GenuineVC David Beisel's Perspective on Digital Change

July 6, 2005

Two weeks ago, I wrote was has turned into my most commented on post to date, An Entrepreneur’s Perspective on Information Asymmetry in Bootstrapping. I intended this entry to highlight a unique perspective on the role of information in the genesis of a startup, but my readers identified a more important and deeper issue at play: the role and involvement of a founding team and founder’s equity. My original comments were as follows,

“[My entrepreneur friend’s] perspective is grounded on the fact that a significant information asymmetry exists between an entrepreneur and his or her constituents, especially extremely early in company formation. No matter how much she communicates her vision of the opportunity, prospective employees/contractors and angel investors alike are not going to be as fully informed about the situation as she is. Only she fully knows the market opportunity and has complete confidence in her ability to execute on it. Because of this differing level of information among each party, her constituents are going to perceive her venture to be riskier than it actually is. And investors and employees are going to want a higher compensation-level for that added perceived risk. Consequently, she doesn’t want to give up more equity than she believes is a “fair price” for investment or services, as these other parties have an inherently different viewpoint than she does.”

Many, like Pat Matthews, commented on the greater issue at hand, raising concerns about founding a company without committed people besides one individual,

“I know how difficult it is to build a successful startup – and I think it’s nearly impossible to do it simply with contract workers.”

Samuel Murphy echos,

“I thought building a new business was supposed to be a team endeavor? Could she be shooting herself in the foot if she tries to hold on to too much of the potential value? What is an idea worth? What is the creation of a new entity worth, Zero (maybe negative) through billions, but how often is one person able to hold majority control? Doesn’t seem too often these days.”

My friend responded,

“Yes, I need a team. Yes, I must lead by example. And, yes, I realize 100% of nothing is still nothing… I don’t have the skills to build it myself… So I’m using my skills to get cash to pay someone else to use their skills to build my prototype. And who knows, maybe the developer will become my first team member. At least I’ll have something, other than an idea, to reduce the asymmetry that currently exists. And in the meantime I’ll keep reaching out to people who drink the same kool-aid and see if there is a talented developer in the mix.”

My own thoughts and opinion are two-fold:

1. One should strive to eventually have founding team. Speaking from my own experience at Sombasa Media where we had four founders, I do truly believe that starting a company should be a team effort. A group of people devoted to an endeavor provides the added resources, and more importantly, the spirit, that will help carry the company in its infancy and later on during difficult or strenuous times. Yes, there are numerous counter-examples, I completely realize. What I am saying is that all other things being equal, a founding team is much stronger than a lone founder.

2. Picking and establishing a founding team is a matter of timing with complex issues facing different companies with different situations. Though a team is ideal, an idea often starts with one. It is up to the sole entrepreneur to manage the process and transition from this idea’s inception towards manifestation. Establishing the founding team is a delicate and difficult process, and one that should be handled carefully with input and advice form others. It is up to the judgment of the entrepreneur to understand who and when is right for the company. I commend my friend for her openness to critical feedback on her situation which she has genuinely expressed to me in person and also in her comments to the post, “I took to heart each of your comments… Thanks… You have given me, and I’m sure many entrepreneurs, some great insight.” There is obviously no easy one-size-fits-all answer here, and an entrepreneur who is both mindful and deliberate about his/her actions during this stage is more likely to succeed than one who isn’t. That is not to say missteps are going to be avoided, but rather the entrepreneur who is thoughtful and flexible possesses an advantage. (For additional reading about the pitfalls involved with not picking the right founders, I’d highly recommend reading Allen Morgan’s entry from yesterday about the subject.)

  • http://stakeventures.com Pelle

    I think a team can be great if you have just the skills in the team you need. Allen’s article is great though and points at situation that I myself have experienced.

    I think though that if you don’t readily have a team I should not stop you and should not force you into bringing the wrong people on board.

    I’ve written more on my blog in the article Bootstrap Antipatterns #7 Searching for the team.

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