The way a founder builds a new-venture team sends an important signal to potential investors, partners, and employees. Some founders like the feeling of control and are reluctant to involve themselves with partners or hire managers who are more experienced than they are. In contrast, other founders are keenly aware of their own limitations and work hard to find the most experienced people to bring on board. Similarly, some new firms never form an advisory board, whereas others persuade the most important (and influential) people they can find to provide them with counsel and advice. In general, the way to impress potential investors, partners, and employees is to put together as strong a team as possible. Investors and others know that experienced personnel and access to good-quality advice contributes greatly to a new venture’s success.
The elements of a new-venture team are shown in Figure below. It’s important to carefully think through each element. Miscues regarding whether team
members are compatible, whether the team is properly balanced in terms of areas of expertise, and how the permanent members of the team will physically work together can be fatal. Conversely, careful attention in each of these areas can help a firm get off to a good start and provide it a leg up on competitors.
There is a common set of mistakes to avoid when putting together a new-venture team. These mistakes raise red flags when a potential investor, employee, or business partner evaluates a new venture. The most common mistakes are listed below.
1. The Founder or Founders
A founder’s or founders’ characteristics and their early decisions significantly affect the way an entrepreneurial venture is received and the manner in which the new-venture team takes shape. The size of the founding team and the qualities of the founder or founders are the two most important issues in this matter.
Size of the Founding Team The first decision that most founders face is whether to start a firm on their own or whether to build an initial founding team. Studies show that more than one individual starts 50 to 70 percent of all new firms. However, experts disagree about whether new ventures started by a team have an advantage over those started by a sole entrepreneur. Teams bring more talent, resources, ideas, and professional contacts to a new venture than does a sole entrepreneur. In addition, the psychological support that cofounders of a business can offer one another can be an important element in a new venture’s success. Conversely, a lot can go wrong in a partnership— particularly one that’s formed between people who don’t know each other well. Team members can easily differ in terms of work habits, tolerances for risk, levels of passion for the business, ideas on how the business should be run, and similar key issues. If a new-venture team isn’t able to reach consensus on these issues, it may be handicapped from the outset.
COMMON MISTAKES MADE IN PUTTING TOGETHER A NEW-VENTURE TEAM
• Placing unqualified friends or family members in management positions.
• Assuming that previous success in other industries automatically translates to your industry.
• Presenting a “one man team” philosophy—meaning that one person (or a small group of people) is wearing all hats with no plans to bolster the team.
• Hiring top managers without sharing ownership in the firm.
• Not disclosing or talking dismissively of management team skill or competency gaps.
• Vague or unclear plans for filling the skill or competency gaps that clearly exist.
When a new venture is started by a team, several issues affect the value of the team. First, teams that have worked together before, as opposed to teams that are working together for the first time, have an edge. If people have worked together before and have decided to partner to start a firm together, it usually means that they get along personally and trust one another. They also tend to communicate with one another more effectively than people who are new to one another. Second, if the members of the team are heterogeneous, meaning that they are diverse in terms of their abilities and experiences, rather than homogeneous, meaning that their areas of expertise are very similar to one another, they are likely to have different points of view about technology, hiring decisions, competitive tactics, and other important activities. Typically, these different points of view generate debate and constructive conflict among the founders, reducing the likelihood that decisions will be made in haste or without the airing of alternative points of view. A founding team can be too big, causing communication problems and an increased potential for conflict. A founding team larger than four people is typically too large to be practical.
There are three potential pitfalls associated with starting a firm as a team rather than as a sole entrepreneur. First, the team members may not get along. This is the reason investors favor teams consisting of people who have worked together before. It is simply more likely that people who have gotten along with one another in the past will continue to get along in the future. Second, if two or more people start a firm as “equals,” conflicts can arise when the firm needs to establish a formal structure and designate one person as the chief executive officer (CEO). If the firm has investors, the investors will usually weigh in on who should be appointed CEO. In these instances, it is easy for the founder that wasn’t chosen as the CEO to feel slighted. This problem is exacerbated if multiple founders are involved and they all stay with the firm. At some point, a hierarchy will have to be developed, and the founders will have to decide who reports to whom. Some of these problems can be avoided by developing a formal organizational chart from the beginning, which spells out the roles of each founder. If the founders of a firm have similar areas of expertise, it can be problematic. The founders of Devver were both technically oriented leaving the firm without a leader on the business side.
