The culture around tech startups has reached a fever pitch in the U.S., with each university’s successive graduating class bringing a new crop of companies and would-be entrepreneurs into the system. But starting a company can be a wild ride, and the majority of founders starting new businesses will see their dreams crushed. According to Forbes, 9 out of 10 startups will ultimately fail.
But hope springs eternal in the prospective entrepreneur’s chest, and there’s always another idea that just might turn into a unicorn — if only the right combination of funding, timing, talent and market fit can come together.
Brad Feld, a co-founder of both TechStars and the Foundry Group, has seen his share of startups rise and fall and rise. Before Foundry, he also co-founded Mobius Venture Capital and, before that, founded Intensity Ventures. He is also co-author of the book Startup Opportunities: Know When to Quit Your Day Job, which had its second edition released last month. Street Fight caught up with Feld over Skype recently to talk about some of the trickier maneuvers in starting a company, and what makes a team more likely to succeed.
(The is is part one of a two-part interview.)
Founders don’t necessarily understand their level of comfort with risk when they start a company. Often they don’t even really know where it’s going and then they’re in it and forced to assess their and their partner’s risk tolerance. What are some important questions to ask before you start a company with someone?
I think the thing I’ve learned over the years is that there are two types of partnerships that are ones that you have to be very wary of. They are the ones where you’ve been friends for a long time and decided to start a business together, or they’re ones where you’ve just met and you’ve decided to start a business together.
The “friends for a long time” also implies that you haven’t worked together before. In situations where you’ve worked together in the past, you’ve both been friends but you’ve been in another company together or you’ve tried to do things together. Those are all very different scenarios and the two cases that I just described they’re not necessarily bad, they just require a different type of exploration.
My general view is that the key dynamics around the exploration is that you have to do things together to really learn how the other person works and the things that you do together have to include some stress, some things that don’t work out, some things where you have different frames of reference on what to do, situations where you have you know arguments. And the key is not that you agree on things, the key is that you know, that you develop way early on comfort level with how to resolve conflict. The partnerships that don’t work — whether they’re two-way, three-way or four-way — are the ones where the initial founders have never had a situation where they’ve had to resolve conflict and when they do they resolve it badly and that immediately sets a negative tone. If you’re starting a company, you’re going to have conflict almost immediately.
Does it matter if one of the founders is in charge or not? Do you need to have one person as CEO who has the final say?
You can do it either way. There’s lots of different viewpoints of equal partnerships versus non-equal partnerships — there’s some people who always argue you should have non-equal partnerships and there’s others who think that equal partnerships are really valuable. My general sense is that either one can work.
It’s defining really clearly the rules of engagement early on and learning how to make decisions. Having one person who makes all the final decisions if you have a partnership of three may be very unsatisfying to the other two people. Having a situation where all three of you have to agree on everything may be very ineffective.
In the context of a company, having anything other than a CEO is often very confusing as you start to grow. If it’s just the initial founders, it matters less, but once you start to add people and you raise money and you start scaling the business, having a very clear CEO is important. We’ve had a few cases where co-CEO situations work — but very few and even in those situations it’s really important to understand the clear delineation of responsibility, who reports to whom and who does what.
Does it matter if the founders come from wildly different backgrounds? I would imagine if someone needs more money from the start-up at the outset than someone else there can create an imbalance.
That’s only a real problem if you don’t talk about that stuff and discover it and then figure out how you’re going to deal with it.
Here would be an example: One person really needs a salary. The other doesn’t. You start with the viewpoint that you’re equal partners and you spend a lot of time talking about being equal partners. You don’t have very much money and one person needs to make $200,000 dollars a year and the other person doesn’t care about how much they’re making.
And you only raise $500,000 and you really want to do this together. Well, one person could go without a salary and the other person could get paid — does that mean you’re still equal partners? Well, one of the ways to compensate for that is that the person who’s not taking salary could get more equity. But how does that feel for the person who’s taking the cash because now it was really important to them to be equal partners?
You talk that through and you know there’s lots of different ways to get to a happy place including deciding we’re each going to take $100,000 salary because we can’t afford a $200,000 salary and we’ll be equal partners or well, you know, we’ll do 55/45 and you’ll take a $200,000 salary and I won’t take a salary for the first year you know or you know… lots of other ways to resolve it. But if you don’t talk about it and you don’t then focus on resolving it, that’s where the problem comes from.
From the other side, can you talk a little about your process for evaluating investing opportunities and tell me a little bit about how ideas get a green light from Foundry.
I think a key part of that is that having the idea is not the magic trick. What you do with the idea is the magic trick. You have a lot of founders who get hung up on the fact that they’re either generating lots of ideas or they’re not having any. And when you come together as partners, the key really becomes to get to a place where you both — or however many there are — are working on an idea that everybody’s excited about.
So if somebody’s generated an idea and they’re super excited about it, but the co-founders aren’t… keep working on ideas or maybe you’ve got the wrong co-founders. So it’s much more around the alignment at the beginning where everybody’s obsessed about the product they’re creating and if you’re in a start-up and you’re not obsessed about the product that you’re creating you’re in the wrong startup or you’re working on the wrong idea.
