The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup

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Published: 4/1/2013
Starting your own company is a big deal, and it's important to make sure it's done right. In The Founder’s Dilemmas, Noah Wasserman has answers to all of the most common questions people have about creating successful startups, and he did his research. His book is comprised of information gathered from roughly ten years of data collecting and 10,000 interviews with business founders.

The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup by Noah Wasserman

Starting your own company is a big deal, and it's important to make sure it's done right. In The Founder’s Dilemmas, Noah Wasserman has answers to all of the most common questions people have about creating successful startups, and he did his research. His book is comprised of information gathered from roughly ten years of data collecting and 10,000 interviews with business founders. Inside, he chronicles how you can face the problems only an entrepreneur understands. He offers insight from those who have experience not only solving these problems, but solving them successfully. Read on to learn why motivation is what separates entrepreneurs from other professionals, whether hiring your best friend will help or hinder your company’s growth, and what singular quality to look for in a new hire.

Let what motivates you to determine your path

Some people enjoy routine work, with a guaranteed paycheck at the end of the day. Others find the consistency draining, dull, and exhausting. If you fall into the second group, it's likely you’d fare well as an entrepreneur, and you’re not alone.  When Geneivive Thiers was working at IBM, she felt stifled, like a cog in a machine. She ended up founding Sittercity, her own company, later. Feeling stifled or bored at your job can be an indicator of what motivates you. In men, those who enjoyed normal jobs were driven by security, prestige, financial gain, and affiliation. All of these motivations can be met outside of entrepreneurship. Men who become founders were motivated by financial gain and control, two needs that aren’t readily met by your average working environment. Women were motivated a bit differently. Those who preferred entrepreneurial careers were driven by autonomy, power, influence, managing people, and altruism. Those who preferred nonentrepreneurial careers were motivated by recognition, affiliation, security, and lifestyle: needs that a normal office job can usually meet. If you can’t relate to the motivations of those who enjoy regular office jobs, you’re in the right place.

Find Human Capital

Now that you’re sure you’ve got the right motivation to have a career as an entrepreneur, does that mean you’re ready to start your own business? Absolutely not. You’ll need a few things first. One of them is known as human capital. This concept refers to an understanding of the field that you’re going into, and it's essential to developing a successful business. Just ask baseball star Curt Schilling. He knew what it took to be a skilled athlete, and had a background in leadership. However, he didn’t have any experience running a business. When he launched a massive gaming startup, he was ill-prepared to manage people in a workplace environment. He couldn’t understand why his employees didn’t want to work weekends, for instance: and this lack of awareness caused problems in his startup. Conversely, Barry Nalls, the founder of Masergy, had worked roughly 25 years at a telecommunications company before launching his startup. This meant he had the experience and knowledge to run a company in a field he understood.

People who lack human capital have higher failure rates when launching startups than anyone else. Do not be one of those people. Make sure you have adequate knowledge of the industry you’re entering, as well as an understanding of successful business practices. Reading books like this one is a great first step!

And add some social capital

Remember Barry Nalls, who we talked about earlier? When he launched his company, he didn’t just have 25 years of experience. He also had social capital, a well-developed network of useful business contacts. This group of contacts includes every sort of person you could need to make your business run successfully: advisors, clients, employees, and investors. The more of these you go into business with, the smoother your transition into your new field will be.

While building your list of social contacts is important, make sure not to linger. It's true that the longer you stay at a job, the more connected you become. However, staying in one job too long can cause you to get stuck. Founder’s need diverse knowledge to create successful companies, and someone who has stuck with the same job too long will only have specialized knowledge. Nalls didn’t fall into this trap. Though he had significant experience, he never stayed at a job for more than two years. Be sure to find the balance between building no connections because of too much career hopping and getting stuck and overly specialized by staying at a job for too long.

Find a partner who has what you lack 

There are three different kinds of capital you’ll need to start a successful business: human capital, social capital, and financial capital. If you find that you’re lacking in any of these areas, there is a solution: a co-founder. Seek out a cofounder who has what you lack, whether that be human, social, or financial capital. When Tim Westergren founded Pandora in 1999, he had the human capital (extensive knowledge about the music industry), social capital (friends in the music industry) and financial capital (all the funds he could need). However, he had no idea how to run a business. He also didn’t have the technical skills to create the database he needed. Though he had an idea about forming Pandora for a while, he waited until he met the right co-founders, then he launched his business. He made the right choice: Pandora was a success. Another great aspect of working with a co-founder is that they will help you deal with the burden of launching a company, especially if it creates more work than one person can handle. It can be tempting to go it alone, but a partner can make up for what you lack and help things run more smoothly.

