Co-founding in the digital age

One of the biggest reasons for startup failure is ‘the wrong team’. I’ve been building startups with different co-founders for over three decades and have seen a lot of what goes wrong.

There are many reasons founders look for co-founders. They range from the ‘I don’t want to do it alone’ angle to ‘I need someone else with skills I don’t have to build my product or market my service or run the financials”.

In an established business with revenue and funds, the business will contract or employ these people, so the arrangement is more straightforward. Employment and contractor contracts are relatively easy to get out of for both parties and they are rewarded with no-risk money.

At the beginning of a startup’s journey, most founders do not have enough ‘risk’ money to pay someone to do the work. This stage has the most uncertainty and most risk. Founders think that the solution is to offer equity in exchange for work because the equity will be worth something in the future and can be exchanged for money: a type of deferred payment. They are in fact selling a dream, one that is unlikely to come true. Most startups fail. Most up-and-running businesses have shares for which they are unable to find buyers. Only a very small fraction of startups go on to have shares that investors want to buy. So why do co-founders accept this offer to invest their time in an unlikely dream?

This is where the founders have a secret weapon. People want adventure, the promise of life changing money, the chance to be their own boss, the opportunity to build something they are passionate about, the chance to make a difference. The list is long and varied. Ultimately the dream can become more compelling than common sense. There are so many stories of success and aspirational entrepreneurs. Counterbalancing these facts, no mention is made that these motivational examples are the exceptions to the rule: on publishing platforms there are very few stories of failure, even when the data supports this outcome in most cases; most articles relate narratives with happy endings where startups had eventual success. 

If we are going to build more successful startups then we have to address the big problem of the wrong team: we need to find a way of making it fairer for co-founders to be rewarded for their time. We are now in a digital age, accelerated by the covid-induced lockdowns, with new business models and ways of achieving goals. What was fine for the pre-digital age is now often obsolete. Back in my youth, meeting people and dating was strictly an offline activity. There was no internet, so people got together through living close to each other and through chance face-to-face meetings. The new world of meeting people, dating and networking has moved massively online. As a result, new etiquettes have arisen: ways of establishing common interest, connection and compatibility. The dating sites are now very sophisticated, using complex algorithms on large datasets to match people for romantic relationships. This isn’t the case yet for co-founder matchmaking.

I have been working with Aditya Bhatnagar, a thought leader in this field, to innovate in this new digital age by tackling the issue of co-founding startups and disrupting current practices for doing so. Fortunately, a lot of the work has been done in the past on the individual parts. By piecing them together and adding a few tweaks we are establishing integrated and appropriate solutions to co-founding in the digital age, where both founders and co-founders benefit from a scientific approach to matchmaking that pairs up the ‘chemistry’ aspect of the human side with the skill-matching and business requirements.

By building a holistic search and compatibility profile, we can then arm the founders and co-founders with the places to run their search. There are plenty of websites that offer founders looking for co-founders (and vice versa), as well as the big social media platforms such as LinkedIn, on which to run the searches. A large part of our research has address the question of how best to utilise these data sources.

The next part of the process is the trickiest. How do founders offer co-founders a fair deal when they are ‘selling the dream’? Traditionally the conversation has been along the lines of ‘it’s my idea and I’m the one choosing a partner, so I’ll take the largest share and we will both work equally hard at it – or let’s reduce the split to nearer 50:50 if you are going to do more of the work’. The negotiation takes place, and the equity split is then set in stone with a contract to say this is the way it’s going to be.

In my experience, while this approach often works, it can create enormous resentment and a feeling of unfairness for: (a) the co-founder who is doing a lot more than their fair share; or (b) the founder who has given away a large stake to someone who isn’t performing, or quits and keeps their shareholding. We have come across some novel ways around this problem, mostly involving dynamic equity at the early stage and some fabulous, low-cost solutions to manage it.

Getting the chemistry and skill requirements right for co-founders is fundamental. Utilising the wonderful co-founding platforms to find the people and putting in place fair equity models to incentivise both founders and co-founders is all part of the new digital world of starting a business. As one of the biggest reasons for startup failure is launching with the wrong team of people, it would be negligent to ignore this data at the co-founder stage or you could be building failure into your business.

We believe that you can build success into the co-founding part. We have been working with a small number of startups to handhold them through this process, including carrying out the co-founder search.

If you want to find out more about the new approaches to co-founding in this digital age, feel free to contact me. I’m part of a philanthropic organisation, The 12Ronnies Foundation whose mission is to help startups launch in the right way for long term success.