by Evangelos Simoudis, Ph.D., Senior Managing Director at Trident Capital
Setting up a company has become easy and even prescriptive. The cost of technology is decreasing thanks to cloud computing and open source software. The millennial generation around the globe is very entrepreneurial and tech savvy. Technology is enabling distributed work, so even teams whose members are not co-located can collaborate effectively, and methodologies such as the Lean Startup provide step-by-step instruction on how to think about starting a company.
However, while setting up a company is becoming easier, starting a company remains difficult. The main reason for this difficulty is the formation of the startup’s founding team.
Starting a company requires five main ingredients.
- You need a big idea for a product or service — one that will solve an important problem that customers are willing to pay for.
- Second, you need a big market that cares about this solution. This may be a new market like social commerce, an existing market such as enterprise performance management, or a reimagined market such as marketing automation.
- The third ingredient is the business model through which to monetize the solution created for the target market.
- Fourth, you need the capital that will enable you to build the solution and sell it in the target market.
- Finally, and most importantly, you need a founding team that will bring everything together and make it possible. The founding team creates the startup’s core. How they interact, make decisions, resolve conflicts, celebrate success and deal with disappointment affects everything, including new hires for the startup. Therefore, creating the right founding team should be every entrepreneur’s top priority.
As investors, we meet with founding teams on a daily basis. We have learned to efficiently evaluate these teams, help them succeed and, when necessary, collaborate to make them stronger. We evaluate these teams along the following five dimensions:
1. Readiness to work as a team: Founders must understand that in order for their startup to succeed, they will have to work as a team rather than as individuals. Because startups are high stress operations, founders must be able to work together under pressure. Moreover, since most startups fail, the founders must be ready for failure and for the additional stress their company’s failure will bring.
We take time to understand how the founding team came together, how long they have spent together before deciding to start a company, and under what conditions they have tested their cohesion, perseverance and ability to deal with adversity. For example, we’ve met with several startups whose founders met in a class, worked together in a class project over the course of a semester and decided to start a company. We have also meet teams that have previously worked together in one or more companies.
Founders must have similar expectations about what constitutes success during every phase of the company’s development and the time horizons during which these expectations will be met. Finally we try to understand each founder’s contribution to the startup’s big idea, business model and market understanding.
2. Chemistry: The chemistry among the founders is very important. At the earliest, it is exhibited when the team first comes to present seeking investment. During such presentations, we see how the founders interact with each other — if they support one another, interrupt each other or try to one-up each other. We also try to determine if there is a dominant founder within the team who makes it difficult for the other founders to express themselves or even showcase their talents. Complementary temperaments in founding teams are key. For every hard-charging founder, you want a more even-keeled one to balance the team out.
3. Relevant experience: The experience of each founder must be relevant to what the startup is working on. We strive to fund teams whose members have experiences that are relevant to the solution they are developing, the business model being used and the market being addressed.
For example, it is unlikely we will fund a team whose members only have experience developing solutions for the enterprise software market but who want to start a consumer Internet company, or a team that has only worked with perpetual license software business models but wants to use a micro-transaction-driven business model in the company they are starting.
4. Complementary past experiences: In addition to relevant experiences, we want founders with complementary experiences because we know that different disciplines make a startup successful. We’ve seen startups with the best technology fail because they lacked marketing DNA or sales expertise in their founding team and ended up spending all their resources creating a technically elegant solution that their target market was not ready for. In the Valley, but particularly abroad, we often meet groups of engineers who want to start companies. We spend significant time educating them that technology prowess alone doesn’t guarantee their startup’s success and encourage them to add team members with marketing, sales and even some financial experience and expertise.
5. Corporate culture: Founders are usually surprised when we talk about corporate culture in a startup since oftentimes they are the only employees. Yet a startup’s culture is set by the founding team, and once set, it is hard — or even impossible — to change. Several different components make up a startup’s corporate culture: they can be as diverse as the health benefits being offered to employees, to the type of office space being used, to employee processes such as hiring, reporting, and firing — including employee processes for founders themselves.
Oftentimes during a startup’s lifecycle, one or more of the founders may have to leave the company — voluntarily or not — or they may have to start reporting to a hired executive. In trying to understand the culture the founders will create, we also explore the personal sacrifices the founders are ready to make in order to see their startup succeed. For example, will they expect to receive cash performance bonuses as their company is starting up, or will they want to maximize their equity holdings by taking their bonuses in the form of company stock? Finally, we try to understand how their corporate culture extends to their selection of investors, board members and advisors.
Regardless of a company’s stage or size, a startup’s founding team is key to its success. Its composition has to be thought out very carefully by the founders themselves. On average, 2-5% of the founding teams we see are successful with the companies they start. In almost all other cases, founding teams are either radically augmented or completely replaced by executives that are hired by the companies’ boards of directors. Consider the five dimensions provided in this blog to create stronger and more effective founding teams — and, ultimately, more successful startups.
Evangelos Simoudis, Ph.D. is a Senior Managing Director at Trident Capital, where he focuses on investments in Internet and software businesses. Find him at blog.tridentcap.com and on Twitter: @esimoudis.