Oh, thank you, so great to reconnect with you and be able to engage in a bunch of the fun stuff that we're going to be able to talk about.
It's such a pleasure to have you here. I have so many questions for you, and our listeners, like we have so many questions for you. So many of our listeners are entrepreneurs and CEOs, running a business, working with a partner, contemplating working with a partner. In that latter category, they have so many questions about should I work with a partner? If so, what profile should that person fit? What exercises should we go to to evaluate the potential effectiveness of a partnership and etcetera? And given that you quite literally wrote the book on partnerships and their potential pitfalls I thought you'd be a perfect person to talk to today. But before we get to all of that, let's set a little bit of context and talk about issues at the top of companies more broadly. I am not a VC.
However, you know, it's pretty clear to me that at least within the VC community, the majority of what we classify as business failures, it's pretty widely understood that those actually stem from interpersonal issues at the top of the company, as opposed to what we would understand to be more business or commercial issues. I've actually heard you say that about 65% of all business failures are due to people problems. So I'd love to ask you more about that, if you could explain that to us. And then also, within that 65%, do you have a sense for roughly what percentage of business failures are due to interpersonal issues at the very top of the company, at the founder or the CEO level?
Sure, no, absolutely. Very important foundational issue. It's interesting in my book, this is the first paragraph of it is delving into that. And it's actually the part of the book that is not my own research. I got recently asked a question about what is the most misunderstood part of the book. And this was the first thing that came to mind was about that first paragraph. The research on the sources of why companies that failed fail, is actually from someone else who was a close colleague of mine at HBS. Bill Solman, the guru of the entrepreneurial finance realm. And it was from some research he was doing back in 1989, or this was published in 1989. And when I was heading into academia, I was coming at it from the perspective of having done entrepreneurship stuff myself, having experienced a bunch of things that only when I was in venture capital during my MBA years, that I was seeing founding team after founding team coming through.
And started realizing that it wasn't just me, that I wasn't just uniquely facing these issues, but that it was actually more common that there were recurring themes, that there were implications of the decisions that founders were making early on in terms of people and stuff like that. And so I'd had those two seasons and planted my own first exam experiences. And then also my observations more broadly of a whole bunch of founding teams during my venture capital time. But then I ran into this paper that Bill Solman had written back in 1989. And he was taking a look at a whole bunch of things inside the black box of VC. What do VCs do? Essentially, that was the name of the article, what do venture capitalists do, very unknown at that time. And he fortunately, in addition to mapping out everything from deal flow that they get, and negotiating the terms and everything else like that.
He fortunately thought to ask the question of these VCs, you think about what the 1% of startups that try to get VC are able to get it? These are the original one percenters like the top of the pyramid, the highest potential of ventures. And Bill was asking, well, you would think that there won't be any chances that those startups are going to fail. Now the highest potential ones that you're very carefully scrutinizing and only taking one out of 100. But some of them apparently did fail. Can you tell me why? And he went in thinking to things that you were just listing before about business or commercial issues and other things that today, there wasn't the lingo back then. Today, we would call them product market fit issues and other things like that. And he found that about 35% of the reasons for failure were those. But what he found was actually this is an ex post, like afterwards, trying to categorize the failures, that 65% of the reasons for failure were the interpersonal problems.
The people issues, the soft, squishy, knotty human factors that were leading to tensions within the team, frictions between the co founders, and then between the co founders themselves, and then also between the founders and and the people who were brought on to compliment them. And that those 65%, nearly two thirds of the reason for failure were those people issues. And so they were taking a look in that case, and things that would encompass a little bit more broadly, like overall companies that have gotten to the point that they were post, the initial round, they had raised VC rounds and stuff like that. So people that were involved beyond just the very top of the company at that point. However, there was a replication study that was done about 17 years later, as published, like in the mid 2000s, that Kaplan and Stromberg, two other ace researchers were doing. They did a very different approach, they were taking a look at ex ante. What were the memos that were being written by the VCs about the potential investments they would make?
What were the risks that they were highlighting ex ante in those memos. And they actually found that 61% of the reasons for failure were the people issues, they were anticipating it was going to be team problems and other things like that. They would be focusing a lot more on the very top of the company, if you will, because at that point, when they're looking at pre the first round, there's almost only the top of the company, there's only the founders there, maybe some early hires that they brought in. And yet they came up with almost the same number in terms of this very different approach. And there's very different focus, very different stage of the company, and yet it was still the people issues. And so overall, I think we'd have some pretty good confidence that it is something in that realm, a majority of the problems caused when it comes to the interpersonal, and that it is at the top of the company or things having to be involved with the people who are the founders who are probably still very much senior in the company.
