Hayden | September 27th, 2012
This FounderDating Guest Post was written by Derek Dukes for our series: FounderTalk – The Real Story. Derek is a serial entrepreneur, co-founder of Dipity & Jetpac and [super] early employee at SAY Media and Yahoo! He’s committed to building great consumer web and mobile experiences and making sure there’s a real business behind them. You can find him and share thoughts here.
Having been a very early part of four startups, I’ve thought a lot about how startups work, when you should hire, how big founding teams should be and how you can most effectively start, launch and scale a product and team. For the past couple of years, the notion that successful startups have a balanced 3 person founding team: Hacker, Hustler and Designer, has been popularized. The core idea is that you had a business founder, a tech founder and a product founder. The balance of expertise and skills would compliment each other and the best possible product and business would emerge.
I started by doing some research and the numbers bear out that 1-2 member founding teams raise more and have better outcomes. But the real question and what I want to focus on is “why?” I believe there are forces at work that make a 3-person founding team more challenging and increase the overall risk profile for the venture. I’ve been part of 4 startups, three of them – SAY, Dipity and Jetpac – had three founders at the start and none of the founding teams stayed intact past the first 18 months of the company’s existence. The 4th, Yahoo!, maintained it’s founding team for about 15 years (before Jerry Yang left in 2011). Here are my personal insights into why 3-member founding teams run into trouble:
However you define the individual H-H-D roles in the earliest days, these items fall in to 2 buckets: what you’re building and how you’re paying for it (fundraising and/or monetization). It would be great if success of a product was determined by each of us just going heads down and doing our job-specific tasks. That is not true and the reality is that the real process of building product and solving requires the founders to be in sync and working as closely as possible. The product design is what falls out of this process, especially at the earliest stages. If the Design can’t be Hacked or Hustled it is not a product, it’s a piece of art. At Jetpac, Julian had been working the problem for a bit before I joined up, then I joined, we collaborated and then Pete joined up as the guy who actually had to make our ideas real. The challenge wasn’t that we had 3 people. The challenge was the overlap. We had hustled (raised our seed round) and were far off from needing to do deals for distribution or sign up content partners, etc. The result was that we effectively had 2 product designers. We each had our approaches, ideas, biases, and opinions. Most of the time it was fine. There might be some heated debate, but we were professional, had mutual respect and solved problems or punted on them until we had more information to base a decision on. All the while though, the clock is ticking. Overlap creates overhead in thought, communication, negotiation etc. and there’s pressure to do more development, less thinking /talking and ship the product faster. It is hard to accelerate development and the Overlap is not your friend.
An Extra Mouth To Feed
Startup resources are precious: discussion, development, team building, money and equity. Depending on the person, they can command as much as a 33% hit to the equity pool, but the drop in efficiency may be much higher. In general, equity split across founders will take no less than an additional 5-10% of founder equity off the table (if the 3rd founder is getting less than 10% they seem more like an employee) before you allocate the 10-15% stock option pool to employees. But it’s not just about equity. Beyond the equity, you’ve got one more person to consult and convince, one more paycheck to write, etc. It all adds up. Alternatively, when you use a set of trusted/vetted freelancers whom you already know how to work with, you gain a force multiplier out of your time and money. You can hire the best part-time or temporary resource for the problem at hand, solve it and move on. With SAY early on we worked with an outside design firm who would produce high quality work, on time and in line with our expectations and they just did that. We worked with them so closely that they developed the brand identity with Troy Young and set the overall visual design for all the SAY: products. What’s more, there was no discussion about if they thought it was the right thing to do, the way to do it, etc. They just came up with a set of designs, we gave them feedback and they reworked overnight and we could hit the ground running each morning. Additionally, they could bring more resources in if and when we needed them either through their direct team or through a network of trusted folks they knew they could get quality output from when they needed it.
