Some famous venture capitalists have estimated that 65% of new startup businesses fail because of team dynamics and team-related issues. This really highlights how important it is that the team be functional and that the team members be able to perform on an individual basis as well. In our experience this is one of the most challenging portions of the startups: how do we decide if the team is right and if the team is adequate to make the business go?
We use several techniques to try to determine if the team is ok before investing, or before starting up the new venture as an initial member of the startup team. First, simply, there needs to be a team. Sometimes we have excellent, star performers come to us with fantastic business ideas which seem a sure-fire win. However, there needs to be a team presented as part of the business idea. As we have said before a great business idea is only a portion of the battle when it comes to making a great business model. We often ask, at the first meeting, about who the team members are and their backgrounds. Let me share with you that there is evidence that a team size of approximately 3-4 is statistically significantly associated with improved outcomes for the business model. And this is per an online Stanford business course that was given on coursera.org. (That same course, Technology Entrepreneurship by Chuck Eesley, is also on novoed.com.) This course is available to everyone and is given on an intermittent basis.
Whether you agree that the ideal team size is 3-4, there are some important considerations beyond simply team size. The team members need to have some background in the idea they are describing. Industry experience and an extensive set of network contacts adds to and enhances the legitimacy of the business idea.
Venture capitalists have estimated that it takes approximately 6-7 million dollars in capital expenditure to train a VC capitalist. That has been an interesting statistic to me, whether you feel it is overly broad or not. It is interesting to me that one way to measure venture capitalist learning and growth is in the total amount of the deals they have performed as evidenced by the amount of capital they’ve run through in getting there.
In our experience as Angel investors, we have learned a great deal from trial and error despite trying to do all the book learning, background work, and other issues. I can’t say strongly enough that we have learned a lot, as expected, by actually doing the work. One of the lessons learned has been just how easy it is to miscalibrate the team. We have had several incidences now of startups in which we have participated where we were very confident that the team performance, background, and structure was adequate and we found out later that we were quite incorrect. We take these experiences as paying-for-education-type experiences. We take the lessons learned from these and try to not make the same mistakes in the future. However, that said, there are other important topics such as alignment.
We will discuss alignment in a separate blog entry. Here, let me tell you that alignment issues occur when the startup teams interests are no longer completely aligned. These may emerge as the business grows and different people expect different things from the business. These may arise from a non-recognition of one startup team member by another startup team member. Alignment issues are very common and there are multiple techniques to keep the team in alignment as it moves forward together. In our experience, despite adequate ideas and margins, the most common reason for failure of a business model is in fact team dynamics.
Please, recognize that I don’t mean that a business is doing poorly or failing and then team alignment becomes an issue. Rather team alignment issues and team performance issues come first and then the businesses do poorly afterwards. The team dynamic issues I am describing here are usually seen before issues with the business and are seen in that first 4-5 months necessary to get a sense for whether the business model works. I cant say strongly enough that our experience substantiates that at least 65% of business ideas and innovative business model canvass do not work because of team dynamics. In our experience it is probably more like 75% that the causal reason is probably the team rather than the idea, regulatory issues, or other significant issues. Check in on later blog entries where we will discuss different issues such as team alignment and ways to keep the startup team aligned in healthcare and beyond.