Nearly two thirds of start-up business failures stem from “people problems”, according to an academic at Harvard University, who has written a tell-all book about start-up failures.
Noam Wasserman, an associate professor at Harvard Business School, has written a book titled The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.
Get daily business news.
The latest stories, funding information, and expert advice. Free to sign up.
In an interview with Businessweek, Wasserman shared his conclusions on start-up failure and recommended ways for would-be entrepreneurs to increase their chances of success.
According to Wasserman, the most common co-founders are sourced within social relationships, namely friends and relatives.
“It’s understandable, but my quantitative analysis shows that these are the least stable of all the start-up teams. There are two Achilles’ heels,” Wasserman said.
“You already trust each other in the social realm and you assume that will map to trust in the professional realm, which it does not necessarily do.
“And you’re not going to have the in-depth conversations about competence and skills that you would have with a business acquaintance or a stranger.
“That’s because you assume you don’t need to talk, and you are hesitant to raise doubts because you fear they could blow up the social relationship that is so valuable to you.”
Wasserman is quick to point out that he is not against business partnerships between friends or family members. His advice is simply to tread with caution.
“Reduce [your risk of failure] by forcing the hard discussions and building firewalls that protect your social relationships from your professional ones,” he said.
Wasserman also offered advice on when to split equity within a founding team, encouraging founders to refrain from rushing into an agreement.
“In my data set, 73% of founding teams split equity within the first month of a venture, and the majority set it in stone without allowing for any dynamism within that agreement,” he said.
“The problem is that early on, entrepreneurs don’t know what their business model or strategy will be.
“They don’t know what individual roles will be, how much commitment each co-founder will have, and they all share a rosy scenario because they’ve never gone to the bottom of the entrepreneurial roller-coaster.”
Wasserman encouraged business founders to “match uncertainties by putting dynamism within their agreements”.
“It’s critical, early on, to take your best cut at a serious discussion about where the company is going, who will be the key players, what are the different ways they’ll be contributing,” he said.
“In contrast to just focusing on the usual rosy scenarios, they should also tackle the expected case and the worst case.
“If you hit each of those scenarios and how equity should be changed under them, you can have a dynamic agreement.”
According to Wasserman, smaller businesses are “often not as aware of some of the nuances in decision-making”, which means they are “playing with fire” more often.
“For instance, half of tech startups co-found with social-relationship partners – that’s even more common in smaller start-ups.
“About one third of tech companies split the equity equally up front; that goes to 70% for smaller bootstrapped start-ups.
“Instead of heading down the most common roads that are most fraught with peril, the smaller companies should be having all the same discussions the bigger guys need to have.
“It’s even more imperative that they understand the ‘head’ side of a business, not just the ‘heart’ side.”