Qualities of the Founders The second major issue pertaining to the founders of a firm is the qualities they bring to the table. One reason the founders are so important is that in the early days of a firm, their knowledge, skills, and experiences are the most valuable resource the firm has. Because of this, new firms are judged largely on their “potential” rather than their current assets or current performance. In most cases, this results in people judging the future prospects of a firm by evaluating the strength of its founders and initial management team.
Several features are thought to be significant to a founder’s success. The level of a founder’s education is important because it’s believed that entrepreneurial abilities such as search skills, foresight, creativity, and computer skills are enhanced through obtaining a college degree. Similarly, some observers think that higher education equips a founder with important business-related skills, such as math and communications. In addition, specific forms of education, such as engineering, computer science, management information systems, physics, and biochemistry, provide the recipients of this education an advantage if they start a firm that is related to their area of expertise.
Prior entrepreneurial experience, relevant industry experience, and networking are other attributes that strengthen the chances of a founder’s success. Indeed, the results of research studies somewhat consistently suggest that prior entrepreneurial experience is one of the most consistent predictors of future entrepreneurial performance. Because launching a new venture is a complex task, entrepreneurs with prior startup experience have a distinct advantage. The impact of relevant industry experience on an entrepreneur’s ability to successfully launch and grow a firm has also been studied. Entrepreneurs with experience in the same industry as their current venture will have a more mature network of industry contacts and will have a better understanding of the subtleties of their respective industries. The importance of this factor is particularly evident for entrepreneurs who start firms in technical industries such as biotechnology. The demands of biotechnology are sufficiently intense that it would be virtually impossible for someone to start a biotech firm while at the same time learning biotechnology. The person must have an understanding of biotechnology prior to launching a firm through either relevant industry experience or an academic background. Some entrepreneurs, who come from a nonbusiness background, fear that a lack of business experience will be their Achilles’ heel. There are several steps, techniques, or approaches to business that entrepreneurs can utilize to overcome a lack of business experience.
A particularly important attribute for founders or founding teams is the presence of a mature network of social and professional contacts. Founders must often “work” their social and personal networks to raise money or gain access to critical resources on behalf of their firms. Networking is building and maintaining relationships with people whose interests are similar or whose relationship could bring advantages to a firm. The way this might play out in practice is that a founder calls a business acquaintance or friend to ask for an introduction to a potential investor, business partner, or customer. For some founders, networking is easy and is an important part of their daily routine. For others, it is a learned skill.
2. Recruiting and Selecting Key Employees
Once the decision to launch a new venture has been made, building a management team and hiring key employees begins. Start-ups vary in terms of how quickly they need to add personnel. In some instances, the founders work alone for a period of time while the business plan is being written and the venture begins taking shape. In other instances, employees are hired immediately.
One technique available to entrepreneurs to help prioritize their hiring needs is to maintain a skills profile. A skills profile is a chart that depicts the most important skills that are needed and where skills gaps exist.
Evidence suggests that finding good employees today is not an easy task. A 2011 survey conducted by the University of Maryland’s School of Business and Network Solutions asked small business owners how well they competed with other companies for good employees, and only 46 percent said they were successful. Respondents said that recruiting workers who were comfortable in a small business setting is difficult. Similarly, a 2008 survey asked the CEOs of 245 rapid-growth firms if finding qualified workers was a concern. A total of 40 percent of the CEOs, in the first quarter of 2008, reported that a lack of qualified workers is a potential barrier to growth for their firms over the next 12 months.
Founders differ in their approach to the task of recruiting and selecting key employees. Some founders draw on their network of contacts to identify candidates for key positions. Others ask their existing employees for referrals. Safilo USA, a luxury eyewear company, pays its employees for referrals. An employee who refers someone who joins the company gets $500 after the new hire has been with Safilo for six months and another $500 after a year. Across all types of firms, employee referral programs account for about 20 percent of all hiring. Many companies use interns to help fill personnel needs. Other companies rely on job search Web sites like Monster.com or CareerBuilder.com.
An increasingly important approach for recruiting employees is via social media sites like LinkedIn, Twitter, and Facebook. The founder of a small firm can broadcast to his or her LinkedIn contacts or Facebook friends that s/he is interested in hiring qualified employees, without paying for a job posting. Similarly, some companies have Twitter accounts specifically for recruiting. ModCloth, the online retailer of vintage and vintage-inspired clothing for women, has a Twitter account named ModCloth Careers, which is specifically designed for people interested in pursuing a career with ModCloth. As of May 2011, it had over 1,100 followers.
