The first decision that most founders face is whether to start a firm on their own or whether to build an initial founding team. Studies show that 50 to 70 percent of all new firms are started by more than one individual. However, experts disagree about whether new ventures started by a team have an advantage over those started by a sole entrepreneur.
Benefits of Teams
Teams bring more talent, resources, ideas, and professional contacts to a new venture than does a sole entrepreneur. In addition, the psychological support that co-founders of a business can offer one another can be an important element in a new venture’s success. Conversely, a lot
can go wrong in a partnership—particularly one that’s formed between people who don’t know each other well. Team members can easily differ in terms of work habits, tolerances for risk, levels of passion for the business, ideas on how the business should be run, and similar key issues. If a new-venture team isn’t able to reach a consensus on these issues, it may be handicapped from the outset.
Harnessing the Value of the Team
When a new venture is started by a team, several issues affect the value of the team. First, teams that have worked together before, as opposed to teams that are working together for the first time, have an edge. If people have worked together before and have decided to partner to start a firm together, it usually means that they get along personally and trust one another. They also tend to communicate with one another more effectively than people who are new to one another. Second, if the members of the team are heterogeneous, meaning that they are diverse in terms of their abilities and experiences, rather than homogeneous, meaning that their areas of expertise are very similar to one another, they are likely to have different points of view about technology, hiring decisions, competitive tactics, and other important activities. Typically, these different points of view generate debate and constructive conflict among the founders, reducing the likelihood that decisions will be made in haste or without the airing of alternative points of view.
The Size of the Team
A founding team can be too big, causing communication problems and an increased potential for conflict. The sweet spot is two to three founders. A founding team larger than four people is typically too large to be practical. If a new venture is started by more than one person, it’s important that the founders have a good rapport and complement one another rather than duplicate one another in terms of skills and backgrounds. Here, the founders of an educational software company have worked together before and are comfortable with each other’s demeanors and work habits.
Pitfalls of Founding Teams
There are three potential pitfalls associated with starting a firm as a team rather than as a sole entrepreneur. First, the team members may not get along. This is the reason investors favor teams consisting of people who have worked together before. It is simply more likely that people who have gotten along with one another in the past will continue to get along in the future. Second, if two or more people start a firm as “equals,” conflicts can arise when the firm needs to establish a formal structure and designate one person as the chief executive officer (CEO). If the firm has investors, the investors will usually weigh in on who should be appointed CEO. In these instances, it is easy for the founder that wasn’t chosen as the CEO to feel slighted. This problem is exacerbated if multiple founders are involved and they all stay with the firm. At some point, a hierarchy will have to be developed, and the founders will have to decide who reports to whom. Some of these problems can be avoided by developing a formal organizational chart from the beginning, which spells out the roles of each founder. Finally, if the founders of a firm have similar areas of expertise, it can be problematic.
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Barringer, B., & Ireland, D. (2008). Entrepreneurship: Successfully Launching New Ventures. Pearson Education (US).