Friday, December 03, 2021

Founder conflicts often trigger entrepreneurial failure

Founder conflicts are one of the leading causes of entrepreneurial failure according to The Global Startup Ecosystem Report 2021.

In 2007 Mark Zuckerberg declared “I want to stress the importance of being young and technical ...Young people are just smarter.

However, contrary to the popular myth, researchers say the best entrepreneurs tend to be middle-aged. The French have a saying "si jeunesse savait, si vieillesse pouvait!" (if youth only knew, if age only could!). Typically, entrepreneurs mature and mellow with age!

The average age of successful business founders, based on US Census Bureau data is 45. That’s “among the top 0.1% of startups based on growth in their first five years.” It is 40 years of age for tech startups.

The researchers compiled a list of 2.7m company founders who hired at least one employee between 2007 and 2014.

In data published in the Harvard Business Review the authors said that for "businesses that are closer in spirit to the prototypical high-tech startup, we used a variety of indicators: whether the firm was granted a patent, received VC investment, or operated in an industry that employs a high fraction of STEM (science, technology, engineering and maths) workers ...We also focused on the location of the firm, in particular, whether it was in an entrepreneurial hub such as Silicon Valley. In general, these finer-grained analyses do not modify the main conclusion: The average age of high-tech founders falls in the early forties."

The data show that a founder who is 50 years old is 1.8 times more likely to start a top company than a 30-year-old and that a 20-year-old founder has the worst chance of all.

In general prior experience does count. While VC-backed companies represent less than 0.5% of American companies created every year according to The Economist, they make up nearly 76% of the total public-market capitalisation of companies started since 1995. Although the rate was 2.5% in 2019 based on employer firms. There were 10,862 US high-growth startups that raised capital last year.

Building a successful business is every entrepreneur’s goal — but only 1 in 12 succeed in doing so according to the Global Startup Ecosystem Report 2019. US data put the 10-year tech failure rate at about 90% compared with 70% for all businesses. Over the years a comprehensive data set of over 34,000 global companies had been compiled.

386 startup failure post-mortems

A summary of 'Why Startups Fail: A New Roadmap for Entrepreneurial Success' by Tom Eisenmann 2020:

"Bad Bedfellows: Startup success is thought to rest largely on the founder’s talents and instincts. But the wrong team, investors, or partners can sink a startup just as quickly.

False Starts: Despite the oft-cited advice to “fail fast,” and “launch before you’re ready,” doing so risks wasting time and capital on the wrong solutions.

False Promises: Success with early adopters is often misleading and gives founders unwarranted confidence to expand.

Speed Traps: There’s lots of pressure on startups to prioritize speed over efficiency and “Get Big Fast.” But hypergrowth can spell disaster for even the most promising ventures.

Help Wanted: Rapidly scaling startups need lots of capital and talent, but they can make mistakes that leave them suddenly in short supply.

Cascading Miracles: Silicon Valley exhorts entrepreneurs to dream big; as Peter Thiel put it, “they promised us flying cars; what we got was 140 characters.” But the bigger the vision, the more things can go wrong."


The early times of Twitter were marked by bitter feuds and just before the IPO (initial public offering) in November 2013 the dirty linen was in full view. The book 'Hatching Twitter: A True Story of Money, Power, Friendship, and Betrayal' was a sensation. Nick Bilton, then a technology correspondent of The New York Times, combined investigative reporting and material from hundreds of sources, documents, and internal e-mails.

The 2013 review of the book in The Financial Times began:

"Any book that starts with a description of a chief executive [Evan Williams] on his knees, throwing up into a bin after being betrayed by friends and investors is unlikely to be a traditional founder’s tale.

Forget your classic bedroom-to-billionaire narrative, often so dull that it must be perked up with allusions to a girl who got away: the story of Twitter’s foundation is a full-on saga of back-stabbing."

Ireland has its own tech firm drama involving the founders of the Web Summit, the international technology conferences firm. Paddy Cosgrave, David Kelly and Daire Hickey, are in bitter open disputes that will be the subject of court hearings. Maybe an intrepid technology correspondent could ape Nick Bilton! Most likely being Ireland the litigants will settle and take vows of Trappist silence!

The Web Summit's initial equity shares are unusually lopsided from its development as a startup: the cofounders' stakes are Cosgrave 81%; Kelly 12% and Hickey 7%.

Maybe Cosgrave put more capital in the business but some of that could have been treated as a loan.

Irish company law gives a bidder the right to force minority shareholders to accept a bid if it has 80% of the equity.

As for allegations that detailed financial data was withheld from the minority shareholders, they had a right to have at least a director on the board who would have such access.

1) Public airing of fall-out between Web Summit directors takes another turn  —  Dispute between high-profile CEO and fellow founders hits Commercial Court once more amid accusation and counter-accusation

2) Second Web Summit case added to fast-track list over alleged shareholder oppression  

3) Vendettas, toxic relations and €850 jumpers: new claims from Web Summit’s legal battle — Second legal action escalates dispute between Paddy Cosgrave and David Kelly, co-founders of Web Summit

The first conference of the Web Summit was held in Dublin in 2010. In that year David Kelly, Cosgrave's close friend from Glenstal Abbey, a Co Limerick boarding school run by Benedictine monks, left the Dublin unit of the US bank Citigroup to join the firm. The 3 founders had attended Trinity College and Daire Hickey had worked as a journalist before and after graduation.

