While every company founder makes trade-offs in building a company, few entrepreneurs appreciate the far-reaching implications of several critical decisions they will be required to make at the outset of a startup’s evolution. Noam Wasserman, Professor of Entrepreneurship at Harvard Business School, classifies this sequence of inevitable decisions as “The Founder’s Dilemmas”, which is the title of his important new book on this topic. A refreshing contribution to the business literature on startups, Founder’s Dilemmas is engaging without sacrificing substance and statistically sound without being turgid. One of the core differentiating strengths of the book lies in that it weaves seven highly relevant case studies of entrepreneurs throughout its 11 chapters, providing concrete anecdotes and illustrations to back up the author’s general observations and recommendations. “The Founder’s Dilemmas” is required reading for entrepreneurs and for the professionals who work with them, particularly venture capitalists.
Wasserman notes that venture capitalists attribute 65% of the failures in their portfolio companies to problems with the startups’ management teams. Focusing on the critical decisions that founders have to make, he observes that entrepreneurs who are company founders are naturally inclined to be passionate, optimistic, and to prefer to avoid conflict with their co-founding team members; these tendencies lead to short-sighted decisions. Most founders tend to make decisions with no process, based on their gut instincts. Wasserman concludes, backed up by a data set of 10,000 companies compiled over 9 years, that the entrepreneur’s most common choices are the wrong ones, particularly co-founding with friends and splitting equity equally among co-founders at the outset of the new venture.
In The Founder’s Dilemmas Wasserman revisits his most well developed dilemma, Rich vs. King. He convincingly argues that, while the passionate desire among entrepreneurs for both wealth and control seem complementary, as entrepreneurial motivations they turn out to exist in perpetual tension with one another. Why? Because founders are resource constrained and need to attract three key outside resources: people, information, and money. Consequently, Wasserman concludes that “wealth and power are decoupled for entrepreneurs and, indeed, in active conflict. As a result, few founders of high-potential startups can achieve both wealth and power; most choose between one or the other and often end up with neither.”
These sobering words are backed up with specific examples and recommendations. Among the most useful, Wasserman points out that the most durable business teams are formed between people who have had prior working relationships and that, though these may “be less endearing”, they are “more enduring.” In determining how to split equity among co-founders, Wasserman prescribes a “dynamic allocation model”, complete with charts, as he points out that founders, from Steve Jobs and Steve Wozniak at Apple to Evan Williams at Blogger/Odeo, rarely correctly identify the future contributions that will actually be made between each other at the outset of the venture.
Turning to the critical issue of raising capital, Wasserman cogently describes the trade-offs associated with taking venture capital, focusing on critical issues such as board composition, understanding the implications of liquidation preferences, vesting of equity stakes among co-founders, and the phenomenon of creeping dilution—both of economic interests and of management control. Many of these issues come to the foreground once entrepreneurs have raised money from VC’s. The book makes a great contribution to practitioners on both sides of the table by shining a light on the difficult conversations that entrepreneurs need to have with their colleagues and with their investors.
The Founder’s Dilemmas is effective because of its plainspoken, common sense conclusions: “…core founders are often missing skills, connections, and financial resources to build the most valuable startup possible. They can make up for this by attracting complementary cofounders or by hiring talented nonfounders. A third possibility is to add investors to the team, but founders must first think carefully about the often-hidden implications for themselves, for the startup, and for the board of directors. For a founder-CEO, losing control of the board is only the first step on the way to losing control of the major decisions in the startup…”
This book is a useful tool to facilitate important dialogue between VC’s and entrepreneurs before they decide to make an investment in each other.
You must be logged in to post a comment.