No Seat At The Table
Boardrooms are small, even though most VC firms have giant conference rooms. When it comes to the operating board of a company, they typically start with 3, then 5, then 7 where they stick – if you’re lucky enough to make it from A through C rounds of funding. It would be unusual for anyone but the founding CEO to be on the board beyond the first round, occasionally the second round of financing. It can happen, but doesn’t very often. From the start, with three founders, one, if not two of you will be on the outside of the boardroom for ‘board sessions’. If you’re the sole founder not in the room, it’s a lonely place to be. The door is closed, things are being talked about that will impact you, you’re a founder and you’ve ceded your voice to your co-founder(s). It can be a flashback to not eating with the cool kids in the lunchroom. While it can be a healthy personal growth moment, I’ve been on both sides of the door, had to re-enact board sessions with my co-founders and felt like some things might have been lost in translation between what was said, heard and retold to me and by me. In almost all cases it’s hard to provide a complete data dump, but more importantly it creates separation between founders and the CEO. With 3 founders, this just happens to the first non-CEO founder earlier in the life cycle of the startup. When the team is building trust, the product is in a higher degree of flux. Success or failure is more uncertain and the whole company can be subjected to external forces and opinions that can be hard to counter. It can be challenging for a startup CEO to represent the interests of both the company and two other co-founders when the company is still so new.
I’m an only child, (sort of an unusual one, because I play well with others) and I’m pretty familiar with ‘The Bowen Theory’ a dynamic in 3 people systems. Generally, each party is jockeying for position or alliance with one of the other two to create a scenario where they have a dominate or majority opinion and aren’t the odd person (or idea) out. Basically, someone in the system is always uncomfortable at some level. I experienced this pretty acutely at Dipity, where we started in 2005 with the H-H-D model and quickly ran into problems. We had differences of opinion about what market to go after, how we should build the product and how specific features should be designed and should work. Early on, we were all professionals, we committed to being respectful, came up with a process for deciding on tough decisions, but then things got stressful. For the most part we were able to resolve issues, but as the cumulative pressure of being in a startup built we started to play off each other in ways that led to the Design founder leaving because the Hacker and Hustler had formed an informal alliance. It sucked all around, but when it was down to two founders things moved faster, there was less friction and the overhead of managing the triangle trade was gone, freeing us up to focus on shipping product. The informal alliance did cause me to lose a close friendship of 10 years, which was really disappointing and possibly the only regret I have in my career.
Lastly, (and this item could apply to any number of founders) there needs to be one person who decides. While I love the notion of letting data win, you can’t/don’t always have the time to do that. There are a number of times in a startup where you’ve got to take a leap of faith and make a call with imperfect information, based on experience and gut. If you’re the CEO of a 3 person founding team and you’re advocating a minority opinion, it is that much harder to sell it to your co-founders and increases your cost of transaction. At the end of the day, it could out you to the outside of the triangle and depending on your equity stake, outside of the company. About 18 months into starting Dipity, in the fall of 2008, we were running low on cash, the economy wasn’t on our side and we had to decide how to keep the team together, work hard for the rest of the year and hope something caught fire. The team gathered and we kicked around ideas, we worked the numbers but in the end there wasn’t consensus. We all wanted to keep the team together, but trading off each other’s value to the company vs. the burn to the bank account, we laid off 1/3 of the team, including one of the founders. It sucked and in April of 2009 we laid off 1/3 again. The second time it was a conversation between two founders, not three, and ended with one founder remaining, figuring out a new path forward while keeping the lights on. From there, Dipity grew to 9MM unique users, won awards and became the market leader in commercial timelines. However, without either a Hacker or a Designer it has been much harder than it needed to be. The takeaway for me is that you need at least a second person, someone who has the same level of interest in the product and the same sense of ownership over it that you have, to help you push things forward. With one founder, you just don’t have that dynamic at play.
I’m not saying that you can’t make 3-person founding teams work in the long run. There are absolutely 3-person founding teams out there now that are doing very well with their products and are a couple years in. What I do encourage, however, is when you’re starting a company and considering a 3rd founder, take an extra pass at considering why. Is the extra person helping you accelerate value creation or creating overhead in thought?