CO-FOUNDERS & START-UPS: WHAT MAKES A SUCCESSFUL

TEAM?

Jason Greenberg, MA, MPP, PhD

New York University

© 2013 Jason Greenberg, PhD

NYU Stern Office of Development & Alumni Relations

Entrepreneurship at NYU: Statistics and superlatives

• 100+ entrepreneurship-related courses

• 845 patents issued to faculty/students – 82 startups launched based on NYU IP

• 3 NYU Incubators (partnership with NYC EDCo.) – 106 companies since ‘09

• $65 million raised

• 5 companies acquired

• 900 jobs created

• $250 million in local economic impact

• NYU Innovation Venture Fund – Seed-stage fund

• MadeByNYU.org

*As of June 2013

2

Wharton alumni entrepreneurship rate

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 8 9 10

Jobs post graduation 3

Founding team problems = greatest source of VC-funded startup failure

65

35

Founding team Product, marketing, function 4

Source: Gorman and Sahlman (1989)

Fred Wilson of USV on the importance of the right team

“No business is so good that the wrong people can't mess it up. And no business is so bad that the right people can't fix it. […] So if you don't get the people part of the equation right, everything else is really immaterial.”

5

Source: http://www.usv.com/2007/01/founders-and-ma.php

--SIR ISAAC NEWTON

I can calculate the motions of the heavenly bodies, but not the madness of people.

6

Objective: Consider the “madness of people” in founding teams • Systematic assessment of “madness”

from

–A social science perspective

–Extensive first hand-experience

• Mike Chan, Founder & Principal, MWC Consulting

–B.S. (Lehigh); M.S. (Georgia Tech); MBA (NYU)

• Philip Rosenthal, Pres. & CEO, Fastcase

–B.S. (Yale); M.A., PhD (Cal. Tech); J.D. (Harvard)

7

Three Rs and team issues

8

Team

Tensions

Roles

Relationships

Rewards Division of labor, positions, skills Decision making

Model for how business should be

organized

Splitting the pie Compensation

Found with friends? With strangers? Co-workers? Family?

Source: Noam Wasserman

Who should you start a business with?

• Two key types of questions – Functional considerations (specific skills,

experience, education, time)

– Social relationships

• An important mechanism of team formation

• Lots of received wisdom on the matter

9

10

“Going into business

with friends or family?

Prepare for disaster.”

Source: Boston Globe (12/14/03)

11

Source: Entrepreneur.com (10/05)

Lots of examples of family members or friends on founding teams

Robert James Edward

Sources: The Guardian; designhistory.com; http://www.kilmerhouse.com/2009/04/how-much-do-you-really-know-about-our-annual-meeting/

Sergey Brin Larry Page

12

Generally speaking, is it a good idea to start a business with…

1. Family members

2. Friends

3. Co-workers

4. Strangers

13

Technological startups often include co-workers and friends

0

5

10

15

20

25

30

35

40

45

50

Co-workers Friends Family 14

% of founding teams including …

Predicted probability venture achieved viability

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Strangers Friends who never worked together

Co-workers Family

15 Note: Transparent bars are not statistically significant; dashed line denotes overall avg.

Significant coefficients differ from each other and all other coefficients. Model includes extensive controls. Source: Greenberg (2013)

EVIDENCE FROM THE FIELD: 1. How do you identify, evaluate and “date” potential co-founders? 2. How do you deal with “lost in translation” issues—tech/business or business/tech?

16

Three Rs and team issues

17

Team

Tensions

Roles

Relationships

Rewards Division of labor, positions, skills Decision making

Model for how business should be

organized

Splitting the pie Compensation

Found with friends? With strangers? Co-workers? Family?

Source: Noam Wasserman

What is the most important criterion when determining which co-founder will be CEO?

1. Who came up with the idea

2. Prior social relationships

3. Research/tech skills

4. Ability to raise funds

5. Business acumen

6. Social network – size and reach

7. Executing idea 18

Positions taken by idea people

CEO 56%

Chair 7%

CTO 12%

CFO 1%

COO 3%

Other 9%

VP 12%

Source: Adapted from Noam Wasserman, “Idea People and Their Initial Roles within Founding Teams,” May 1, 2008, post on

research blog, “Founder Frustrations”

19

Role agreement critical for founding team success

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Key predictors of viability (odds-ratios)

20

Source: Greenberg (2013); Note: Model includes extensive controls.

What kind of company do you want? The importance of blueprints

Employment blueprint

Attachment Selection Coordination/ Control

Star Work Potential Professional

Engineering Work Skills Peer/ cultural

Commitment Love Fit Peer/ cultural

Bureaucracy Work Skills Formal

Autocracy Money Skills Direct 150%

-45%

-100%

-55%

5%

30%

200%

-40%

-200% -100% 0% 100% 200% 300%

Baseline

Pr(IPO) Pr(Failure)

21

Source: Baron and Hannan (2002)

Three Rs and team issues

22

Team

Tensions

Roles

Relationships

Rewards Division of labor, positions, skills Decision making

Model for how business should be

organized

Splitting the pie Compensation

Found with friends? With strangers? Co-workers? Family?

Source: Noam Wasserman

Generally speaking, do you believe that equity should be split equally among all co-founders?

1. Yes

2. No

23

How important are the following criteria to you when determining how to split equity?

1. Who came up with the idea

2. Prior social relationships

3. Research/tech skills

4. Ability to raise funds

5. Business acumen

6. Social network – size and reach

7. Executing idea 24

Equity stakes for idea versus non-idea people by position

0

10

20

30

40

50

60

70

CEO CFO Chair COO CTO Other VP

Eq

uit

y %

Premium for being

idea person

20.0 16.7 24.6 21.2 5.6 5.5 2.3

Equity % if not the

idea person

42.1 13.3 35.1 28.5 27.6 14.3 22.3

Source: Noam Wasserman, “The Idea Premium: How Much (Equity) is Your Idea Worth?” June 17, 2008, post on blog, “Founder Frustrations” 25

Equity more likely to be split equally when…

• Initial financial capital investments are the same

• Founders have similar levels of industry experience

• All founders are first timers

• Equity is split early in the process

• Founders are friends

• Team is smaller 26

Generally speaking, do you believe that “roles” and “rewards” need to be specified in a formal contract?

1. Yes

2. No

27

Formal contractual agreements predict founding team success

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Key predictors of viability (odds-ratios)

28

Source: Greenberg (2011). Model includes extensive controls.

Known-knowns, know-unknows, and unknown-unknowns and contracts

Know-knowns Known-unknowns Unknown-unknowns

Each founder’s financial contribution

to date

What the final business model will

be

?

Who came up with the original idea

What part of the idea can be monitized

?

29

“Because we know, there are known knowns; there are things we

know we know. We also know there are known unknowns; that is

to say we know there are some things we do not know. But there

are also unknown unknowns--the ones we don’t know we don’t

know.”

Static contractual

provisions

Dynamic contractual

provisions

Trust!

Takeaways • Finding the right partner(s) may be the most

important step – Understand that it is a dynamic process

• Aligning the “three Rs” critical • Also ensure that you are “in sync” with respect to

role expectations

• Don’t wait too long to discuss – Contracts

• Always incomplete—consider as a process-defining tool for discussing rights/responsibilities

– Equity splits • Equal split not always the best

– Especially true if contributions not equal

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THANK YOU! JGREENBE@STERN.NYU.EDU

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