Why Startups Fail - The Team

Starting up a company needs commitment, effort, time and passion but it gives a lot of satisfactions when the hard work turns into success; however, the majority of the start-ups fail and do not make it through. The article that follows is the first of a section in which we will talk about the main reasons why a start-up fails: today’s topic is the team, which, according to a recent report by CBInsights, brings down 23% of the newcos.


How to build a team


Quoting our Instagram post on “the importance of building the right team”, in order to best select team members, you should follow a set of simple but very important rules:

  • Choose the people who have the skills needed to achieve the goals and satisfy the needs of your business.

  • Avoid homogeneity.

  • Compose a team that will strive for success together by learning from each other.

Once the team is formed, it is nonetheless vital to maintain effective communication between the members, being sure that everybody shares the same vision, making sure the team can adapt to a rapidly changing business environment.


Following a guide or a list of advice is clearly a good help but, to grasp the real value of a well-assembled team, it is far more useful to look at some real cases in which the team has played an essential, yet negative, role; this way, we believe it is easier to detect possible mistakes in putting together a groupwork.


Standout Jobs


Standout jobs was a Canadian start-up, founded in 2007 by Austin Ill, Benjamin Yoskovitz and Fred Ngo and recently acquired by Talemetry (which changed the platform name into technojobs). Basically, this start-up offered employment services to SMEs: its value proposition was “Invest in your employer brand and over time you’ll hire better fits into your company at a faster rate.” As pointed out by its CEO, Standout Jobs had several problems, but the business idea and the business model were not among them since “you can see in the marketplace today that a number of players have been working on enhancing employer profiles, increasing employer branding and social recruiting opportunities for employers”. In his start-up post-mortem analysis, the CEO Ben Yoskovits sets out the main reasons why his company (despite being sold) was not a financial success (“Although we did exit Standout Jobs it was not a financial success. In fact, personally, I have less money now than when I started the company.”). Here we will try to analyse the major reasons why Standout Jobs did not have a good team and, therefore, failed.

To start with, the CEO was not experienced enough in the market he was going to operate: using his very words “I didn’t have a strong enough understanding of the HR / Recruitment market going in […] The lack of market understanding ultimately meant that we couldn’t match the right product to the right market at the right price.” Secondly, the founding team could not build an MVP on its own: this led to raising “too much money, too early for Standout Jobs (~$1.8M)”. Lastly, Standout Job’s team decided to pursue a channel partner strategy, “This meant providing partners with a white label version of the Standout Jobs platform so they could resell it […] In some ways we tried to offload responsibility of selling our product to our channel partners”; not knowing how to sell a product and delegating this function to a third party can bring advantages but can be risky: in this case, it was risky since in 2008 the recession hit and “Our partners recoiled and focused on their core, and we were left holding the bag”.

As we can see, Standout Jobs team was not well-built: primarily, because team members did not know how to build their actual product; they could have avoided the problem recruiting someone with developing competences and rewarding him with equity, so that the product could be adapted and designed in the light of clients’ feedback and suggestions. In the second place, the team decided not to sell the product on his own because of inexperience and little knowledge of the market: not understanding the market in which one operates is detrimental, not only because it is important to consider its underlying dynamics but also because it is easier to adapt to changes in the market, in one word, being experienced in a market gives you control.


ArsDigita


ArsDigita was a web-development company, founded in the mid-1990s by Philipp Greenspun (the CEO), Tracy Adams, Eve Andersson, Jin Choi, Olin Shivers, Aurelius Prochazka and Ben Adida. It grew until becoming one of the main leaders in its market until the dot-com bubble hit: however, not only the burst of the bubble led the company to selling all its assets to Red Hat; specifically it failed because of a poor team. Philipp Greenspun, while a lawsuit filed by other Board of directors’ members against him was pending, explained why the company went from being profitable to running out of cash and losing market shares. ArsDigita, according to its CEO, was solid and rapidly growing: it had implemented an Open-source software strategy, it fulfilled clients’ needs, who were enthusiastic about the Company’s services and thus were loyal, it had founded a non-profit organization (ArsDigita Foundation) -a free physical school teaching an intensive one-year course in undergraduate computer science- it had enforced a fringe benefits’ strategy, which made its employees happy as well as improving the company’s repuation (for example, ArsDigita used to buy a Ferrari F355 to whom had recruited 10 employees).

Soon VCs started getting interested into ArsDigita. At the end of March, 2000 the CEO closed a venture capital financing with Greylock and General Atlantic. The terms of the investment were that the VCs purchased stock that gave them about 30% of the shares and the shareholders voted for a new Board of Directors (composed by 1 Greylock person, 1 General Atlantic person, 3 senior officers from ArsDigita, including the CEO, 2 outsiders). The first outsider nominee was Allen Shaheen, who had previously worked at Cambridge Technology Partners (CTP) where he managed a large group of consultants in the overseas division of this IT services firm: the other new members, including Allen, neither had software product business competences nor had worked in this industry. Based on Greenspun’s statements, from Allen takeover, he and the other new members changed the strategy from producing open-source software to licensed ones, modified the firm’s general culture -reducing working days and hiring high-salary executives- did not share managerial decisions with senior executives and the CEO. Eventually, this situation created tension between the CEO, his former staff and the new Board: the filing of the lawsuit was only the drop that breaks the camel’s back. Shortly thereafter, in fact, ArsDigita was sold.

We can learn two fundamental lessons by the analysis of this case:

  • Team members should have complementary competences, obviously, but those competences should be the best fit for the market the Company is active in.

  • Team members should be aligned on the same goals and the same culture: else, co-operation is not effective, and the productivity will be affected.