3. The Roles of the Board of Directors
If a new venture organizes as a corporation, it is legally required to have a board of directors—a panel of individuals who are elected by a corporation’s shareholders to oversee the management of the firm. A board is typically made up of both inside and outside directors. An inside director is a person who is also an officer of the firm. An outside director is someone who is not employed by the firm. A board of directors has three formal responsibilities: (1) appoint the firm’s officers (the key managers), (2) declare dividends, and (3) oversee the affairs of the corporation. In the wake of corporate scandals such as Enron, WorldCom, and others, there is a strong emphasis on the board’s role in making sure the firm is operating ethically. One outcome of this movement is a trend toward putting more outsiders on boards of directors, because people who do not work for the firm are usually more willing to scrutinize the behavior of management than insiders who work for the company. Most boards meet formally three or four times a year. Large firms pay their directors for their service. New ventures are more likely to pay their directors in company stock or ask them to serve without direct compensation—at least until the company is profitable. The boards for publicly traded companies are required by law to have audit and compensation committees. Many boards also have nominating committees to select stockholders to run for vacant board positions.
If handled properly, a company’s board of directors can be an important part of the new-venture team. Providing expert guidance and legitimacy in the eyes of others (e.g., customers, investors, and even competitors) are two ways a board of directors can help a new firm get off to a good start and develop what, it is hoped, will become a sustainable competitive advantage.
Provide Guidance Although a board of directors has formal governance responsibilities, its most useful role is to provide guidance and support to the firm’s managers. Many CEOs interact with their board members frequently and obtain important input. The key to making this happen is to pick board members with needed skills and useful experiences who are willing to give advice and ask insightful and probing questions. The extent to which an effective board can help shape a firm and provide it a competitive advantage in the marketplace is expressed by Ram Charan, an expert on the role of boards of directors in corporations:
"They (effective boards) listen, probe, debate, and become engaged in the company’s most pressing issues. Directors share their expertise and wisdom as a matter of course. As they do, management and the board learn together, a collective wisdom emerges, and managerial judgment improves. The on-site coaching and consulting expand the mental capacity of the CEO and the top management team and give the company a competitive edge out there in the marketplace."
Because managers rely on board members for counsel and advice, the search for outside directors should be purposeful, with the objective of filling gaps in the experience and background of the venture’s executives and the other directors. For example, if two computer programmers started a software firm and neither one of them had any marketing experience, it would make sense to place a marketing executive on the board of directors. Indeed, a board of directors has the foundation to effectively serve its organization when its members represent many important organizational skills (e.g., manufacturing, human resource management, and financing) involved with running a company.
Lend Legitimacy Providing legitimacy for the entrepreneurial venture is another important function of a board of directors. Well-known and respected board members bring instant credibility to the firm. For example, just imagine the positive buzz a firm could generate if it could say that Jack Dorsey of Twitter or Mark Pincus of Zynga had agreed to serve on its board of directors. This phenomenon is referred to as signaling. Without a credible signal, it is difficult for potential customers, investors, or employees to identify highquality start-ups. Presumably, high-quality individuals would be reluctant to serve on the board of a low-quality firm because that would put their reputation at risk. So when a high-quality individual does agree to serve on a board of a firm, the individual is in essence “signaling” that the company has potential to be successful.
Achieving legitimacy through high-quality board members can result in other positive outcomes. Investors like to see new-venture teams, including the board of directors that have people with enough clout to get their foot in the door with potential suppliers and customers. Board members are also often instrumental in helping young firms arrange financing or funding. it’s almost impossible for an entrepreneurial venture’s founders to get the attention of an investor without a personal introduction. One way firms deal with this challenge is by placing individuals on their boards that are acquainted with people in the investment community.
ATTRIBUTES OF EFFECTIVE BOARDS OF DIRECTORS AND EFFECTIVE BOARD MEMBERS
Attributes of Effective Boards of Directors
• Strong communication with the CEO
• Customer-focused point of view
• Complementary mix of talents
• Mutual respect and regard for each other and the management team of the firm
• Ability and willingness to stand up to the CEO and top managers of the firm
• Strong ethics
Attributes of Strong Board Members
• Strong personal and professional networks
• Respected in their field
• Willingness to make personal introductions on behalf of the firm
• Strong interpersonal communication skills
• Pattern recognition skills
• Investment and/or operating experience
• Ability and willingness to mentor the CEO and the top managers of the firm
4. Board of Advisers
Some start-up firms are forming advisory boards to provide them direction and advice. An advisory board is a panel of experts who are asked by a firm’s managers to provide counsel and advice on an ongoing basis. Unlike a board of directors, an advisory board possesses no legal responsibility for the firm and gives nonbinding advice. As a result, more people are willing to serve on a company’s board of advisers than on its board of directors because it requires less time and no legal liability is involved. A board of advisers can be established for general purposes or can be set up to address a specific issue or need. For example, some start-ups set up customer advisory boards shortly after they are founded to help them fine-tune their initial offerings. Similar to a board of directors, the main purpose of a board of advisers is to provide guidance and lend legitimacy to a firm.
