65 Percent of VC-backed Startups Fail Because They Don’t Ask These 2 Questions

For many founders, tackling success is synonymous with chasing money. The idea is that if a startup can land funding, then it will inherently be set up for success. And as founders become blinded by their mission to amass massive amounts of money, they often overlook the main reason why 65 percent of VC-backed startups fail: senior management issues.

The reason why VC-backed startups fail more often than not is not due to external factors, but internal. In other words, the startup doesn’t fail, the founders fail each other, and in return, fail the startup. And this is good news.

The over 1 in 3 VC-backed startups that do succeed are those that strategically assemble their senior management team. In other words, they build a better team. Doing so boils down to two critical questions, according to Ethan Mollick, Associate Professor of Management at The Wharton School. First, should you found alone or in a group? Second, should you choose people who are similar to you or different from you?

Should You Found Alone Or In a Group? 

Not surprisingly the answer is clear: a group. VCs and angels are notoriously reluctant to invest in new ventures depending on a solo founder. With all the weight–and work–on the shoulders of one founder creates a great deal of risk, something investors are looking to shoulder. And not only are groups more likely to get funding, but statistically, cofounders succeed more and are also generally happier.

More specifically, not just any group, but groups of three appear to have the best odds of startup success. The golden number of three has much to do with the dynamics of a team of three. There’s synergy with three, split votes, and the ability to easily divide roles (e.g., technical, operational, sales).

Long-time Harvard Business School professor and author of the Founders Dilemmas, Noam Wasserman researched startups’ success based on the number of teams remaining and the value of a company. Teams with three members at the time of raising venture capital or angel money are those that have the highest valuation. And as you start to increase the size of your founding team, you start to have a dropoff in valuation.

Who Should You Found With? Similar vs Diverse Teams 

When building a founding group, the most successful startups strategically build their teams. They ask the crucial question of who to found with and what type of team they want: a similar or diverse team. Unlike the question of going solo or in a group, there’s no one clear answer. Instead, the answer is a bit more complex and interesting.

Each type of team has its benefits, and so the answer depends on your strategy and startup goals. Keep in mind that team diversity, in this case, does not mean ethnic gender diversity, but, diversity in knowledge, skills, and backgrounds.

Similar teams act faster and are less likely to fall apart. They are easier to operate and more effective at exploiting a strategy. In other words, businesses that are exploiting an existing opportunity do best with a similar founding team as they are able to move more quickly and require less innovation.

Whereas diverse teams are much slower to act, they are more innovative. And this innovation comes from the recombination of ideas. So startups working to do something new that hasn’t been done before are best positioned for success with a diverse team. 

Granted, while founders often start solo and later look for cofounders, but it tends to be far more difficult to build a founding team after establishing a new venture. In an ideal world, a founding team will be strategically formed from the offset.

 It’s not to say you can’t go it alone. Plenty of highly successful startups were built by solopreneurs. But the most successful people are those who are able to identify their own shortcomings and allocate work to those who have the skills they lack–which often comes in the form of a group of cofounders. 

Working in a team –and working within the right team–makes your startup stronger, distributing the tremendous amount of work and leveraging the knowledge, expertise, and experience of each founder, allowing them to focus on doing whatever it is they do best. Startups set up with the right senior management team are those that are set up right for success.

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