In the romance of venture capital and startup land, relationship disharmony is rarely discussed and yet is very common in founding teams and investors.
CB Insights’ list of 20 reasons why startups fail ranks disharmony in a founding team or between the founding team and investors as the 10th most common reason startups fail.
I suspect it’s also behind many of the other reasons for failure reported in the study.
Tension and conflict are important features in dynamic, successful businesses. But if unresolved, this discord can lead to slower decision making, frustration born from shifting priorities and direction, and reduced staff commitment and performance.
If a venture is performing well, issues may be pushed into the background, sometimes for many years, until a reputational or liquidity event brings it to the fore.
The sorts of issues that can create tension between founders include equity split, reliance on the venture to provide income to live, the split between external and operationally focused roles, decision making processes, incompatible styles, values or personalities, and the perceived level of contribution and commitment to the venture.
The sorts of issues that can create tension between founders and funders include how capital is utilised, team member appointments, the pace of progress, changes to products or plans, transparency, willingness to follow advice, and unbalanced risks and rewards.
There are many tools and techniques founders can use when tensions and conflicts start to arise:
- Formal documents: shareholders’ agreements, co-founders’ agreements, subscription agreements, operating agreements, and founder vows
- Operating documents: a business plan, product plan, KPIs, milestone deliverables, and budgets
- External people: boards, mentors, mediators, and advisers
- Rituals and behaviours: regular practices used to maintain communication and resolve issues
The intent with which these tools and techniques are used will determine their effectiveness. Many founders and funders miss the opportunity to use these tools to their maximum benefit because it is inconvenient, hard, or uninteresting.
If founders do not consciously address the potential for disharmony, their venture has a higher risk of failure.
Adam Grant in his book Originals talks about how successful entrepreneurs are able to balance the risks within a venture by taking extreme risks in one area and offsetting them with extreme caution in another.
Product and technical risks for startups are typically significant, complex and difficult to mitigate. Whereas the risk of disharmony between founders and between founders and their investors can be structurally mitigated.
These tools and techniques are some of the greatest levers available to both founders and funders to reduce overall project risk.
It is important for founders and funders to take steps to mitigate for team disharmony.
By addressing the inconvenient, hard things founders and funders can convert tensions into constructive outcomes, rather than dysfunctional discord. This provides a solid platform on which to navigate the product and technical challenges that need to be overcome for the venture to succeed.