Startups

The Case For A Large Founding Team

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Gal Nachum

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Gal Nachum is an entrepreneur, 5X founder and startup mentor.

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It is common wisdom nowadays that a founding team consisting of 2–3 founders is ideal. Doing it solo is simply too hard. Founder burnout is an imminent possibility, and statistics are simply not on your side. Many early stage investors will tell you outright that they will not fund a single-founder venture.

Until recently, the most common formula for a startup’s founding team was the MBA and techie duo. The MBA would usually be the CEO, and would deal with all the business issues; the techie would own all the technical aspects of the venture.

In recent years, there’s been a shift toward a three-member formula. For consumer startups, the dream team is often described as consisting of a hipster, a hacker and a hustler. This shift is driven by the realization that design is such a critical aspect of a consumer startup that it must be handled by a co-founder.

A typical consumer startup will usually have more than three core domains. The technical side itself is usually split into multiple subdomains, which require specific skills. Then there are marketing, sales, operations and quite a few other domains, which are arguably critical. Aren’t they important as well?

The truth is that if you map out the core domains of a typical startup, you’ll usually end up with more than three core domains. In this article, I’ll make the case for having larger founding teams.

There are many well-known advantages to having a co-founder in each critical role. The level of commitment of a co-founder will always exceed that of an employee. It is hard to overstate the importance of this level of commitment.

Founders will usually work harder, will settle for less or no pay and will look at the bigger picture, not just at their strict domain of responsibility. Also, they will willingly do whatever it takes, even if it is not in their comfort zone or would otherwise have been considered beneath their status or level of expertise. In addition, co-founders can support each other when things get tough, and a diverse team is more likely to adapt to changing circumstances.

The traditional cons for a larger founding team include difficulty to make decisions and dilution. These two concerns are valid, and I will address them shortly.

In the last couple of years, as startups are becoming a more significant part of the overall tech scene, another important consideration needs to be taken into account — talent scarcity. By “talent scarcity” I am referring to the significant demand versus supply imbalance of talent we are witnessing in most major tech hubs, such as Silicon Valley or Tel Aviv.

Talent scarcity is a recent phenomenon. With the explosion in the number of startups, the ability to attract top talent is one of the key aspects a startup needs to build. This is a make-or-break issue, and startups that don’t position themselves as sufficiently attractive will have to settle for second best. A second-best core team usually has a profound impact on the startup’s chances to succeed in today’s super-competitive environment.

What makes things even more difficult for startups is when they have successfully attracted top talent employees, it is very hard to retain them. The sad reality is that top-talent employees are not likely to stay long.

There will always be a better position, sooner or later. Your key employee may start his or her own startup, may be offered a co-founder role somewhere else or will just get tempted by the most recent technology, better compensation or just a nicer office. This is obviously not always so, and many employees remain loyal to their current startup.

However, as you cannot foresee who will leave and who will stay, a startup’s working assumption must be that all key talent will leave within 1-2 years. Assuming anything else is simply too risky. When a core person leaves a startup, it is usually a major blow from which it is not easy to recover.

To prepare for this eventuality, and to mitigate the risk, startups will attempt to build overlap between team members or reduce the scope of responsibility of each team member to make them less of a critical function. These mitigation attempts become a factor that accelerates the departure of those key employees, making this a self-fulfilling prophecy.

Let’s revisit the perceived disadvantages of larger founding teams. It is said that larger founding teams have difficulty reaching decisions. I argue to the contrary. When there are few founders, it is usually expected that no major decision is made without the unanimous agreement of all founders. Each co-founder basically has a veto right for all major decisions. That makes decision making very hard, and a lot of time can be spent on internal debates and discussions.

The moment the number of founders grows, an alternative decision-making process evolves. This sheer number forces a more mature decision-making process at a much earlier stage. A side benefit is that it also eases the transition to a more formal management structure when the company matures.

The issue of dilution is also not as one-sided as it may seem at first glance. It may seem that if we compare a team of three equal founders to a team of six equal founders, the former will have twice the equity compared to the latter.

This is not exactly so, as in this example we are comparing apples and oranges. If the venture needs six key employees and only three are founders, we’ll need to hire the remaining three as employees. When we hire top talent as employees, we are forced to pay top salaries.

The most common way to be able to afford such salaries is to raise sufficient venture capital. Most of the funding raised in the first financing rounds will be spent to attract and retain that top talent. This process is obviously quite dilutive, as well — and the equity difference between our two teams will be much smaller than it may have seemed originally.

I, for one, am much happier giving equity directly to co-founders instead of giving it to investors who would finance my top talent hires.

Being a co-founder is first and foremost an emotional status characterizing a relationship. It is not a legal status, although oftentimes it will get formalized contractually. It is also not an equity position, as co-founders may or may not have equal equity stakes.

Like other relationships, it needs to be built, earned and managed. Managing large founding teams requires special attention, and has its own challenges. Its merits, however, outweigh its disadvantages — especially in times of talent scarcity. I believe we’ll see more and more startups being formed with larger founding teams.

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