Guest Post – Team, the most important ingredient in a startup

Ask any investor or successful entrepreneur, and they will reiterate that the most important factor in a start-up is the quality of its founding team. A team is more important than the idea or the size of the market or the technology or the business case, or indeed any other factor that investors will review to check the investment-worthiness of a venture.

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Even if  – the product is great; the technology is cutting-edge; the market is large and the company has a strong chance to be a dominant player in that large market – investors will hesitate to invest in the venture if they do not get the confidence that the founding team can deliver in the market.

What investors seek is a team that is passionate about the subject, is enthusiastic about the opportunity, has a good grasp on the dynamics of ‘business’ and not just the product/service, and who can demonstrate commitment to fight it out in the market.

While it is good to have experience in the domain, that is not a must, as that will exclude a number of bright people who either do not have work experience or are from a different domain than the concept they are pursuing. However, what is important is that even without experience in the sector, the team should have studied the sector enough to understand it very well. In fact, that is also why passion and interest in the sector is critical, because that makes it easier for a person to study the sector well.

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Failure is a part of the entrepreneurial journey

The general rule is that out of 100 new ventures, perhaps 50-60 will shut down by year 2, may be 20-30 will survive with their heads above water or at a lower scale than the aspiration was. May be 8 – 10 will be reasonably successful and may be 1 or 2 of these 100 startups will be ‘very’ successful.

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Just because a venture is not successful or shuts down does not mean that the entrepreneur has failed. It just means that this particular venture did not succeed. Simple.

Of course, aspire for success. But remember, there is no shame in having tried and not succeeding.Like everyone will advice you not to let success go to your head, remember to not let failure deter you.

Understand and evaluate your appetite for risks. Not just financial risks, but opportunity costs as well. Evaluate what the upside of success is and measure it against the risks. See if it makes sense.

More importantly, DO NOT start up on the basis on just your enthusiasm. Validate the concept with your potential customers/consumers, seek mentors who can guide you, seek advice and guidance in building a good business pan and see if the concept has a good business case.

Remember, entrepreneurs are NOT people who take unnecessary or unplanned risks. Good entrepreneurs make efforts to evaluate all the risks associated with a venture and take necessary steps to mitigate the risks.

Yet, you can fail. And it is all right. Plan for how you will deal with failure too. Failing or shutting down is not the end of your professional or your entrepreneurial journey. It just means that there could be a diversion from the originally intended path.

How should equity be split between founders?

How much equity each founder gets in a startups has to be decided after serious deliberations on a number of factors. This is especially true when two or more friends (and worse, relatives) are coming together to start a venture.

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Whatever the split, assuming that equity should be split equally between all founders is an incorrect starting point. 

Each team will have their own dynamics, and emotional as well as rational reasons to decide the split of equity between them. I would urge them to consider the following factors:

  • Importance of the person’s function to the team (e.g. technology, marketing, etc.)
  • Criticality of that person being in the team
  • Is he/she the only person with that skill set in the team
  • The seniority of that person in professional life
  • What is the person giving up to come to this venture (opportunity cost)

Here’s a link to a neat tool to help you decide on the equity split Co-Founder Equity Calculator

Hiring technical resource for Startups

Many developers love working for startups and some who will only work for startups. Good startups.

Hiring for a startup is like any hiring: your network is easiest, resumes hardest. You can do a few things to limit the field and attract the right folks if you’re gathering resumes:

  • Find places to post your requirments  frequented by startup types
  • Remember being a startup is major selling point, say it loudly and often, and ask for startup experience.
  • Ask for technology experience popular in startup circles, i.e., not .NET, not JEE.

Elance can work for assembling a programming team, but it’s not a great solution as their contract requires you keep Elance as a middleman for future work between the same two parties

If you’re looking for alternatives for finding outsourcing, try also asking on Quora who are all the great developers that build early product versions for early stage startups.

 

What happens to the shareholding of a founding team member in case he decides to quit the company?

Ideally, the founder’s shares should vest over a 3-4 year period. This is not just in the interest of the investors, but also protects the entrepreneurs in case one of them decides to leave.

In simple terms, if there is a 3-year vesting period, then every month the promoters get 1/36 part of their equity.

For example, if there are 4-founders, and one of them who has 18% equity decides to leave the startup after 15 months because the venture faces significant challenges, then in a 3-year vesting period clause, the leaving founder will get to keep only 7.5% of his 18% equity, with the rest of the equity now available for the company and the board to offer to another person who may be brought in as a co-founder or at a management level to fill in the gap left by the leaving founder.

In case the equity that has not vested to the leaving promoter is not given to a new person, then in the case of an event like a M&A that equity is distributed to all the remaining shareholders, including the promoters in the proportion of their holding in the company.