Noam Wasserman | Not all founders are equal
5 min read 11 May 2014, 05:17 PM ISTThe Harvard Business School professor on why going it alone may not be ideal for entrepreneurs, how to pick co-founders, and what to consider when splitting equity
PremiumNEW DELHI :
Noam Wasserman specializes in start-ups and, in particular, in the decisions start-up founders have to take. The 44-year-old Harvard Business School professor wrote a book last year on the same theme, titled The Founder’s Dilemmas: Anticipating And Avoiding the Pitfalls That Can Sink a Startup. He was in Mumbai earlier this year, meeting entrepreneurs and teaching at the Harvard Business School classroom at Taj Lands End hotel. Here, he talks about his current research and shares his thoughts on entrepreneurship. Edited excerpts:
What is your current area of research?
Having studied 10,000 start-ups in the US over the last decade in the areas of technology and life sciences, I am looking to expand the data collection on start-ups to four other countries besides the US. This helps me look at what is truly universal in terms of what founders face and the decisions they must take, and what is idiosyncratic to different markets. I am looking at start-ups in the UK, Israel, India and China, which gives me a spectrum in terms of size and how more or less developed the markets are.
What are your initial impressions of entrepreneurship in India? Is it in any way different from the US?
There is a focus here on building in the education space, to strengthen it for the next generation. This is unlike America, where it’s much more the sexy sectors like the technology start-ups or the social media start-ups that seem to grab entrepreneurs’ mindspace.
What are the factors to consider before making the leap to be an entrepreneur ?
There are three aspects to consider: personal readiness, career readiness and market readiness.
Personal readiness addresses whether you are at the stage where you can put in 20-hour days building the business, whether you are single and without debt or whether you have schoolgoing children you want to spend time with.
Career readiness addresses whether you have been able to build up the necessary skills like
industry knowledge, the ability to knot together functions like sales, marketing and finance and how to lead a team and manage a profit-and-loss account. You won’t be able to learn those skills as you are founding.
Market readiness for your idea looks at whether the market will like the idea enough that enough money will come in to keep the venture going.
What are a founder’s major dilemmas in a start-up?
These begin with when am I going to be a founder? Am I going to do it alone? If I am going to get co-founders, who should they be? How am I going to split equity between the co-founders?
Should founders go solo?
There are some founders who decide to become a superman and do it all by themselves. But as it turns out, they end up overestimating themselves, overestimating their networks and underestimating their challenges and the support they need. They allow their passion to cloud their judgement, and this comes back to bite them. They decide to become solo founders, and they shouldn’t.
How should entrepreneurs pick co-founders?
There is a natural human inclination to flock to people who are just like you, but picking a co-founder like you will make for a bad founding team. You will be overlapping, stepping on each other’s toes and leaving holes. A founder should also resist the temptation to just go to the most comfortable person nearby, like friends or family. There are all sorts of ways these relationships can get in the way of being a tightly knit team. We assume because someone is a good friend, he will be a good CTO (chief technology officer) or CFO (chief financial officer) and it’s a rude awakening when we discover our friends are not scaling with the venture. It’s also hard then to bring up with a friend or family member the fact that they are not performing. There’s a time-worn wisdom in fact in China that if you mix business and personal relationships, you will lose both. Despite this, more than half of all ventures have friends and family. It’s a common decision, but it’s one that is fraught with peril.
What are the factors to be considered when splitting equity?
The most common way to split equity is at the beginning, and equally. There’s an inclination to avoid a tension-filled conversation—it’s assumed that all the founders will be contributing equally, and what happens is a rushed handshake. But then there is a rude awakening when one partner is not contributing equally, either because of
inability to take the pressure, lack of skill or otherwise. The equal split arrangement comes back to haunt the team, and just heightens tensions.
What is the most common myth about entrepreneurship that you have encountered?
That every founder is going to be the next Bill Gates or that if Steve Jobs could do it, I can do it. But Gates and Jobs are not the norm. They are put up on a pedestal precisely because they are unique.
For most ventures, there are trade-offs that have to be made at every stage. For a techie who has started a company, he will need a CEO (chief executive officer) that can knit together marketing, finance and managing people. As a founder CEO you need to know when to transition yourself out. If as a founder you stay on the throne and try to keep the kingdom, it will be a smaller and less valuable one. If you give up the reins, you will be able to grow and have an equity stake that is going to be much more valuable. It’s a hard trade-off.
Three books you would recommend to any entrepreneur?
The three legs of any venture are product,
finance and people and I would recommend one book for each of these areas—The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses by Eric Ries, which deals with the product; Venture Deals: Be Smarter Than Your Lawyer And Venture Capitalist by Brad Feld and Jason Mendelson that is a deep dive into the financial aspect; and The Founder’s Dilemmas: Anticipating And Avoiding the Pitfalls That Can Sink a Startup, my book on the people aspect.
