When it comes to the success of a company, there are good news and bad news. The bad news is that the responsibility of owners is undividable. The good news is that ownership can be divided. For startups, it’s imperative that the owner-manager team’s mindset and capacity are at par with their opportunity. You can build a great opportunity into a Great Company by making sure that ownership (=responsibility) evolves optimally – that venture parenthood is always in the right hands. For contrast, lack of opportunity-ownership fit limits growth and often leads to failure.
Having worked with hundreds of founder teams, it’s my key lesson learned that the responsibility of owners of the success of their company is undividable, but ownership can be divided.
A few years ago, a young Finnish startup team turned down a term sheet from a local VC and merged with a Swedish scaleup instead. I was impressed by how the team chose rapid cross-border scaling, instead of just getting their startup funded. As it went against the tide, many only saw an exit in record time: “Again a company was sold to Sweden”, said one media headline.
Valtteri Korkiakoski, today a Forbes 30 under 30 Europe in Science and Healthcare, underscored how his team merged Medified Solutions with Mindler above all to fast-track the scaling of their solution to a big global problem: access to efficient mental health services. With an early focus on opportunity-ownership fit, the team had from the start actively pondered which kind of ownership would yield the fastest growth instead of them just seeing how far they could get on their own.
After delivering over a million treatments at Mindler, Valtteri is back to Founder Mode, ready for a next High Impact and Profit Potential Opportunity. As a repeat founder, he already knows how tough it is to build a Great Company and – in his case, uniquely – how opportunity-ownership fit is key to reaching sustainable product-market fit (PMF). The following is a summary of my findings, conclusions, and recommendations for all founders, advisors, and investors currently working to build Great Companies, and all those who want to help them succeed.
Tech-focused founders depend on advisors in their company building
Founders fall into two broad categories: opportunity-focused and tech-focused. Opportunity-focused founders don’t care who makes the tech as long as it gets their opportunity realised. Tech-focused founders don’t care how much (money) they get as long as they can continue develop their technology. Steve Jobs is a classic archetype of the former, Steve Wozniak of the latter.
We say tech-focused founders often have a solution looking for a problem. There is an invention – e.g., a new technology, material, or device – and a dire need to commercialise it. By default, they lack the capacities required to productise, craft a business model, design a go-to-market strategy, raise growth funding, and execute. They also lack the natural conviction to build a profitable growth company.
Tech-focused founders are – in many ways – at the mercy of available mentors, coaches, advisors, and consultants, who again are driven by the pressures of financiers to somehow get their funds invested. In result, tech-focused founders are rushed to productise, claim PMF, pitch hockey stick projections, and commit to execute an outsourced go-to-market strategy – “to fail fast”, they say.
Opportunity, not technology, lays foundation for sustainable PMF
Founders working on deep, groundbreaking, potentially disruptive technologies can relatively easily get grant-funded, and later VC funded – provided that some potential users show interest in their prototype or early technical performance. It’s convenient to focus on technology and follow the intellectually fair and rationally hierarchical approaches to assess and justify funding decisions. Just see how most VC funds are technology centric, rather than opportunity centric.
However, only opportunity, not technology, can lay foundation for sustainable PMF. The greater their technology, the deeper breath founders should take before concluding what exact and how big a problem (or set of problems) their technology helps solve. And the more actively they should search for the people who can envision and best realise the maximal opportunity, comprising:
- The problem you solve: the nature and scope of the problem, the effect of the tech to the problem, and the proof of the effect.
- Need and demand: recognition of the need, market readiness, and proof of willingness and ability to pay.
- Degree of disruption: impact on ecosystem, comparison to competition, validation of benefits, and impact on user’s life.
- Attractiveness: ease of understanding the benefits, reaction to benefits, potential for media interest, and sustainability footprint.
- Business potential: total available market, serviceable available market, serviceable obtainable market, and length of opportunity window.
First-time founders should not be the only entrepreneurs of their startup
The bigger the opportunity, the better company building competence the founder team deserves. The original founders should not be the only entrepreneurs responsible for their company building effort – and they don’t need to be. Unlike human babies, venture babies have no similar limits when it comes to parents and parenthood. Venture babies could have an optimal dream team of parents for every growth stage, but this is easier said than done. After a company is founded, and ownership distributed, parenthood becomes contractually chained to “private property”.
It’s critical to understand the differences between the responsibilities and the rights of company owners and how the dynamics change across the stages of growth. Physical equity ownership creates a sense and anticipation of wealth, vastly increased upon arrival of patents, grants, and prospects of raising growth funding at multimillion-euro valuations. It gets psychologically difficult to share a million-euro-prospect, however imaginary, with people who have had nothing to do with it – even if the odds of realising the prospect successfully without them would be slim.