Most boards of advisers have between 5 and 15 members. Entrepreneurial firms typically pay the members of their board of advisers a small honorarium for their service either annually or on a per-meeting basis. Boards of advisers interact with each other and with a firm’s managers in several ways. Some advisory boards meet three or four times a year at the company’s headquarters or in another location. Other advisory boards meet in an online environment. In some cases, a firm’s board of advisers will be scattered across the country, making it more cost-effective for a firm’s managers to interact with the members of the board on the telephone or via e-mail rather than to bring them physically together. In these situations, board members don’t interact with each other at all on a face-to-face basis, yet still provide high levels of counsel and advice.
The fact that a start-up has a board of directors does not preclude it from having one or more board of advisers. For example, Coolibar, a maker of sun protective clothing, has a board of directors and a medical advisory board. According to Coolibar, its medical advisory board “provides advice to the company regarding UV radiation, sunburn, and the science of detecting, preventing, and treating skin cancer and other UV-related medical disorders, such as lupus.” The board currently consists of seven medical doctors, all with impressive credentials. Similarly, Intouch Health, a medical robotics and instruments company, has a board of directors along with a Business & Strategy advisory board, an Applications & Clinical advisors board, and a Scientific & Technical advisory board. Intouch Health says that its “diversified Advisory Board draws on the talents of seasoned executives, clinical and scientific authorities, clinical and scientific authorities, and pioneers from a variety of technical areas. Their expertise encompasses international business management, robotics, telemedicine, and computer software, hardware and networking.”
There are several guidelines to organizing a board of advisers. First, a board of advisers should not be organized just so a company can boast of it. Advisers will become quickly disillusioned if they don’t play a meaningful role in the firm’s development and growth. Second, a firm should look for board members who are compatible and complement one another in terms of experience and expertise. Unless the board is being established for a specific purpose, a board that includes members with varying backgrounds is preferable to a board of people with similar backgrounds. Third, when inviting a person to serve on its board of advisers, a company should carefully spell out to the individual the rules in terms of access to confidential information. Some firms ask the members of their advisory board to sign nondisclosure agreements. Finally, firms should caution their advisers to disclose that they have a relationship with the venture before posting positive comments about it or its products on blogs or on social networking sites. A potential conflict of interest surfaces when a person says positive things about a company without disclosing an affiliation with the firm, particularly if there is a financial stake in the company.
Although having a board of advisers is widely recommended in start-up circles, most start-ups do not have one. As a result, one way a start-up can make itself stand out is to have one or more boards of advisers.
5. Lenders and Investors
Lenders and investors have a vested interest in the companies they finance, often causing these individuals to become very involved in helping the firms they fund. It is rare that a lender or investor will put money into a new venture and then simply step back and wait to see what happens. In fact, the institutional rules governing banks and investment firms typically require that they monitor new ventures fairly closely, at least during the initial years of a loan or an investment.
The amount of time and energy a lender or investor dedicates to a new firm depends on the amount of money involved and how much help the new firm needs. For example, a lender with a well-secured loan may spend very little time with a client, whereas a venture capitalist may spend an enormous amount of time helping a new venture refine its business model, recruit management personnel, and meet with current and prospective customers and suppliers. In fact, evidence suggests that an average venture capitalist is likely to visit each company in a portfolio multiple times a year. This number denotes a high level of involvement and support.
As with the other nonemployee members of a firm’s new-venture team, lenders and investors help new firms by providing guidance and lending legitimacy and assume the natural role of providing financial oversight. In some instances, lenders and investors also work hard to help new firms fill out their management teams. Sometimes this issue is so important that a new venture will try to obtain investment capital not only to get access to money, but also to obtain help hiring key employees.