It's so interesting that, you know, let's call it 60 to 65% of business failures are attributable to interpersonal issues, many of which are at the very top of the company at the founder or partner CEO level. Yet, I strongly suspect that way less than 65% of the time and due diligence is spent evaluating the partnerships. There's a clear asymmetry between source of the problem and the amount of homework that investors do visa vie the source of that problem. Why do you think that is? Is it just because these things are harder to evaluate than revenue and profit margins? Or is there some other reason for this asymmetry?
No, great question. Because one of the things that I've been trying to do for the last 20 years is educate people about what their due diligence checklist should look like. What are the holes that they have in it? What are the things that they ignore at their peril? What are the red flags that the research has highlighted are the ones that are going to increase the chances, increase the risks, increase the chances of failure and other things like that. Because of that I actually started doing to complement my founder boot camp, I usually do like a one day firehose of knowledge for the people right now founding. That's in some ways, a one day version of the course that you took Steve, where we had a full semester, to be able to delve into but a one day firehose, as a founder boot camp. I started doing an angel investor boot camp, so that the angel investors would be able to understand what should be on their checklist when they're evaluating which teams to invest in.
And then also, what are the typical holes that teams have when it comes to the people issues that once you've invested in it, that you should be trying to mentor them through them, you should be educating yourself about what those issues are, that you can put on their radar, and then be able to give them the benefits or your wisdom and things like that. So you're exactly right, that a lot of the implications of the research are very important for an investor who's going to be doing due diligence, very important for a potential hire, that's trying to evaluate is this founding team going to be one that is going to be able to be solid and stable, and other things like that. Like there's people beyond investors who should be doing due diligence on these things, and a lot of the red flags that the research has highlighted, I assume it's going to be some of the things that you're gonna want us to get into. This is very much in fact, at the beginning of the angel investor boot camp, one of the first slides is a checklist with some things checked off and other things not.
That I'm going to say to them that a lot of you have incomplete parts of what you're looking at, I want you to find at least one thing today, that you're going to add it to your due diligence checklist, and be able to have it be a more complete one than what you had coming in. And so then at the end of the day, we go around and see what is the one two or more things that you're adding onto your checklist. And so that perspective, I think is a great one that you're taking about, what are the things we can do to educate both sides of the table to the founders about what things they're about to make as decisions that are going to be ill fated? And what are the things that investors and other outsiders like the potential hires should be really evaluating to see whether this team has done its work, to be able to make sure that it has a solid foundation as possible?
You know, when I was reading your book, I've read it a few times now, at the risk of oversimplifying, when a friend or a colleague would ask, hey, what's that book about? I would summarize it by saying, well, it's a book about entrepreneurship, specific to partnerships, and it evaluates the most common ways in which partnerships can fail or stumble. However, your data also suggests that partnerships tend to be more successful than do solo entrepreneurs. So on one hand, we've dedicated an entire book to potential pitfalls and stumbling blocks. Yet on the other hand, the data is clear that partnerships are indeed more successful than solo entrepreneurs. So can you just reconcile these two points of view for us, not that they're mutually exclusive, but would it be an accurate summary to suggest that on average the potential benefits of partnerships tend to outweigh their potential pitfalls, or am I oversimplifying when I say that?
Well, I think there's any encapsulation is going to simplify. But no, I think that there's nothing wrong with what you were just saying. The key early fork in the road. So what we go through in the class of the book and things like that is the key forks in the road where founders are making a decision that is going to have long term consequences for it and often is really hard to undo. Those are the most critical ones that we have to be able to put on people's radar and be able to have them think a little more deeply before they dive into it, you might remember the opening phrase that, my favorite saying from dear departed Steve Jobs, that I think captures in a lot of ways what you're talking about there, but also some of the prescriptions that we come up with. What he said was follow your heart, but check it with your head. And especially when it comes to the people issues that we look at, the gut level instincts, the things that lead us to make decisions, just based on the things that we celebrate instinct and other things like that, when it comes to the people issues are the most ill fated.
