The most common decisions are the ones that sink the majority of start-ups, according to a US academic, with local industry figures saying the situation is similar in Australia.
Noah Wasserman, a professor at Harvard Business School, is the author of The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls that Can Sink a Startup.
His research is based on the experiences of 10,000 company founders, with stories from entrepreneurs such as Evan Williams of Twitter and Tim Westergren of Pandora.
“There’s a craving… to anticipate things that in the past would have taken a serial entrepreneur with the pattern recognition to see that decision X will lead to outcome Y,” Wasserman said.
Wasserman identifies three frequent causes of start-up failure:
1. People problems
According to Wasserman, most start-ups fail as a result of people problems, such as picking the wrong co-founder.
“The most common decision is to co-found with someone you know socially,” he said.
“But that’s the least stable of all teams, because you’ll likely be co-founding with someone who’s more similar to you than they should be.”
“You could [also] be far less likely to handle the tension-filled discussions and tackle the elephant in the room until these issues blow up in your face.”
Sydney-based entrepreneur Ryan Wardell, who heads up Cofounder Speed Date, agrees a lot of Australian entrepreneurs make the mistake of seeking out a co-founder they’re friends with.
“You run the risk of ruining the friendship. And because you’re friends, you tend to have a lot of similar interests… [Co-founders] need to be different from you,” Wardell says.
The challenge, Wardell says, is making sure you work well together.
“Stuff like Startup Weekend is really useful for that because you get the opportunity to see how you cope in a high pressure situation where you have to build or develop something in a certain timeframe,” he says.
2. Equity splits
Wasserman said 73% of the company founders included in his research divided the equity within a month of founding, which, according to him, is too early.
“This is when uncertainties for the venture are at their highest, when you don’t really know what your business strategy will ultimately be or the roles you’ll ultimately be playing,” he said.
“Yet founders are splitting equity then and setting it in stone, and it causes major tensions later.”
Philip Alexander, a partner at Sydney-based corporate advisory firm Hall Capital Strategies, agrees it can be difficult to value contributions to new businesses, but urges start-ups to act fast.
“The best time to set the terms and conditions of your legal and working relationship with your joint venture partner is now – before too much expense and time has been invested,” he says.
“You could start with a 50/50 split in the new joint venture and have a mechanism to ‘buy’ more equity from the other partner.”
3. Funds from friends and family
Wasserman said while most founders take money from friends and family, “you’re playing with fire”, which means “you have to build some firewalls”.
He suggested writing a “prenup” and discussing worst-case scenarios upfront.
“And thinking hard, as founder, that if Aunt Sally is the only one willing to invest in your business, maybe that’s telling you something,” Wasserman said.
Wardell, who, in addition to Cofounder Speed Date, founded Project PowerUp, also warns against taking money from friends and family.
“For me personally, I would try to avoid taking money from family. That can jeopardise all kinds of relationships,” he says.
“If you’re good enough, and your idea is good enough, there will be an investor out there who wants to give you some money to make it happen.”
“If you can’t raise investment from private investors, perhaps something isn’t quite right with your business plan. A workaround is to try and do both – raise private investment and ask your family, will you match it?”
“The big weakness is that family will probably give you money without scrutinising the business plan as much as they should.”