For example, during its beginning stages, eBay’s partners, Pierre Omidyar and Jeff Skoll, decided to recruit a CEO. They wanted someone who was not only experienced, but who also had the types of credentials that are valued by Wall Street investors. They soon discovered that every experienced manager they tried to recruit asked if they had venture capital backing—which at that time they did not. For a new firm trying to recruit a seasoned executive, venture capital backing is a sort of seal of legitimacy. To get this valuable seal, Omidyar and Skoll obtained funding from Benchmark Venture Capital, even though eBay didn’t really need the money. Writer Randall Stross recalls this event as follows:
"eBay was an anomaly: a profitable company that was able to self-fund its growth and that turned to venture capital solely for contacts and counsel. No larger lesson can be drawn. When Benchmark wired the first millions to eBay’s bank account, the figurative check was tossed into the vault—and there it would sit, unneeded and undisturbed."
This strategy worked for eBay. Soon after affiliating with Benchmark, Bob Kagle, one of Benchmark’s general partners, led eBay to Meg Whitman, an executive who had experience working for several top firms, including Procter & Gamble, Disney, and Hasbro. In March 2008, Whitman stepped down as eBay’s president and CEO. However, Whitman continues serving as a member of the firm’s board of directors.
BEYOND FINANCING AND FUNDING:WAYS LENDERS AND INVESTORS ADD VALUE TO AN ENTREPRENEURIAL VENTURE
• Help identify and recruit key management personnel
• Provide insight into the industry and markets in which the venture intends to participate
• Help the venture fine-tune its business model
• Serve as a sounding board for new ideas
• Provide introductions to additional sources of capital
• Recruit customers
• Help to arrange business partnerships
• Serve on the venture’s board of directors or board of advisers
• Provide a sense of calm in the midst of the emotional roller-coaster ride that many new-venture teams experience
6. Other Professionals
At times, other professionals assume important roles in a new venture’s success. Attorneys, accountants, and business consultants are often good sources of counsel and advice.
Consultants A consultant is an individual who gives professional or expert advice. New ventures vary in terms of how much they rely on business consultants for direction. In some ways, the role of the general business consultant has diminished in importance as businesses seek specialists to obtain advice on complex issues such as patents, tax planning, and security laws. In other ways, the role of general business consultant is as important as ever; it is the general business consultant who can conduct in-depth analyses on behalf of a firm, such as preparing a feasibility study or an industry analysis. Because of the time it would take, it would be inappropriate to ask a member of a board of directors or board of advisers to take on one of these tasks on behalf of a firm. These more time-intensive tasks must be performed by the firm itself or by a paid consultant.
Those leading an entrepreneurial venture often turn to consultants for help and advice because while large firms can afford to employ experts in many areas, new firms typically can’t. If a new firm needs help in a specialized area, such as building a product prototype, it may need to hire an engineering consulting firm to do the work. Consultants’ fees are typically negotiable. If a new venture has good potential and offers a consulting firm the possibility of repeat business, the firm will often be willing to reduce its fee or work out favorable payment arrangements.
Consultants fall into two categories: paid consultants and consultants who are made available for free or at a reduced rate through a nonprofit or government agency. The first category includes large international consulting firms, such as Bearing Point, Accenture, IBM Global Services, and Bain & Company. These firms provide a wide array of services but are beyond the reach of most start-ups because of budget limitations. But there are many smaller, localized firms. The best way to find them is to ask around for a referral.
Consultants are also available through nonprofit or government agencies. SCORE, for example, is a nonprofit organization that provides free consulting services to small businesses. SCORE currently has over 13,000 volunteers, 360 local chapters, and can provide assistance in over 500 areas. An increasing number of score volunteers, called mentors, assist clients via e-mail rather than face-to-face. Commonly, SCORE mentors are retired business owners who counsel in areas as diverse as cash flow management, operations, and sales. The Small Business Administration, a government agency, provides a variety of consulting services to small businesses and entrepreneurs, primarily through its network of Small Business Development Centers (SBDC), which are spread throughout the United States. There is evidence that these centers are effective in providing advice and helping entrepreneurial ventures get off to a good start. For example, one study found that the rates of survival, growth, and innovation of SBDC-counseled firms are higher than the population of start-ups in general.
In summary, putting together a new-venture team is one of the most critical activities that a founder or founders of a firm undertake. Many entrepreneurs suffer by not thinking broadly enough or carefully enough about this process. Ultimately, people must make any new venture work. New ventures benefit by surrounding themselves with high-quality employees and advisers to tackle the challenges involved with launching and growing an entrepreneurial firm.