Welcome to module three of entrepreneurship laying the foundation. In our first lesson for this module, I'm going to share with you my thoughts about building a great team for your new venture startup. How are you going to recruit and motivate the kind of team that it will really take for your startup to be really successful. Here's the word cloud for this lesson on team building. I'll be talking about co founders, advisors, and key employees, and the need to create a culture in which team members have a shared vision and a passion for success. I've been teaching, advising and investing in entrepreneurs for more than 30 years. And I can't tell you how many times I've listened to or participated in a panel discussion or a presentation in which a venture capitalist who's on the panel says I'd rather invest in a great team with an average idea than an average team with a great idea. You could almost say that this is the golden rule of venture capital investing, but actually it's not. The golden rule of venture capital investing is whoever has the gold makes the rules. We'll talk some more about this when we get into negotiating investment deal terms. Still, it's a really important rule. The reason should be obvious, entrepreneurship is hard, most start ups fail. If most start ups fail, then it makes sense that a team that is just average is more likely to fail than succeed. Why is that? With very few exceptions, start up ventures have limited resources. They usually only raise enough money to get them to the next milestone, then they'll have to raise more money to get to the next one. They don't have a lot of extra cash lying around. This means that they usually don't have a very large margin for error. A team that makes a big mistake about its target market, its technology, its value proposition, its revenue model or some other part of its strategy will have a hard time recovering from that mistake. A team that makes more than one big mistake will almost certainly fail. Average teams, teams that lack experience, teams that don't work together well, teams that have a hard time setting and achieving milestones, they make mistakes, lots of them. On the job training can be very expensive. On the other hand, great teams can sometimes find a way to make something out of nothing by focusing on the customer they can pivot to a different revenue model or an improved pricing strategy. By carefully monitoring their key performance indicators, they correct problems before they get out of control. By understanding their costs and their market dynamics, they can plan ahead so that they'll have the resources they need to accomplish their objectives. But what makes a great team? One of the key concepts of the lean startup approach is that a startup is not a business, rather, it's a group of people who are searching for a viable business model. When you're just getting started, all you have is your idea and your own skills. Maybe you've got a co founder. Ask yourself if this is a foundation you can build from, if not, you're probably not ready to launch the business. You need to spend more time talking to customers understanding their needs and designing your product or service to meet those needs. At the same time, you should be thinking about the type of team that it will take to manage the business successfully and looking for co founders, who can be a part of that team. It's usually pretty hard to raise money from investors for a startup that has only one founder involved. Most investors want to see that there are at least two or three people who are truly committed to the project. one of these three co founders is the person I'll describe as the Domain Expert. This might be the CEO or chief executive officer or it might not. This person has to have a deep understanding of the industry, the customer and the customer's needs or pains and gains. This person will probably interact with customers more than anyone else at the start. He or she is likely to be the company's only salesperson at the start. The Domain Expert should understand the customer well enough to know what channels are best for reaching those customers and how they'll ultimately make their purchase decisions. More than anyone else, the Domain Expert understands the value proposition, what the customer needs and why they'll buy the company's solution. The second person is the product expert. In a technology company, this person is probably an engineer. He or she might have the title of Chief Technology Officer or CTO. The product expert is the person who can figure out how to design and build or make arrangements to build the product so that it meets the customer's needs and expectations. And he or she must be able to make it so that it can be sold at a price that makes sense for both the customer and the company. The 3rd person is the business expert. He or she could be the CEO but the title might be chief operating officer if the domain expert is the CEO. The business expert is the person who has management experience or talent. Essentially the business expert is responsible for building and managing the company so that the domain expert and the product expert have the resources they need to be successful. By resources I mean money, space, team members, strategic partnerships and so on. Those of you who are taking this course is part of an MBA program need to pay special attention here because this person just might be you. As I mentioned before, startup companies have a hard time recovering from big mistakes. More than anyone else on the team the business expert is the person who can be trusted to keep the ship moving in the right direction using its resources wisely and avoiding the kind of mistakes that could cause the ship to sink. I don't want you to think that there must always be exactly three co founders on the startup team. The experts that I just described are really rolls and not people. It's not uncommon for a person to be able to play two of these roles if they have the right skills experience and mindset. However, it's pretty rare for one person to be good at all three of these roles at the same time. And there are also some diminishing returns that can be expected when a team has too many co founders. Most startups don't need to have five or six co founders. There's not enough founder level work for them to do and they're too expensive. I'm not only talking about salaries here. If you have five or six co founders, the result is that nobody owns more than 20% of the company that can have a negative impact on the team's motivation. If everyone's a boss, then there really is no boss. The founding team also needs to be a group that can work together