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Noam Wasserman – The Founder’s Dilemmas

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If 65% of failure comes from team problems, then ultimately this places more responsibility on investors, who are supposed to be more experienced in leadership, particularly in relationship to first-time founders, the implication being that they invest in the wrong team, not necessarily the wrong product.

Based on your research, how might investors evaluate opportunities differently?

From the investor perspective it’s key for them to be able to understand which of these early decisions are going to heighten the risks. When investors are going in, they’re not looking for “Let me invest in a team that’s likely to blow up.” They should be looking to invest in a team that’s carefully considered the early decisions, that’s built an arrangement that will be sustainable and robust against a bunch of the pitfalls that they might face.

They should, as part of their due diligence, look at the founding decisions we talked about. I’m stunned by a number of investors I’ve run into who actively try to avoid looking at these decisions. They say, “The equity split is just within the founding team. That’s up to them to decide. It’s not for me to evaluate whether it’s good or not, push back on it, make sure that it was done well, and maybe ask that it be reassessed.” That’s just one example. Investors need to be able to understand which of these early decisions heightens the tensions within the team.

It’s not a good thing for investors to be investing in a team that has latent or hidden tensions that are going to come back to bite the team, and in turn the investors. So from the investor perspective, there are two ways investors should be playing a key role. One, which you were focusing on, is their selection of the teams to begin with, whether they are assessing them correctly and whether they understand the ways in which the early decisions haven’t reared their heads yet but could down the road.

it’s important for the investor to stay involved as a mentor, as a guide down the road on which the founder has never traveled. Investors, especially ones who have joined a board, should be a critical input, giving guidance about the key, far-reaching decisions that a startup is making. They should leverage their experience to plug in the portions of the road map that the founders lack.

However, once the due diligence is completed and an investor decides to go forward, it’s important for the investor to stay involved as a mentor, as a guide down the road on which the founder has never traveled. Investors, especially ones who have joined a board, should be a critical input, giving guidance about the key, far-reaching decisions that a startup is making. They should leverage their experience to plug in the portions of the road map that the founders lack.

Back on the founders’ side, it’s important to note that there’s also some conflict of interest that the investors have in terms of playing that mentorship role. Such conflicts can impact some of their objectivity as they advise, perhaps influencing how they paint the pros and cons and the pitfalls that are coming. Investors might not even realize they’re going to be misaligned with the founders.

For that reason, I believe that there is a real need for a third-party mentor who can act as an independent board member rather than an investor board member. Such a person will likely be a lot better at being a CEO-mentor, painting the full range of objective advice for the founders. That said, the investors should still play a large role in plugging in segments of the road map that the founders (especially if they’re first-timers) lack. This will enable the founders to make better, more informed, and forward-thinking decisions than when they operated without a solid road map.

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Noam Wasserman, Professor at Harvard Business School

Noam Wasserman is a professor at Harvard Business School.  For more than a decade, his research has focused on founders’ early decisions that can make or break the startup and its team. At HBS, he developed and teaches an MBA elective, “Founders’ Dilemmas,” for which he was awarded the HBS Faculty Teaching Award and the Academy of Management’s 2010 Innovation in Pedagogy Award.  In 2011, the course was also named one of the top entrepreneurship courses in the country by Inc. magazine.