From Founding to Scaling
At the Lean Startup Conference this past November, Lean Startup Co. Founder, Eric Ries, Jeff Jordan, a general partner at the venture capital firm Andreessen Horowitz, and JP Mangalindan, senior correspondent for Yahoo Finance, sat down and discussed the full journey of how startups progress from founding to scaling.
JP kicked off the fireside chat with a question about whether a startup should have several founders, and if these founders should have different traits from one another.
Eric leapt right in, saying, “There’s no one size fits all rule for entrepreneurship. And for every rule, you can find someone who broke the rule and made it fit.”
Put One Founder in Charge
That said, he takes wisdom from The Founder’s Dilemmas, a book by Noam Wasserman, whose in-depth research showed that there’s a “U-shaped curve” where a couple of founders are good, but too many (more than four or five) complicate business.
Wasserman also believes in not splitting equity evenly, more like a 51 to 49 percent split. While that may sound counterintuitive, Eric pointed out that it makes sense because, “Somebody has to be the boss from the beginning and it’s always going to be the person with the most [equity].”
As for whether diverse personalities are a plus, Eric felt it’s about striking a happy medium, which he compares to “alchemy.” “You need to be different enough that you bring true diverse perspectives and you could have some creative tension, but not so different that you kill each other and the thing blows up.”
Jeff agreed that “someone needs to be in charge.” He’s observed that in the case of multiple founders, one of them often ends up separating from the company relatively early. “So one of the things VCs often ask for is founder vesting.”
JP jumped in to add, “If you’ve got two founders and one is going to spend fifteen years working this concept until they die, and the other says ‘Hey, good luck with that,’ but they both have the same equity ownership, that’s not equitable equity ownership.”
The Traits of Successful Founders
So what are the traits of successful founders?
Jeff argued that there “is no founder archetype,” but he did pin down a few characteristics that are important: “Courage, persistence, and unyielding effort, because bad things happen in…every single startup,and you need someone who can power through.”
Another key trait, Jeff continued, is what he called a “storytelling” form of salesmanship. “You have to sell your employees. You have to sell your co-founder. You have to sell your investors. You have to sell your customers, so you have to be able to tell the story.”
In order to tell a story, you have to have a vision “and a North Star” and stick with those.
But Eric offered that not all traits of a good founder are necessarily “positive,” which is based on research. “The attributes that make you more likely to become an entrepreneur in the first place are slightly negatively correlated with the same attributes that make you more or less likely to succeed as an entrepreneur.”
He jokingly gives the example, “Ability to ignore inconvenient facts.” While it’s a very important skill “because if you knew how hard it was going to be you certainly would never do it,” he says everyone knows examples of founders where that same trait “has gone too far.”
Entrepreneurs Don’t All Have to Be Founders
Jeff took the conversation in a slightly different direction when he pointed out that some of the most talented people in a company are not necessarily founders.
“Literally every company I’ve been involved in, the early employees are every bit as entrepreneurial, every bit as dedicated, and they work harder for less recognition than the true founders,” he said.
It’s no coincidence, Jeff added, that “these amazing entrepreneurial lieutenants go on to found amazing companies too.”
How Important is Company Culture?
JP steered the conversation to the topic of how founders strike a balance between allowing for diversity of thought and making sure there’s a culture fit within a company.
Eric was the first to say “We are getting creamed on this issue right now in Silicon Valley, and I say rightfully so.”
He feels that there’s a lot of “rhetoric about meritocracy and wanting to be meritocratic in our decision-making” that Silicon Valley hasn’t lived up to, because “we are not yet harvesting the best ideas from anywhere…just look at the demographics of who gets funded.”
Yet Eric does feel there is “such a thing as culture fit,” and that it’s an important component for companies to cultivate and align around. But he doesn’t believe that Silicon Valley’s attempts to be a meritocracy jive with the need for companies to force employees into a culture fit. “[If] we don’t use the absolute best practices to try to prevent ourselves from having bias, then I call bullshit on the whole thing.”
In affirmation, Jeff returned to his earlier point about the importance of founders creating a kind of “North Star” around which the culture can be shaped.
How to Avoid Hiring Mistakes
JP asked about some of the hiring mistakes that founders make early on in a startup.
Eric suggested that hiring someone for their “domain expertise” regardless of whether they can be successful in a startup is a common problem he’s seen. “You forget that maybe what made them good at that job is the fact that they worked at that company. They had the fancy business card and the Rolodex.”
