Why Start-Ups Really Fail

Given the current vogue for "lean startups" I thought it may be useful to point towards a fact based alternative way of looking at the problem. Harvard Business School's Noam Wasserman on what drives success and failure of a startup. He has surveyed nearly 10,000 founders from 3,500 ventures, compiling his results in a huge database that he has mined for patterns, and he has now published a book on it “The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup”.

I haven't started it yet, just a quick flick through - but there is this video and an article in the NYT summarising his research where he mentions 3 main somewhat counter-intuitive learnings:

The predominant pattern I’ve seen is that the most common choices people have to make are the ones that are also most fraught with peril. For example, one of the most common decisions is to co-found with someone you have a prior social relationship with — friends or family – and not a prior professional relationship. But that type of team is the least stable. It’s the most likely to end up in disaster.

A second example: 73 percent of founding teams I’ve studied divide the equity within a month of founding. That is when the uncertainty is highest. The majority of those teams are also setting that split in stone. That’s the predominant model they use – split early and split in a way that’s static – but that means teams can’t adjust and are setting themselves up to get burned down the road. What are the chances that you are all going to be contributing to the venture on an equal basis? It’s a recipe for team tensions to increase.

And a third example, which was actually the biggest surprise for me: In my data, by the time start-ups raise the third round of financing, 52 percent of founder C.E.O.’s have been replaced. In three-quarters of these situations, the board fired the founder. In the remaining cases – by far the minority – the founder raised his hand and said, “There’s got to be someone better than me to lead us to the next stage.” And I found that the most successful of founders, the ones who led their start-ups to completing key milestones the quickest, were actually the first ones to get fired.

In other words, it is about The Team - but not the people, more the structure.

Some years ago I wrote about the original "Founders Discount" where it is highly likely that they will operate at a financial dioscount to their potential. That there is another dilemma - losing your job - is another issue not often well understood. There are two main drivers:

Often you begin with a technical founder, a scientific founder, someone with deep knowledge who is the best person to lead the charge during the early development of the product. But as soon as they succeed at hitting that milestone, they have to go and build a company. Often they have the exact wrong set of skills for the next stage of development. And one of the big problems is that their success heightens their belief that they’re the right person to keep running the show.

The second factor is that, a lot of times, founders’ early success is enabled by taking rocket fuel, raising money from outside investors. One of the few levers your board has control over is who’s going to be the C.E.O. So every time you raise money, it heightens the chances you’re going to be fired as C.E.O. When you’ve lost control of the board, given up more than half the seats, the combination of that and hitting a new stage in the venture means the chances you’re going to get fired are heightened dramatically.

The anguish is therefore whether to jump out the seat before being pushed, in the hope that you get a smaller share of a greater pie:

The quantitative data shows that, for founders who keep control of their boards and hang onto the C.E.O. position, their own personal equity stake is worth half as much as if they give up control to a brand-new C.E.O. with resources to grow the value of the venture. That’s the “rich-versus-king” tradeoff.

The trick, as anyone who has been here will testify, is not to get shafted once you have relinquished your powers. On this, Mr Wasserman is sadly silent in the article, but does deal with it in the book. Suffice to say Mr Zuckerman was an able student

Incidentally, I read a fascinating lecture by Michael Lewis on a related topic to Princeton undergraduates, pointing out that his career was largely based on luck - and that that luck would not have occurred if he hadn't been to Princeton: