their barebones budget for doing all this. Logical.

And wrong.

Keep Your Eyes on the Prize
The team confused the goal of the MVP, (seeing if they could find a delighted farmer who would pay for the data) with the process of getting to the goal. They had the right goal but the wrong MVP to test it. Here’s why.

The teams’ hypothesis was that they could deliver actionable data that farmers would pay for. Period. Since the startup defined itself as a data services company, at the end of the day, the farmer couldn’t care less whether the data came from satellites, airplanes, drones, or magic as long as they had timely information.

That meant that all the work about buying a drone, a camera, software and time integrating it all was wasted time and effort – now. They did not need to test any of that yet. (There’s plenty of existence proofs that low cost drones can be equipped to carry cameras.) They had defined the wrong MVP to test first. What they needed to spend their time is first testing is whether farmers cared about the data.

So I asked, “Would it be cheaper to rent a camera and plane or helicopter, and fly over the farmers field, hand process the data and see if that’s the information farmers would pay for?  Couldn’t you do that in a day or two, for a tenth of the money you’re looking for?”  Oh…

ShortcutThey thought about it for a while and laughed and said, “We’re engineers and we wanted to test all the cool technology, but you want us to test whether we first have a product that customers care about and whether it’s a business. We can do that.”

Smart team. They left thinking about how to redefine their MVP.

Lessons Learned

  • A minimum viable product is not always a smaller/cheaper version of your final product
  • Think about cheap hacks to test the goal
  • Great founders keep their eye on the prize

Listen to the post here Or download the podcast here

Don’t Give Away Your Board Seats

I had a group of ex-students out to the ranch who were puzzling over a dilemma – they’ve been working hard on their startup, were close at finding product/market fit and had been approached by Oren, a potential angel investor. Oren had been investing since he left Google four years ago and was insisting on not only a board seat, but he wanted to be chairman of the board. The team wasn’t sure what to do.

I listened for a while as they went back and forth about whether he should be chairman. Then I asked, “Why should he even be on your board at all?”  I got looks of confusion and then they said, “We thought all investors get a board seat. At least that’s what Oren told us.”

Uh oh.  Red flags just appeared in front of my eyes. I realized it was time for the board of directors versus advisors talk.

Roles for Financial Investors
I pointed out that there are four roles a financial investor can take in your company: a board member, a board observer (a non-voting attendee of board meetings,) an advisory board member, or no active role. I explained that as a non-public company there was no legal requirement for any investor to have a board seat. Period. That said, professional venture capital firms that lead a Series investment round usually make their investment contingent on a board seat. And it sounded like if successful, their startup was going to need additional funding past an angel round to scale.

In the last few years, it’s become more common for angel investors to ask for a board seat, but I suggested they really want to think hard about whether that’s something they need to do now.

“But how do we get the advice we need? We’re getting to the point that we have lots of questions about strategic choices and relationships. Isn’t that what a board is for?  That’s what we learned in business school.”

What’s a board for?
I realized that while my students had been through the theory it was time for some practice. So I told them, “At the end of the day your board is not your friend. You may like them and they might like you, but they have a fiduciary duty to the shareholders, not the founders. (And they have a fiduciary responsibility to their own limited partners.) That means the board is your boss, and they have an obligation to optimize results for the company. You may be the ex-employees one day if they think you’re holding the company back.”Board Fight

I let that sink it for a bit and then asked, “How long have you worked with Oren?”

I kind of expected the answer, but still was a bit disappointed. “Well we met him twice, once over coffee and then over lunch.”

“You want to think hard about appointing someone to be your boss just because they’re going to write you what in the scheme of things will be a small check.”

Now they looked really confused. “But we need people with great advice who we can help us with our next moves.”

Advisory Board
“Do you know what an advisory board is?” I asked.  From the look on their faces, I realized they didn’t so I continued, “Advisors are just like they sound. They provide advice, introductions, investment, and visual theater – (proof that you can attract A+ talent.) An advisor that provides a combination of at least two of these is useful.”

A “board” of advisors is not a formal legal entity like a board of directors. That means that they can’t fire you or have any control of your company. While some founders like to meet their advisors in quarterly advisory board meetings, most companies don’t really have their advisory board meet as group. You can connect with them with them on an “as needed” basis. While you traditionally compensate advisors by giving them stock, I suggest you ask them to match any grant with an equal investment in the company – so they have “skin in the game.”

shutterstock_70458487Equally important is that an advisory board is a great farm team for potential outside board members. It allows you to work with them over an extended period of time and see the quality of their advice and how it’s delivered. If they are world-class contributors, when you raise a Series A round and you need to bring in an outside board member, picking someone you’ve worked with on your advisory board is ideal.”

Finally I suggested that Oren’s request to be chairman of a five-person startup seemed to be coming from someone looking to upgrade their resume, not to optimize their startup.

No Outsiders Until a Series A
As we wrapped up, I offered that there was no “right answer” (see Brad Feld’s post) but they should think about their board strategy as a balance between the amount of control given to outsiders versus the great advice outsiders can bring. I suggested that if they could pull it off they might want to consider keeping the board to the two founders for now, surrounded by great advisors which may include their seed investors. Then when they got a Series A, they’ll probably add one or two professional VC’s on the board with one great advisor as an outside board member.

As they left they were going through the experienced execs they knew who they were going to take out for coffee.

Lessons Learned

  • Your board of directors is your boss
  • Your advisory board is your friend
  • Not all investors get board seats, it’s your choice
  • Date advisors, marry board members

Listen to the post here
or download the podcast here

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