A Harvard Professor Analyzes Why Start-Ups Fail

Noam Wasserman, a Harvard Business School professor, wants you to survive. For more than a decade, he has been hunting for reasons that explain why start-ups and their founders self-destruct. He has surveyed nearly 10,000 founders from 3,500 ventures, compiling his results in a huge database that he has mined for patterns.

Some of the companies, which all come from the life science and high-tech industries, were venture-backed; others hadn’t yet left the geeks-in-a-garage stage. Initially, Mr. Wasserman solicited participation using trade association membership rosters. Later, bloggers helped him put the survey in as many hands as possible.

This spring, he delivered his findings in a new book, “The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup” (Princeton University Press, 2012). The tome — Publisher’s Weekly called it “seminal,” “illuminating” and “captivating” — functions both as a start-to-finish reader and as a browse-able first-aid manual to help resuscitate ailing start-ups. “In case of emergency,” Mr. Wasserman said, “you can break the glass and grab this book.”

In a recent interview, we asked him about the common catastrophes that doom young ventures.

Most business books are built on grand platitudes and decorated with anecdotes. How is your approach different?

This is an arena in which anecdotes, rules of thumb and gut instincts rule the day. But I’ve found that it’s critical to shine the light of data on those things. My favorite quote from Steve Jobs, which informs the work I do, is “Follow your heart, but check it with your head.” To the extent that large-scale data is able to highlight which decisions increase the chances that you’re going to succeed, and which ones increase the chances that you’re going to have some major pitfall, it enables us to see where we have to check, where we have to have founders think twice, where we can isolate for them all of the things that they are doing within their start-ups.

I started collecting data back in 2000 and continued every year doing annual surveys of founders. The book uses the first decade’s worth of data, from 2000 to 2009, which has a pretty large and representative sample and also has the advantage of going through two ups and downs, extremes of the market.

What lessons were the most surprising?

The predominant pattern I’ve seen is that the most common choices people have to make are the ones that are also most fraught with peril. For example, one of the most common decisions is to co-found with someone you have a prior social relationship with — friends or family – and not a prior professional relationship. But that type of team is the least stable. It’s the most likely to end up in disaster.

A second example: 73 percent of founding teams I’ve studied divide the equity within a month of founding. That is when the uncertainty is highest. The majority of those teams are also setting that split in stone. That’s the predominant model they use – split early and split in a way that’s static – but that means teams can’t adjust and are setting themselves up to get burned down the road. What are the chances that you are all going to be contributing to the venture on an equal basis? It’s a recipe for team tensions to increase.

And a third example, which was actually the biggest surprise for me: In my data, by the time start-ups raise the third round of financing, 52 percent of founder C.E.O.’s have been replaced. In three-quarters of these situations, the board fired the founder. In the remaining cases – by far the minority – the founder raised his hand and said, “There’s got to be someone better than me to lead us to the next stage.” And I found that the most successful of founders, the ones who led their start-ups to completing key milestones the quickest, were actually the first ones to get fired.

Why?

I ended up calling it “the paradox of entrepreneurial success.” When you’re the creator of a company, you’re increasing the chances that you’re going to get fired. And when you’re a smashing success, you’re also heightening the chances you’re going to get fired. There are some very concrete reasons for that. Often you begin with a technical founder, a scientific founder, someone with deep knowledge who is the best person to lead the charge during the early development of the product. But as soon as they succeed at hitting that milestone, they have to go and build a company. Often they have the exact wrong set of skills for the next stage of development. And one of the big problems is that their success heightens their belief that they’re the right person to keep running the show.

The second factor is that, a lot of times, founders’ early success is enabled by taking rocket fuel, raising money from outside investors. One of the few levers your board has control over is who’s going to be the C.E.O. So every time you raise money, it heightens the chances you’re going to be fired as C.E.O. When you’ve lost control of the board, given up more than half the seats, the combination of that and hitting a new stage in the venture means the chances you’re going to get fired are heightened dramatically.

To that point, your book talks about the trade-off between wealth and control. Why can’t founders have both?

The quantitative data shows that, for founders who keep control of their boards and hang onto the C.E.O. position, their own personal equity stake is worth half as much as if they give up control to a brand-new C.E.O. with resources to grow the value of the venture. That’s the “rich-versus-king” tradeoff.

When you’re facing that trade-off, you have to strike a stark balance. You’re going to have to give up something dear to you in order to get something that is even more dear to you. Founders have to get clarity about their own motivations and what is most important to them as they’re heading out on the journey.

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