In a 2016 article, 'The Very First Mistake Most Startup Founders Make,' published in the Harvard Business Review, Noam Wasserman, a long-time Harvard Business School professor and Thomas Hellmann, a professor of Entrepreneurship and Innovation at the Saïd School of Business, University of Oxford, noted "It is said that a team has succeeded at splitting the equity if all of the cofounders are equally unhappy. Unfortunately, founder unhappiness tends to get even worse with hindsight; the percentage of founders who say they are unhappy with their equity split increases by 2.5x as their startups mature. Increasing discontent within the founding team is a prime indicator that destructive turnover may be on the horizon.

Exhibit A: Facebook. As memorialized in the movie 'The Social Network,' Mark Zuckerberg’s initial equity split with Eduardo Saverin went sour as the company evolved. Mark’s attempt to reclaim Eduardo’s equity landed him in court — maybe good for winning Academy Awards, but not good for business, let alone personal relationships."

It's believed that Saverin's percentage stake in Facebook was cut from 34% to a single-digit figure.

The authors also examine the pitfalls of splitting founder equity well between family members or close friends.

"[T]here aren’t many founders that choose their company over their own ego”

Jack Dorsey, CEO of Twitter, this week announced his departure from the company. He noted in a communication to the staff:

"There's a lot of talk about the importance of a company being 'founder-led.' Ultimately I believe that's severely limiting and a single point of failure. I've worked hard to ensure this company can breakaway from its founding and founders ...[T]here aren’t many founders that choose their company over their own ego.”

Dorsey had been fired by Twitter in 2008 and he returned in 2015.

Twitter was developed in 2006 by Evan Williams and Biz Stone. They had worked at Google before leaving to launch the podcasting venture Odeo. Williams had created the Blogger platform. Jack Dorsey joined the management team and the first version of Twitter was officially launched in March 2007.

Twitter’s Founder Feuds, Explained

[After being demoted by Ev, Jack becomes a CEO’s worst nightmare — jetting off to Iraq on the company’s behalf, proclaiming himself the “inventor” of Twitter, and shoehorning himself into glitzy events like the Time 100 Gala. At one point, Ev confronts Jack about his claim that he invented Twitter. “No, you didn’t invent Twitter,” he says. “I didn’t invent Twitter either. Neither did Biz. People don’t invent things on the Internet. They simply expand on an idea that already exists.”]

Paul Allen (1953-2018), co-founder of Microsoft in 1975, left the software company in 1983 after being diagnosed with Hodgkin's lymphoma. Allen kept his shares and became a billionaire after the IPO in 1985. Bill Gates had offered $5 per share in 1983 while Allen requested $10.

In Vanity Fair in 2011, Paul Allen revealed his bitterness after all those years.

He wrote that from the time they started together in Massachusetts, he’d assumed that the partnership would be a 50-50 proposition. But Bill had another idea. “It’s not right for you to get half,” he said. “You had your salary at MIT while I did almost everything on BASIC without one back in Boston. I should get more. I think it should be 60-40.”

Allen said: "Bill’s intensity was nonstop, and when he asked me for a walk-and-talk one day, I knew something was up. We’d gone a block when he cut to the chase: 'I’ve done most of the work on BASIC, and I gave up a lot to leave Harvard,' he said. 'I deserve more than 60%.'

'How much more?'

'I was thinking 64-36.'”

In a statement, a mellower Bill Gates said: “While my recollection of many of these events may differ from Paul’s, I value his friendship and the important contributions he made to the world of technology and at Microsoft.”

The founder's dilemmas

Prof Noam Wasserman (referred to above) had the book, 'The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup' published in 2013.

In 2008 he published the results of research and he noted "successful CEO-cum-founders are a very rare breed. When I analyzed 212 American start-ups that sprang up in the late 1990s and early 2000s, I discovered that most founders surrendered management control long before their companies went public. By the time the ventures were three years old, 50% of founders were no longer the CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies’ initial public offerings. Other researchers have subsequently found similar trends in various industries and in other time periods. We remember the handful of founder-CEOs in corporate America, but they’re the exceptions to the rule.

Founders don’t let go easily, though. Four out of five entrepreneurs, my research shows, are forced to step down from the CEO’s post."

US research published in 2016 found that founder CEOs are more likely to positively affect their firm’s innovation strategy. 

Developing a startup and running a scaled-up company can require different skills. Besides leaders get bored. Some stay in charge too long. Others like Jack Dorsey quit or focus on other businesses such as the newly named Block.

Henry Ford, one of America's greatest industrialists, could not be fired which damaged the company. 

Henry Ford (1863-1947), son of a West Cork, Ireland, native, William Ford (c. 1826-1905), at a company meeting in 1909 said that he would have "any colour so long as it is black” for the Model T which had been launched in 1908.

General Motors (GM) was also founded in 1908 and Ford had significant success in the next decade with the moving assembly line which cut the time it took to build a car from more than 12 hours to one hour and 33 minutes. In 1914 Ford set the pay rate for most workers at $5 per day.

In 1918 Henry Ford officially retired from the company, naming his son Edsel president, and ceding to him the controlling interest. But Henry became a back-seat driver.

Also in 1918, Henry Ford acquired a hometown newspaper for distribution across the country. The Dearborn Independent was used for a hate campaign against Jews. "I regard Henry Ford as my inspiration," Hitler told a Detroit News reporter two years before becoming the German chancellor in 1933.

GM overtook Ford in sales in 1929 and during the Depression Ford fell to third behind Chrysler. Ford lost money while in the 1930s while GM and Chrysler were profitable and increased market share.

During the Second World War, the company built aircraft and aircraft engines. When peace came it was on the verge of bankruptcy.


Irish digital economy firms account for 1.4% of employment

Paddy Cosgrave versus Crony Ireland