Tech Founder Wins at Early Stage

At the early stages of a startup, the founding team is probably the most important variable of success.  As a company matures, the concept of “founding team” is replaced by “management team”, which may and hopefully includes the founders.  The management team continues as the critical success factor.

Focusing on the early stage, the founding team typically will have a tech oriented founder and a business oriented founder.  It may have multiple people in each category, but for purposes of this post, let’s assume one tech founder, one business founder and then some additional “first employees”.  It would be normal for these first employees to be involved in product development.

There are many blog posts (from others) written about founding team composition and the importance of picking your co-founders carefully.  I am not going to focus on those aspects.  Rather, I want to focus on one interesting aspect of the relationship between the tech founder and the business founder.

At Cornell, where I teach, it is not uncommon for a Johnson School student (business school) to meet up with a tech oriented graduate student from another Cornell department and actually start a company.  This combination can work very well, and I strongly encourage my Johnson School students to do just that.  But, with one big piece of advice:  once you raise money and before the company’s product takes off, the tech founder is in the driver’s seat. My point is not to cause anxiety.  Rather it is to make sure that both founders (yes, I want both to hear the advice) understand the reality with the hope that they will interact with each in a more informed manner.

Let’s play this out a bit.  Company XT has a tech founder and business founder.  It has a great idea and developed a great product concept (stress concept – product not yet launched).  Based on the work, Company XT has raised $250,000 in its first round of outside financing from an angel group or early stage VC.  Importantly, the “money” has a seat on the board and is actively engaged.  The other board members are the tech founder and business founder.  The company’s burn rate is only currently $15,000 a month (and expected to increase over time), so that $250,000 will last, say, 12 months.

At the end of month 4, the tech founder raises competency issues to the “money” board member about the business founder.  They discuss the issues, but after a few weeks of hashing them out, it becomes clear that the tech founder is unwilling to continue working with the business founder.  The tech founder’s reasoning may be justified or might be questionable.  What happens?

In the usual case, there is no way to complete the Company XT product without the tech founder and the only way for the investor to see a return is for the product to launch.  In essence, at this stage, product development defines the company.  Sure, the product may change prior to launch and end up directionally in a different spot, but the product “owns” the company.

There is only one choice – replace the business founder to make sure the tech founder stays engaged.  The first time this happens, the tech founder basically uses a hall pass and the business founder is shown the door.  If the issue comes up again, all bets are off, but it is not surprising to see a second hall pass used by the tech founder.  A third time, different story – you should just hope the product is launched by then.  So watch out – founder issues are the most likely cause of company death at the early stage.