Arnold Kling  

Peter Thiel on the Founding of Companies

The Bottom One Percent... George Stigler on Prisons...

He is quoted saying,

one factor dominates all others. That factor is whether the founders are aligned with each other. This is key both in terms of structure and company culture. If the founders are in sync, you can move on to the rest of the equation. But if they aren't, it will blow up the company. Nothing will work. This is why investors should and do focus so much on founding teams. Everything matters. How well the founders know each other matters. How they interact and work with each other matters. Whether they have complimentary skillsets and personalities matters. This set of questions is very important. Any fissures in the founding team will be amplified later on.

Pointer from Tyler Cowen. Read the whole thing. It is difficult to excerpt. There is a whole section on "Ownership, Possession, Control" that could have used Cato as exhibit A for how these issues can bite. Consider:

Employees tend to have lots of day-to-day possession, small ownership stakes, and very minimal control. But issues arise if they're not happy with their ownership or control pieces.

Gosh, I cannot stop from quoting:

If you have north of 10% after many rounds of financing, that's generally a very good outcome. Dilution is relentless.

By those standards, I did not have "a very good outcome" when the company I founded got sold. But at every stage of dilution, I kept thinking it was a choice between a large percentage of a small value or a small percentage of a large value, and going with the latter. I don't think I would do it differently if I had it to do over.

Also, a lot of the dilution I experienced came from adding business partners, as opposed to fundraising. In Under the Radar, I have harsh things to say about fundraising. "Fundraising is not for businesses. Fundraising is for charities."

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CATEGORIES: Business Economics

COMMENTS (4 to date)
Kevin Dick writes:

It's important to remember that Thiel is talking about the incredibly small percentage of startups that take several rounds of VC funding and then generate a big exit.

And no, these are not also the only ones that provide significant outcomes for the founders. If you look at the Kauffman AIPP data, slightly better returns and more dollars are generated by angel-backed startups that never take VC funding.

This should not be surprising given that average VC returns to their investors over the last decade have been about 0. Even the top quartile has been under 10% IRR.

I'd say the most important thing about startup founders is that they be aligned on whether they'll take an early exit or not.

Foobarista writes:

I've been a "startup lifer" and have seen several fail, even with very well-engineered products. In one startup, the CEO was from a super-rich family and wanted to show the world that he had the chops to do Something Big by himself. Unfortunately, he didn't, and refused to step aside until forced to do so by investors, and by then it was too late.

In another startup, we just tried too many things and spent too much money. Ironically, after that startup nearly died and I was laid off, it found something completely different and ended up getting bought for a healthy sum a decade after I left. (Fortunately, I exercised my stock options when I was laid off.)

In yet another, the founding team dissolved after basically deciding they hated each other. The company itself dissolved not long after.

In my present startup, the founding team is pretty much gone, although the company itself is now doing quite well.

The thing to remember about startup founders is you have to be a little strange to start a tech company. You'll usually lose your shirt, and even if you make it, you will work insane hours and do lots of flailing - and if you're married, there's a pretty good chance your marriage won't survive.

In the past couple of companies, I've been "Employee Number 6", waiting until after the garage-level flailing and not-getting-paid has been dealt with, but before Big Funding has showed up. I tried the founder stuff and realized I'm a better early-stage employee than entrepreneur.

Mike W writes:

"Fundraising is not for businesses. Fundraising is for charities."

Oh grow up. Fifty percent...or more...of a founder's time is spent in raising capital. Investors don't put their money up just because an academic says he has a good idea...they've got to be convinced. That's what the founder does. This ain't about winning a debate among navel gazers...this is real money. Man-up or stay home school boy.

Mike writes:

Wow. I guess I've been doing it wrong.

Next time I'll just pull out a gun and demand the money.

It'll save time.

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