But domain expertise isn’t always enough to make a good fit.
Jeff agreed. “You want to tee [your hiring] more to the state of the company and what the actual job is.”
He also urged not to hire your friends. “It does not work out a lot and that can have issues for the company.”
Not to mention losing a friendship, JP offered.
Where Should Founders Focus First?
Probably the most common mistake, Eric finds, is a lack of focus. One of his favorite sayings in the startup world is “Startups don’t starve, they drown.” A lack of focus can lead to spreading too thin or not honing in on what the company and its founders are good at.
Eric explained, “So much of the apparatus of Lean Startup is designed as a focusing device to get you to do one thing at a time, because…there is zero evidence or research anywhere in the world to suggest that people are good at multitasking and yet we all think we’re good at it.”
Your ability to learn is the “rate-limiting step in an early-stage startup,” Eric said. Learning has to be the most important part.
“If you have more experiments going on than people to pay attention to what’s happening, you can’t be efficient by definition. That’s why we have build, measure, learn, and MVPs and pivot.”
Also, it’s important not to get caught up in what Eric calls “vanity metrics” and instead focus on what is and isn’t working through specific steps. “I can’t tell you how many founders I meet that have no customers but they’re working on 90-day retention. And it’s like, ‘But you don’t have one-day retention, nobody downloaded the software.’”
Jeff recommends founders also need to keep their expectations of success realistic. “There’s this revisionist myth on tons of companies, that they launched it, everyone loved it and you married a model,” he said with a laugh.
Jeff brought it back down to reality saying some of the most successful companies—such as Airbnb—“walked through a desert…you’re talking multiple years before it really worked. And there’s nothing more important than making it work.”
When’s the Time to Scale a Team?
Jeff shared that early on in a startup, even founders feel like players, not captains. “And at some point the business scales to the point where you just literally can’t make the decisions.”
He recalled a time at eBay where there was a line at his cubicle at 6 p.m. of people “waiting for the thumbs-up, thumbs-down because I would insist on making all of the decisions.”
That, he said, doesn’t scale. So, “You have to morph into being a coach, hire people, incentivize them, and motivate them such that they’ll make the decision you would make most of the time.”
At each stage of the scaling, your role changes: “Then you morph into the general manager, where the people who are working for your coaches are making the decisions.” And so on and so forth.
He added that just building a team isn’t sufficient. “You’ve got to leverage them. They’ve got to make the decisions.”
Eric admitted that the “psychological transition” from being an entrepreneur to having entrepreneurs working for you can be a challenge. “You have to have the psychological through-the-looking-glass moment where you’re not the man, not the woman, not the entrepreneur who makes the decisions, you have to empower those people yourself.”
Of course, you won’t be doing these things in a vacuum. He reminded us that, “in Silicon Valley, and in the startup movement in general, we have certain management practices that are absolutely universal.” Every startup has a board, does rounds of metered funding, and so on, Eric said.
When Should a Startup Consider an IPO?
Going public has long been the zenith of a successful business. But Jeff explained that’s changing due to a “new tranche of capital that historically had not existed in the Valley.” It’s coming from “sovereign wealth funds and oligarchs writing hundreds and hundreds of millions of dollar checks.” As well as SoftBank, a fund that Jeff said is rumored to be over 200 billion.
“This injection into the late-stage market is changing the calculus so companies don’t have to go public anymore,” Jeff pointed out.
Eric jokingly added, “I just had a VC say to me the other day ‘IPO readiness is the new black.” So everyone wants to be IPO ready, no one wants to go public.”
However, Eric, who among many roles is CEO of the Long-Term Stock Exchange (LTSE), said they’re trying to create new ways for companies to go public “without the short-term pressure.”
He explained that the general trend is that the total number of public companies in the United States has been cut in half in the last twenty years because he has concerns about all this “private capital chasing too many unregulated opportunities.”
In other words, the “general bargain of when companies go public and why is busted,” Eric said. “And we’ve got to do better.”
Thank you to Jordan Rosenfeld for contributing this piece. If you want to bring the entrepreneurial spirit to your organization, Lean Startup Company can help. We empower you to solve your own problems using entrepreneurial management, no matter your industry, size company, or sector of the economy. Email us. We’re here to help.