With many startups, until you hit critical mass or get a funding it doesn’t really feel real. But then it immediately once you do hit critical mass, you’re already too deep and have a lot invested. How do you navigate that process where people are doing things casually and part-time and then all of a sudden have this thing that’s valuable.
It can be uncomfortable, but it doesn’t have to be. Because presumably the more you’re doing it, the more you want to be doing it and if you’re part-time on it and you know it’s not full-time yet because they can’t afford you or you’re still in other things. The moment it becomes full-time or can afford you if you’re not all in, then you shouldn’t be doing it.
As a founder, the idea that you have the opportunity to be 100% of your time on the new company that you’re working on should be a really attractive thing. As a co-founder, if one of your founders is not eking out every last minute that they possibly can on it, you should raise that flag, like something’s wrong here: “This is not the thing you’re obsessed about. Let’s talk about that.”
And I think a lot of people when they’re in that foundational stage before the thing is real, they, they’re afraid to bring that up. You and I are working on something and I’m afraid to say to you, “Hey, man, it doesn’t feel like you’re totally into this. I see you working on this other thing over here too. What’s up?” Or “Man, last week I worked really hard on this thing and you were nowhere to be found. I understand that you’ve got some other things going on but what’s up? Is this important to you or not?”
Talk a little about company “culture.” How do you instill passion and drive into more and more new people as you bring them on? Everybody talks about ping-pong tables or other perks, but what is it that really creates company culture in a start-up?
I have found that the word “culture” is basically useless today and I think it’s a very dangerous word because people in startups use it to avoid dealing with the more important notion. So I like to use the phrase “cultural norms” and the reason I use that phrase is the concept of culture is important, but the way that people use the word is not effective. If you use the phrase cultural norms, the idea becomes “hey, as founders, we are defining the cultural norms” and one of the magical things about being a founder of a company is you get to define the cultural norms for your company rather than having those cultural norms imposed upon you.
Those cultural norms are much deeper than the perks that you have sitting around. They’re much more significant than how your vacation policy works. In some ways all those things are just hygiene factors, right? There’s a very common sort of HR knowledge, which is that you know you can give people hygiene factors but it’s very hard to take them away. Once you’ve given somebody something, it’s hard to say you can’t have them anymore.
But cultural norms are much more profound and a lot of them have to do with confronting things that are difficult. You know, how are you going to deal with inappropriate behavior from someone? What does that mean? What is inappropriate behavior? What is unacceptable to us? What are ways that we think it’s okay for people to let off steam outside of work versus what are ways that are not okay in the context with customers or co-employees?
One of my favorite examples of cultural norms came from something many years ago I was still running my first company. I spent time with a guy Alan Trefler who runs a company called Pega. That’s a public company, been a public company for a long time and he came up with this notion of “TDC,” which stands for “thinly-disguised contempt” and he and he told me this story: He and one of his sales guys were in the parking lot of one of their clients or a prospective client and they had just had a meeting and they were standing in the parking lot talking to each other, and they were sort of talking with contempt about the people they just met with, right — like “they don’t have their shit together, they don’t really know what they’re doing.”
It turns out that somebody was sitting in a car with the window rolled down that had been in the meeting that heard everything that the CEO and this other guy said. And you know, they either got fired or they didn’t get the business or something like that. And so Alan decided to outlaw TDC. So any time somebody in his company expressed TDC to anyone, a client, a vendor, an employee, somebody you’re looking to hire, somebody that worked at the shop that you bought your burrito at, there was like a 1000-dollar fine for the management team and a 100-dollar fine for employees. You just can’t do it. So that’s a cultural norm, right: “We don’t allow TDC here. Everybody is to be respected.”
So TDC is like sort of a respect thing as opposed to…I mean, you can have negative opinions obviously?
Yeah. I can say: “I had this meeting with David and you know I wasn’t, I wasn’t impressed with the interview and here are the reasons why.” But it should be something I’d be willing to tell you.
I can present that in a way that’s not contemptuous. I can provide that in a way that’s constructive. Again, defining a cultural norm you can be as intellectual as you want, but the neat thing is you get to do that — and so founders, instead of just saying “I want my perfect company to be this,” you can sit down and say, “The things about my previous jobs and the previous companies I was part of that I didn’t like were these sorts of things, and I want to make sure that in our company not only do we not do those sorts of things but we solve this problem that those sorts of things actually exacerbate.”
And if you can start to define your cultural norms early, as you add people to the team, you’re not looking for a phrase that’s also overused and I think very bad, which is culture fit. “Culture fit” implies that you’re looking for people that are like you, that fit in your culture. What you’re actually looking for, the phrase I like to use, is “culture add.” You’re looking for people who are additive to your culture — which means that they subscribe to your cultural norms, but they can extend them and what that means is that it allows you to have a much wider lens for the kind of the people that might join you in terms of diversity, background, experience, et cetera.
David Hirschman is co-founder and CEO of Street Fight. This interview has been edited for length and clarity.