at a very high level of performance. The team has to get along. The members need to have a shared vision, a shared sense of purpose and a shared passion for success. Every company has a culture, no matter how small the team members need to buy into and represent that culture. That's why it's rare to see a successful startup where the founders were strangers before they got together to launch the business. One of the most successful companies that I've ever invested in was started by two brothers. They were more than brothers, they were great friends and they had a deep level of trust in each other. They had different backgrounds, one in technology and the other in marketing and sales. They understood each other's roles and they didn't second guess each other. They knew that they could count on each other. That's the level of trust you want to have in your co founder and he or she should have that same level of trust in you. However, this does not mean that the team should not be diverse. I've seen entrepreneurs who are engineers, try to build founding teams that are made up entirely of engineers. Why would they do that? It's because they communicate well with each other and they get along. They may be able to work well together, but they have trouble solving problems because they all have the same perspective. You could almost describe a situation like this as one plus one equals 1.5 instead of one plus one equals three. I'm not trying to single out engineers here. Michael for Dick wrote an excellent article in the Harvard Business Review in 2013 titled Don't Start a Company With Your Business School Pals. With the nucleus of the team in place, you can start to build the broader team, that's what those two brothers did. They went out to recruit the strongest people they could find for the roles that needed to be filled. People who would be strong in areas where they were weak. Steve Jobs used to say that A players hire A players, while B players hire C players. Guy Kawasaki says that good people hire people who are better than themselves. Your goal as a company founder is to hire the best people you can. And that sometimes means you have to get creative with how you pay them. What's the difference between a co founder and an early hire? It's really equity in most cases, when you start the company with your co founders, you'll divide up the common shares amongst yourselves. Your key hires may get some equity too, but they'll get stock options instead of actual shares and the percentages they'll get will be much less because they did not take the risk of starting the company. One of the first hires you're going to want to make as someone who can be a sales or sales management Rockstar, especially if your product is ready to go to market. This person is going to be responsible for generating meaningful revenue as soon as possible. If your product is still being developed, then you probably have to focus on product development and engineering first. And you're going to need customer support and engagement people almost as soon as you have customers, it's a lot easier to keep an existing customer than it is to find a new one. And the customer facing employees you have will be important in this. Marketing, production and operations people are also likely to be early hires, but the product development and sales people should come first. A finance person may eventually be important, but most startups don't have that much cash to manage in the beginning. The finance person can usually wait until you've raised a decent amount of money from investors and the company is ramping up its spending. He or she will be especially important when you're getting ready to sell the company because a deal like that will fall apart if your books are not in order. It's almost never too early to start looking for advisors. If you have gaps in your management team or if you don't have a lot of experience having a group of advisers who have been there and done that can be helpful in more ways than you might think. Good advisors with industry experience can help open doors for you with customers and potential partners. Experienced entrepreneurs can help you connect with investors and with potential management team members. And of course they can act as a sounding board and provide valuable advice when you need to make important strategic decisions. Most startups compensate their key advisers with stock options so they should not be a drain on cash. Unfortunately, some entrepreneurs make the mistake of recruiting advisers and then failing to get much value out of them. Use your advisors, that's what they signed up for. First of all, be honest with them about what you're going through. Some people have a tendency to hide the truth from their advisors or mentors because they don't want to look bad in front of them. But if you don't let them help you with your problem, what's the point? Keep your advisers engaged in the business. You don't have to talk with them every week, but it should be more than once or twice a year. And don't conduct a meeting with an advisor or an advisory board as if it's just an opportunity for you to tell them what you've been up to. You could do that in an email, set an agenda for each meeting and tell them what sort of help you'll be asking for ahead of time so that they can be prepared. That way, they can actually spend their time helping and not just listening to your update. Some people who have leadership and other skills that are perfect for getting a start up off the ground are not well suited for that same leadership role as the company matures and its priorities change. It's not uncommon for startup teams to be replaced as the company grows, transitions like this can be smooth or they can be very painful. How can you tell when it's time for a company to recruit new top management? It could be when the actual job itself has changed and the individual is no longer a fit. An example of this is when the CEO needs to spend less time talking to customers and more time dealing with organizational and staffing issues. It could be when the company culture or its working environment has changed and the founder doesn't have the same passion for the job anymore. That can happen when a company that used to have 5 or 6 members working closely together to create something out of nothing turns into a 50 or 60 person organization with offices in multiple cities around the world. But the most common trigger is when the company is failing to perform and its stakeholders, mainly the investors who are sitting on the company's board of directors, demand to change. As the founder of your startup, you should be thinking about and