And be very specific with them about their roles

When Steve Jobs and Steve Wozniak started Apple, their roles were clearly defined. Jobs was CEO because he had more experience in sales, and Wozniak took over research and development. Because their skill sets were distinct, their roles were obvious. Sometimes, the roles of leaders will overlap, like in the case of Smartix, where the three founders had similar skill sets. This can work too, though it can be preferable to have specific roles. If labor is properly divided, it can make accountability easier to define. At Pandora radio, their system was divided, and roles were well defined: one person managed contacts in the music industry, the other worked with technical aspects of the business, and the third did administrative work and business development. This division of roles is ideal because everyone knows what they are responsible, and who is accountable for what is well defined: meaning that when there’s an issue or a mistake, it won’t devolve into a witch hunt trying to determine who is responsible. This makes problems easier to address and solve.

Determining what’s fair can be tricky: tread carefully

It is normal for roles and responsibilities to change between founders when starting a new company. Just ask Evan Williams and Noah Glass, the two founders of Odeo. Initially, Noah received a 70% share in the company, because he was working full time while Evan was working part-time. However, their roles shifted when Evan started to work full time too. Tension over who was CEO clouded their every interaction until Noah decided to leave the startup. The founders of the start-up UpDown distributed equity equally amongst everyone initially, but soon discovered the seemingly fair distribution actually undercut one of the employees who did more work than another. Trying to set rules after their initial discussion led to incredible tension within the team. These are just two examples of how the power dynamic between founders can go awry. Remember, it is normal for individuals' roles to change within companies. This can mean making adjustments, like deciding the parameters you’ve set for wages need to be renegotiated. To prevent tension-filled relationships or employee loss, try to know the skillset and commitment of your fellow founders before determining how much they get.

Consider whether hiring people you know will help or hinder your company

People like to hire people they know to work at their companies. Founders like those working at Pandora radio hired friends, old coworkers, and relatives at their company, instead of outsiders. Interestingly, investors tend to value their strategy. Research shows that those who hire friends and relatives in their companies tend to have companies that are valued at 35% higher by investors than those who don’t. Though there are many benefits to working with people you know, there can also be negative aspects. Firing anyone can be difficult, but firing a good friend or a relative can be excruciating. Giving honest performance reviews or providing negative feedback can also become more of a challenge with loved ones. When Pandora had to perform layoffs, it was dismal firing people they knew and cared about.

If you’re unsure about whether or not to hire people you know, consider what kind of work you want to do. Even William’s exhibited both hiring strategies when he started two different companies. When he wanted a loyal environment, he hired from his family and friends. When he wanted to develop a new company quickly and efficiently, he opted for outside hires. Consider your business objectives: this will help you determine which method of hiring is best.

Use this tip to determine if a new hire will be successful in your startup

Though there isn’t one all-encompassing quality that will determine whether or not someone will be a good employee, there is a certain ability that can point to whether someone can thrive in a startup environment. When interviewing candidates, consider: is this person a generalist, or a specialist? Generalists are more likely to be able to handle the changing priorities of a startup because they are more likely to be flexible. Generalists are those who have a varied skill set, who can handle a wide range of tasks successfully. These are the people to look out for. Also, consider whether this person has worked at a small or big company. You’ll want the person who’s more experienced with small businesses. This is a mistake that was made by Frank Addante of StrongMail, who hired someone incredibly experienced as a VP of sales for IBM and Oracle. He was smart, talented, and he couldn’t build a system from scratch: rendering him useless for the first three months of his job. There are many skills that people who work exclusively with established businesses miss out on, and leadership often falls on that list. Teamwork and the ability to work independently and self-motivated are skills needed to be successful at a startup - and most jobs at large businesses just don’t teach people how to do that, so you’re better off hiring those from small businesses instead.

Be wary of the strings that come with taking money from investors

The decision to take capital from investors, or to make it yourself, is a complicated one that should be based on a few key factors. To determine which direction to take, it is helpful to think about the ultimate goals of your company and the competition in the market for your product. Or you can just go with your gut. When Ockham Technologies was founded by Jim Triandiflou and Mike Meisenheimer, they were offered $2 million from investors. They turned the money down and started with $150,000 from their own pockets. When questioned about his choice, Jim said they wanted to sell something before accepting money from investors. Williams felt the same when he started Vlogger, but his tune changed when he worked on Odeo. He realized that his competition was expanding quickly, and he needed to compete, so he raised roughly $5 million in exchange for 30% of his company to venture capitalists. As his motivation and competition changed, the ideal strategy changed too.

If you choose to make money from investors, it is important to consider that they may have irksome ideas or habits they impose on you or your employees. Venture capitalists are known to require certain reporting or to impose rules or regulations on the founders they work with. Barry Nall’s who founded Masergy calculated that he spent a quarter of his time each month preparing for board meetings alone! That’s a lot of time! Consider your ultimate goals, and the most reasonable strategy should become clear.

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