In result, ownership and responsibility of startup success remain too often locked in tech-focused hands. Too many founders lose their company to investors because they fail to execute and meet the milestones that got them funded. Founders don’t realise how raising, for example, 3M€ at a 30M€ valuation locks the CAP table and creates such psychological and contractual barriers, that they can only play with ESOP and hire and fire managers, but no longer upgrade founder capacity.
CAP table as indicator of company building capacity
Founders cannot hire or outsource the missing owner-manager competence. They can only gain it “invested”, i.e., injected in their startup’s entrepreneurial DNA, evidenced by a balanced CAP table. Having worked with hundreds of founder teams, I’ve learned how the window is only open until the first major post-money valuation. Thereafter, execution is a startup’s make-or-break task. By then, the go-to-market plan, projections, milestones, and founder team better be 100% right.
A startup’s CAP table tells a seasoned professional more than a thousand words. As there is only 100% of equity to distribute, a clear distinction needs to be made between the key categories:
- Founder equity is held by the fulltime team and defines who is responsible for company building. It’s precious as it’s the sole vehicle to bring in the necessary founder capacities. A strong majority should be in opportunity-focused hands by the first investor valuation round.
- Inventor equity is held by non-executive founders. It’s payments for past contributions whose value is yet to be proven by the fulltime team and therefore dead weight. Regardless of how sentimental it gets, only a marginal or capped stake should be allocated for inventor equity.
- Manager equity is to be reserved to attract professional managers and commit employees to execute the plan and meet milestones that got the startup funded. Employee Stock Option Plan (ESOP) is the vehicle and, if the terms and conditions are right, the bigger the better.
- Sweat equity (services-for-equity) is essentially in-kind payments for defined services with a clear cash value and a beginning and an end. This is well suited for bootstrapping but is best be kept at minimum as it’s payments for completed contributions and thus becomes dead weight.
- Investor Equity is the vehicle to bring in financial capital at investor valuation when all the right ingredients are in, and all the wrong ingredients are out: When the founder team is confidently opportunity-focused with all bases covered and the startup now of the “just add water” kind.
How financial instruments impact CAP tables – and company building
Policymakers, institutional investors, and financiers at large hold the keys when it comes to how founders will equip themselves (=structure their CAP table) for the company building journey. And what roles and services enabler organisations and enabler individuals will engage and specialise in.
The way funding instruments are designed and distributed defines what founders and their enablers deliver. Founders need a natural incentive to seek professional co-founders on their side, to share the risk and responsibility. Only then the enabler sector will have the incentive to transform from external consultant and training roles to hands-on engagement as professional company builders.
- Grants create positive value when require founder teams to maximise opportunity-ownership fit, as this benefits all stakeholders, and negative value when enables tech-focused founders to lock CAP table, play with ESOP, and hire managers, as this benefits no-one in the long run.
- Capital loans (junior debt instruments) spur natural demand for professional company builders, because the payback pressure (tied to trade sale or IPO) creates interest to share risk and responsibility, rather than natural temptation created by grants to just hire managers.
- Simple agreements for future equity (SAFEs) are a big step to right direction. These give founder teams time to complete go-to-market plan, bring in all necessary founder capacities, and maximize valuation, before the CAP table gets locked and “it’s all execution stupid”.
You get what you measure, so measure the right things!
Company building is a principal’s business, not a hired agent’s job. It requires total freedom, mandate and the mindset and capacity to think creatively, outside the box, what exact and how big an opportunity is at hand. To figure out what all needs to be combined to seize it: which technologies, concepts, services, people – and startups. If the goal is to merely commercialise a technology, it often leads to rushing to a minimum PMF, creating a buyer’s market, and selling the entire company short.
Building a Great Company is like a complicated and highly demanding team sport where the ultimate challenge is to build a loyal fan base, community, and culture: the bedrock of a sustainable PMF. This requires responsible, optimally expanding ownership: smartly evolving venture parenthood. As there is only 100% of common stock to distribute – but an unlimited universe of ownership-like instruments – the key question is how small and symbolic a stake is enough to commit each key stakeholder.
Founders of high impact potential companies deserve to find professional co-founders who can take responsibility of the kind of company building their biggest imaginable opportunity requires. They should go outside their comfort zone only to figure out “Who” they need to be to “Do” what needs to get done. The founders who get their “WhoDo” right can one day enjoy a reward which is at par with the complexity of their challenge, their odds of success, and the magnitude of their achievement.
Recommendations in conclusion:
- Founders: Measure the opportunity your tech enables, your team’s current readiness, and what all – and who all – you need to realise it. Focus on getting what you are missing.
- Enablers: Embed measuring of opportunity-ownership fit as part of your activities. Focus on enabling the formation of opportunity-focused owner-manager teams.
- Financiers: Design funding instruments that require opportunity-ownership fit, not just new tech and a rushed PMF. Focus on High Impact and Profit Potential Opportunities.