planning for these transitions, even for yourself, planning for a transition should make it more likely to be a smooth one. Ask yourself, when it might be appropriate to hire a new CEO, even if that person might become your boss, be as objective about this as possible. I've seen too many CEOs start to see the board of directors as their enemy when they know the company is not doing well. That almost never ends well. At the same time, think about a role that would make sense for you after a management change. Should you transition into a sales or technical role or would it make more sense for you to leave the management team, but stay on as a member of the board of directors, as a major shareholder. And here's something that you can do to help a transition go smoothly. Think about the CEO job and the qualifications that a strong candidate for that job should have. Do you know anybody like that? Can you recruit a new CEO yourself before your investors bring in somebody from their networks? What kind of people do you want to hire for your company? To use a sports analogy? Should you try to hire great position players? Or should you hire great athletes regardless of the position that they might play? Others may disagree but I think you should try to hire the very best position players that you can. That's because team chemistry is so important in a small company, It's time consuming and costly to fire people because they weren't a good fit. They didn't embrace the company culture or they wouldn't focus on the role that she needed them to play. It's just as costly to hire their replacements. So before you hire anyone, focus on the key activities that the current team is unable to perform. Come up with a job description that's based on that unmet need. When you're interviewing candidates, look for people with previous startup experience, people who can work hard and smart, deal with ambiguity and thrive in a startup environment. Put metrics in place so that you can quickly determine if they're performing as you need them to. Take action quickly if they're not. The fact is, that employees almost know that things are not working out before their bosses do, when they get dissatisfied, they can have a negative influence on the rest of the team. It's better to fire someone when you have to and move on. I don't think I've ever heard an entrepreneurs say that they regret that they fired a team member who wasn't working out too quickly. How do you recruit great people to join your team? Great people have great options. You have to have a plan to find them and recruit them. Although there are a lot of recruiting tools in websites out there, your best recruiting channel is almost certain to be your own personal network. That's where you find people who know you and hopefully believe in you, who do you know that you can reach out to personally to discuss your company and the job you think they can fill? Personal referrals can also be effective, reach out to other entrepreneurs that you know, they are likely to be able to refer people who have startup experience. Your own employees can also refer people and they already work for you. So they should have an idea about who might be a good fit. Your customers understand what you're trying to build. So they should be able to help you find people. You might also be able to hire people away from competitors. You might already know who some of their top performers are, because you're competing with them. They know your industry and they may be willing to jump ship, especially if they can see that they've been losing business to you. As mentioned before, you want to look for people who will thrive in a fast paced entrepreneurial environment. Here are some of the qualities that you want to look for. People who are able to deal with uncertainty and ambiguity. People who are creative problem solvers, people who are eager to learn new skills and new ways of doing things. People who can achieve goals with limited resources and don't blame others when they fall short. People who understand the startup culture and see how their job fits into the big picture of what you're trying to accomplish in your company and in your industry. Remember Howard Stevenson's definition of entrepreneurship from Mulele one. The pursuit of opportunity without regard to resources currently controlled. You want to hire people who can achieve goals with limited resources and take pride in finding new ways to succeed. Here are some things you should look out for, people who need a lot of structure and supervision, that you may not have time for. People who resist change and want to continue doing things the way they have in the past, people who are focused on current rewards and can't focus on creating value for the future. Employees who don't buy into the startup culture can be a drag on the company's progress and they can have a negative influence on their team members. I'm probably starting to sound like a broken record, but remember that there are only three reasons why somebody would want to join a startup company. To make money, to make the world a better place in some way or to have fun. This is true for employees, co founders and advisers as well as investors. So why should someone want to work for you? First, they think it will be a way for them to make more than they could by working elsewhere. This is where stock options become valuable because you may not be able to pay the same salary that they could make in a larger business. Second, they think that what your company is doing is important in some way, that's why you should share your vision with them and show them that it's not just a job that they'll be doing. And third, they think that they'll have fun working with you. They want a chance to truly enjoy their work in a fast paced startup environment. This is where your company culture comes in, do your best to create a culture where your employees enjoy coming to work every day. If you can offer people a way to do all three of these things at once, you're probably going to be a pretty successful recruiter. But as I've said before, if you can only offer one of these things, you'll have to offer a lot of it. Let me put it slightly differently, in her book Lean In, Sheryl Sandberg says that the best advice she ever got was from Eric Schmidt of Google. If you're offered a seat on a rocket ship, don't ask what seat, just get on. If you really want to recruit top people, show them that your company has the potential to be that rocket ship. Show them that their job will be important and that they'll be rewarded for it when the company succeeds and show them that they'll enjoy working with you and your team.
