The Hypergrowth Conundrum: Q&A with Noam Wasserman, Start-up Statistician

Noam Wasserman, professor, Harvard Business School and author of The Founder's Dilemmas

Noam Wasserman, professor, Harvard Business School and author of The Founder’s Dilemmas

After surviving his own founding pitfalls and watching the failure of many other founding teams when he worked for a venture capital firm, Noam Wasserman began to see patterns in who succeeded and who failed. He tried to find out more, but discovered that although a lot had been written on the question, almost all of it was anecdotal, and there was no way to tell whether the case studies available were typical experiences.

When he became an academic, Wasserman, now a professor at Harvard Business School, decided to fill that gap by producing a study that would be “far more systematic” and would enable him to understand the most common set of outcomes to expect, which cases are representative and which are outliers. Now, after spending a decade building a database of interviews and data that chronicles and analyzes the experiences of more than 10,000 start-ups, Wasserman’s insights, which some critics have called “Moneyball for start-ups”, are now gathered in a book called The Founder’s Dilemmas . Like Michael Lewis’s book about how data-mining transformed baseball management, a number of big names in the field have described The Founder’s Dilemmas as a seminal book, potentially as important to entrepreneurship as Clayton Christensen’s Innovator’s Dilemma was to the technology business.

Excerpts from an interview:

Q. What surprised you most about what you found in your study?

A. Realizing that when you make certain key decisions, you should not trust your intuition. For instance, when it comes to co-founding with certain types of people, in particular, friends and family–which in my data set were more than 50% of the teams–those are the teams that end up being less stable than any of the other types of teams.

With regards to the equity split, the most common times that people pick to split the equity and the most common approaches that they use to split the equity are also the ones that lead to the biggest problems down the road.

The good news is that by understanding these common risks, there are actually actionable things that you can do to be able to protect yourself.

Q. Don’t go into business with a buddy?

A. I don’t come out saying, “Don’t you dare go and co-found with friends and family”, but that if you are co-founding with friends and family, you have to understand that you’re playing with fire. Fire can forge a stronger team, but also can lead a team to blow up more often. If you understand the risks–and there are clear ones highlighted by my research–you can also create “firewalls” to protect yourself and hopefully increase your chances of ending up with a glorious team rather than a disastrous team.

Q. What does an ideal team look like, aside from not having a sibling on the team?

A. They have to be different in key ways–mostly regarding the “hard skills”–but similar in other ways, mostly regarding “soft stuff” like values and working styles.  There’s a tension between the two because hard-skill differences naturally make it less likely that you’ll be similar in the soft stuff.

In terms of specifics, for the typical company, the best combination is to have a founder who is an ace at building and the other one who is an ace at selling–the proverbial “Mr. Inside” and “Ms. Outside” or vice versa. Having each of those is a terrific dynamic that helps cover the key bases both early on and later in terms of knitting together all those pieces. The challenge is that a lot of times, the people who are different in this way are also coming to work with a very different set of values, a very different set of work styles, and a very different set of motivations–all areas where you have to be compatible.

Q. In your book, you say founders usually end up having to choose between wealth and control–being rich versus being king. Why is that?

A. A founder who wants to keep control, but instead goes and raises a bunch of money from the outside, is not making decisions that are consistent with the rewards that he is seeking. He’s going to be much more likely to end up with something that he will have major regrets about, because giving up equity and board seats will cost him the control he wants. Outside investors are likely to block him from achieving his dream of being a visionary who is going to be able to have his stamp on the idea, its implementation, and the product or service that comes to the world.

And vice versa: for the founder who wants more of a financial gain, if he is making decisions that are going to be far more about keeping control, he may harm his ability to attract those key resources and people, and he’s going to end up with an outcome that he is not going to be celebrating.

Either way, the biggest disconnect is not understanding yourself, not understanding the requirements of the venture, not understanding the path ahead and what’s going to be needed to get there. Because of that, you make decisions that will actually conflict with getting to the Promised Land you are seeking. A key goal of my research and teaching is to provide first-time founders with the roadmap of the key forks in their entrepreneurial journeys.

Q. Much of your book focuses on decisions made in the start-up phase. Are there other critical decisions later on, such as when the company moves into a fast-growth phase?

A. A lot of times fast growth is sparked by your bringing on rocket fuel from investors–outside parties who, as they are investing, take board seats so they can make sure that they are able to monitor their investment. That rocket fuel helps you develop a great product even quicker than if you hadn’t taken the investor money. However, because of that, the demands on the CEO are going from a technical or a scientific need–where the emphasis is on developing the product–to having to build and coordinate functions that you’ve probably never worked in and that you aren’t familiar with. At the same time as the company’s growth is starting to outstrip your capabilities, the people on the board have a very different read on whether you, as the founding CEO, should continue leading it, not only despite the fact that you have been succeeding smashingly until now, but (also) precisely because of that early success that you’ve had.

And that is a very tough thing for founders to grapple with, to get the message from outside that we’re going to fire you. Once you’ve taken that outside money, hearing from the board, “You no longer have control over who’s CEO, we’re the ones who have that say.”

Q. Does this happen often?

A. For founders who have raised outside capital, it happens more often than not. By the time that founders have gotten to raising their third round of financing, 52% of them–more than half of the founder-CEOs in my data set–have been replaced as CEO, and nearly three-fourths of those were not where the founder was raising his or her hand and saying, “I can see where this is going, I can see I’m getting in over my head.” Instead, for those three-fourths, it’s the board that’s doing the firing.

For the founder who is receiving that message, that is very much a visceral attack. It is extremely hard to take that message in a very productive, calm way, and because of that, that dramatically heightens the stakes at that key inflection point. For the company, that inflection point becomes ‘make or break’: make a smooth transition to a successor and it can lead the company to glory and riches, or have the transition go badly and imperil the company. If it’s not going to be a smooth transition, rather than solving a bunch of the company’s upcoming problems, the fight over succession can increase the risks for the investors and for the venture.

Q. It sounds like the reality of growing a company tends to be very different from the popular image of the entrepreneur who takes the company from his parents’ garage to Wall Street. Does that mythology get in the way of smart decisions?

A. I think those “Rich and King” role models are a great motivator to help people make the leap, but only if it does not blind them to the key dilemmas that they will face and prevent them from having a clear understanding of the trade-offs that they will have to make. By trying for both Rich and King at key points where a tradeoff between them is required, founders could be heightening the chances of failure rather than glory.

Q. Are the entrepreneurs you meet listening to what you have to say?

A. The founders that I have been working with are now thinking far more carefully about the pitfalls that the research has highlighted. Hopefully, along the way we’ll be able to start seeing that the rates of failure within start-ups start to fall as founders learn to anticipate and avoid the most common difficulties. Some research has suggested that the types of people issues that we are talking about–whom to involve in your venture and how–are the sources of almost two-thirds of all the failures within start-ups. To the extent that people think harder about them and make better decisions at key forks in the road, we should see that failure rate drop dramatically. Even a little drop in that percentage would have a huge impact on the entrepreneurial sector.