The Founder’s Dilemmas

In the last a few years, multiple friends recommended The Founder’s Dilemmas by Noam Wasserman to me. I did not pick it up till my recent trip returning from Canada. One evening, a friend, A.J., compared the startup environment in Canada with that in Silicon Valley. He commented on how this environmental difference affects the success and failure of startups, besides many other factors. That conversation reminded me to read this book.

The subtitle of this book tells the gist of it: anticipating and avoiding the pitfalls that can sink a startup. It consists of three major parts followed by a conclusion. The first part talks about the pre-founding career dilemmas faced by the entrepreneurs. Part two presents the founding team dilemmas over multiple chapters: the solo-versus-team dilemma; relationship dilemmas – flocking together and playing with fire; role dilemmas – positions and decision making; reward dilemmas – equity splits and cash compensation; the three Rs system – alignment and equilibrium. Part three covers dilemmas beyond the founding team, specifically hires and investors: hiring dilemmas – the right hires at the right time; investor dilemmas – adding value, adding risks; failure, success and founder-CEO succession. Finally, the last but one of the most distinctive points I learned from this book: the wealth versus control dilemmas.

Some messages presented in this book read familiarly, as I previously read Peter Thiel’s Zero to One and various others, and the Creative Entrepreneur: Innovation Through Design Thinking programme I attended at Stanford referenced the Founder’s Dilemmas extensively. Taking an extensive research approach adds great credibility to the findings and arguments presented this book. I realize there could be many flaws in these studies. But the essence of reading a book like this is not to follow its prescription, but to establish a certain amount of awareness of the unknown based on others’ experiences, and when appropriate to integrate those options into our knowledge set to be called upon when the time comes. To be fair to the author, there is no trace of intention of prescribing any rules for the entrepreneurs-to-be in the book. Furthermore, as the author put it: we know amazingly little about the chief perils that beset the entrepreneurial activity we so often acclaim as the very heart and soul of the economy. So for the scarcity reason alone, this book is worth a read.

My takeaway from the book is: know yourself and your options at each stage of founding a startup, the potential consequences following each of your options, whether and how you can adapt yourself to match with the varying demand from each growth stage assuming you have not failed yet, the inevitable influence from being wealth-driven or control-driven, ways to adjust your approaches and mitigate the danger of failure.

A number of passages are fresh and educational to me. They either break down my old belief or broaden my view by providing arguments from new angles. Here are some examples.

Each of these founders aspired to build a high-impact startup, but “impact” meant very different things to each; to the financially motivated, it tended to mean a large gain in wealth, but to the control motivated, it tended to mean that the startup would bring to the world the product or service they envisioned.

Accumulating more experience is far less valuable if that experience does not shape the mental model in relevant ways (or, worse, if it shapes the mental model in counterproductive ways)….A broad range of work and educational experiences is indeed associated with a significantly higher willingness to become self-employed.

Among the founders in my dataset, only 18% had management experience before founding their startups, including 19% of technology founders and 15% of life science founders. (This is consistent with another study that found that technical founders tend to lack prior managerial experience and may even lack interest in developing managerial skills.)

Founding a startup requires the knitting together of all of the functions required to make an organization run effectively, from product development to marketing to sales to finance to human resources. Having prior experience in those functions arms the founder with the ability to understand how each one operates on its own and as part of the larger whole.

Prioritization is even more important in a startup than in a stable business. I realized that I needed people to not only prioritize what to do, I needed them to create not-to-do lists. It was easy for people to find new products for us to bring to market, new pieces to add, new customer segments to go after… when you are smaller, if you go after something, it takes precious resources. You are also moving a lot faster, so you can harm the organization…There’s much more at risk, much more damage you can do.

One hears a lot about “following your passion.” Potential founders should avoid the mistake of thinking that their passion excuses them from a rational assessment of their circumstances…. The heart is forever making the head its fool.

I learned that leadership is all about taking in information and making a decision – shared information but not shared decisions. Make decisions yourself and live with them. Another key is speed. I want a single decision maker, even below me. If I have a VP of operations, he makes the call about operations.

There are three recurring categories of founding-team decisions: relationships, roles and rewards – each involving trade-offs and tensions.

Researchers have already observed that specific founding experience is more valuable for startup growth than are overall work experience and educational human capital.

Knowing for sure that someone has to go is hard, but I have learned that if I start thinking someone needs to go, they need to go. It is always the right call to upgrade when you realize someone can’t or isn’t succeeding.

One of the most critical inflection points in the evolution of a startup: the “succession” from a founder-CEO to a “professional” (nonfounding) CEO.

Managing a technical team is quite different from managing multiple functions that must interact and with most of which the CEO has little direct experience. At this point, the startup’s finances and metrics also become much more complex, requiring a level of financial sophistication possessed by few founder-CEOs. The leap from leading product development to leading a multifunction startup challenges not only the founder’s skills, but – perhaps even more profoundly – his or her values.

Founders who refuse to give up ownership and control in either or both of these ways will be less likely to attract the resources they need and thus not be able to fully pursue the opportunities they envision. It appears, then, that each of our founding dilemmas is also a dilemma of what resources to acquire at what cost in ownership and control. This is the dilemma behind all the other dilemmas.

My analyses also suggest that founders who keep control personally give up a significant amount financially. Such founders tend to build a less valuable startup while keeping a larger share of equity in it, but it turns out that the value-seeking founder’s “smaller slice of a larger pie” is generally greater than the control-seeking founder’s “larger slice of a smaller pie.”

The hardest decision a founder, inventor, or entrepreneur needs to make is “when do I give up some control to grow the company”.

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