The founding team is vitally important to the success of any startup, and indeed, some studies argue that the founding team is more important to the success of the startup than the product itself. That’s largely the ethos behind accelerators such as Entrepreneur First, who back exceptional people and help them turn their intellect into marketable products and successful businesses.
Rotman research from a few years ago highlighted the vital role the founding team played in the success of the business, due in large part to the breadth of knowledge and experience required to run a successful startup.
“A founder’s individual characteristics are important but what’s more important is that person’s ability to bring a bigger and more experienced team with them,” the researchers say. “And the bigger that team the more likely the firm will succeed.”
Sadly, researchers from the University of Maryland’s Robert H. Smith School of Business argue that many startups get the creation of their founding team all wrong. They reinforce the value of the founding team, with the right combination of skills and personalities leading to more funds raised and greater long-term success for the business.
“Formation strategy is important for building strong transactive memory systems—the combined knowledge within the team of who knows what and how the team uses this shared knowledge to efficiently and effectively solve problems and make decisions,” the researchers say.
The authors argue that there are typically two ways in which co-founders find one another. The first approach is through the connections forged via their past experiences, so through old university friends, family members, or former colleagues. The second approach is more competency-led and is through seeking out people with particular skills.
A hybrid approach
The authors believe that the best approach is a combination of the two, and yet only around 10% of startups actually adopt it. They suggest that the relative difficulty of the approach perhaps explains this poor adoption.
“To get the team with that perfect combination of having both the resources and the right mindset, and the right level of comfort that you share with each other, that’s hard to do,” they say. “Creating teams requires intentional thought and attention to these two things. It’s going to be hard, and it’s going to be rare, but if you do it, there are huge performance benefits.”
The findings emerged after analyzing the founding teams of ventures that were trying to raise money on the Kickstarter crowdfunding platform. The founders were coded depending on whether they were selected for their personal characteristics or their capabilities, or both.
“We were able to link these strategies to the amount of funding they actually raised,” the researchers say. “A minority of those teams—about 10% to 15%—engaged in the hybrid team formation, but there was a huge dollar-value premium for those teams.”
The hybrid approach is largely successful because of the nature of the tasks a founding team must take on as they grow their business. Despite the common perception of entrepreneurship as a sole endeavor, with the inspired founder bending the world to their will, the reality is that it’s far more likely to be a team affair in which each member plays a crucial role.
“Each member is important not because they are just dividing and conquering all of these tasks, but also because they’re brainstorming and problem-solving on what should be the right solution,” the researchers explain. “For that, team members need complementary skills, but they also need to trust in each other.”
The Kickstarter experiment was then followed up with an analysis of the startups participating in the Technion incubator program in Israel. The founders were asked how they created the founding teams when they entered the application process. As before, this revealed the success of hybrid teams.
“We were able to show that hybrid teams were more successful and we were also able to verify that it was the transactive memory system—that ability to really understand who knows what and integrate that differential knowledge better as a team—that explained why hybrid teams succeeded,” the researchers say.
Mixing and matching
A final experiment was then undertaken in the entrepreneurship courses run at Maryland Smith. This third experiment saw founding teams deliberately constructed according to the different strategies, with the teams tracked as they created businesses and strived to raise funds. Once again, the hybrid approach seemed to be the most effective.
The researchers urge founders not to overlook chemistry in favor of capabilities, or indeed capabilities in favor of chemistry, as the best teams get the right combination of both. They do provide some solace for founders who don’t get the right mix at the outset, however, as when new members of the team are brought in, it’s possible to reset the balance in the right direction.
“Commitment to being a disruptive player in the market required all the original partners (four) to not only challenge their own assumptions about how business had been done but also have a vision as to what was possible,” says Scott Levy, CEO of the financial services startup Bedford Row Capital. “The business only really began to realize its vision with the departure of two of the original directors who, ultimately, could not deliver to that vision. Now, we are attracting more senior talent from the conventional banking sector who have realized the model is broken and that there are so many new opportunities to reassemble the value chain to actually allow for companies to actively compete in the wholesale capital markets.”
As more research is conducted into the ideal makeup of founding teams, they provide us with a timely reminder that while ideas, intellectual property, and technology are undoubtedly important to startup success, we should not overlook the importance of the very humans who create the business in the first place.