The most common decisions that we make about the people, when we are just following what seems right turns out to be the ones that heightened the risk the most. And we're gonna get into a variety of what those are. But as we're mapping each of those out of the key forks in the road, after we get into that, is it for you? Is this the right timing for you? Are the circumstances right in terms of the market and the career readiness and the personal rights and things like that? Next one we get into is the fork in the road that we're just talking about? Should you do it solo, or should you attract co founders, and that key fork in the road is going to determine which of the kinds of risks you're going to take on. When it comes to founding solo, that's going to be you're taking on the weight of the world, on your own shoulders, on your old broad shoulders, he tried to leave the the the the opportunity barrier all in your own single bound, versus getting other people to be involved. And when you have everything riding on you, that's going to be one set of risks that you are taking, especially if you were not thinking through and I prepared for it.
What is my checklist of the things that have to go well, have I all of those skills and contacts and resources that are on that checklist or not? Or if I have the big holes in it, can I fill those with co founders or with other substitutes or co founders other things that you might be able to use to be able to fill in your holes? But it's a different set of risks and a different set of profiles that you're taking with that. What my data showed when I was diving into this, being able to see solo versus Team and how well they do is that there are some solo entrepreneurs who are actually able to be able to perform at least as well as what teams do. But that in general, they do much worse, if you will, the solo founders who should found solo have prepared well for it and doing it the right time. They have stacked the deck in their favor. But the solo founders who possibly in their rush or in their passion, have not evaluated whether they're ready for it, whether they really should be doing it solo, they have not they've neglected to make sure that the checklist is as solid as possible.
And their approach to me on the tablet and things like that those are much more likely to crater, those are the ones that are going to be in the real big worry list in terms of solo people who should not be embarking on this journey. And so in general, yes, teams do outperform the solo from the data and the analysis that I was doing, it is possible for solo people to reach the performance of the team. That's only if they've done all the other basics, all the other blocking and tackling, all the other preparation things that are necessary to be able to reach that potential.
So let's get into some questions specific to finding that partner because there are a lot of folks listening to this who are reasonably sure that they want to take the entrepreneurial plunge. But the second order question, of course, is, do I do it myself? Do I do it with a partner? And if I choose to do it with a partner, you know, who might that partner be? So it is that latter question that I want to focus on for the next little while. Now you have done a systematic study that evaluated the success of partnerships between three types of people. Bucket one, people who know each other and like each other socially. So let's just call them friends. Bucket two people who have worked together in the past and bucket three complete strangers who just decide to partner for various reasons. I'd love for you to please share with us the results of that analysis and which partnership recipes proved to be most and least effective and why?
Okay, no, absolutely. Let me just start off backing up a little bit to frame a little bit the big picture and then we can dive into this specific piece of it. What the research has shown is that there are three particular areas that founders make decisions that tend to be ill fated. And those are the things that we have to inject a head into before they follow their heart when it comes to them. And we call those the three R's So, the three R's, the first of them is what you are talking about here. Those are the relationships that you tap when you're looking for co founders. The second of the R's is the roles of decision making, how are you going to allocate that within the team? How are you going to have the roles, the titles, each of the people that they're taking on each of those? How are you going to collectively make decisions or decide that you're gonna be able to have people run with their own domains. So that's the roles of decision makings that comes on the heels of the relationships.
And then the third of the R's is the rewards, how are you gonna be able to allocate those, both the intangible and the financial rewards, most central there is around the equity split, and the ownership allocation within the team and how you're gonna be able to approach that. And so that's big picture, like how your question fits in is the first of the three R's that we would want to be taking a look at. So within that, the options that you're taking a look at, you're mentioning the spectrum of them. So it ranges from the people, you know, socially, the friends and family, to in the middle where there's no real relationship that you have yet as acquaintances, or even strangers that brought together were brought together in some form. And then at the other end of it are people that you know, just professionally where it's the co workers that you've worked with in the past a lot of times, then you become close to them. But the initial things that bring you together is the professional. And those have very different implications.
So in our analyses of founding team stability, and a variety, other factors that we have to be able to see are different across those teams, and that people have to think about when they're taking on the risks of each of them. For me, the biggest surprise that I had was not the fact that the prior coworkers is the most stable of the teams, you can see there, they've already gone through the wars with them, you've been able to hone being able to deal with difficult business issues together. You also have, you've now chosen them as your co founders, you've cherry picked the ones that you're the most productive with that you can work effectively, and be able to tackle difficult issues and things like that. So that one, it wasn't surprising for me about that, that is the most stable of the teams. For me, when I was comparing the stability of the ones that you have no relationship with, versus the ones that you have, like the friends and family relationship with the people, you know, socially.
That was where the bit of the surprise was. And so a lot of times we go into when we're thinking about who we're going to co found with friends and families, the people I trust already, it's the people who, you know, we know each other, we can engage with each other in productive ways. But we have that baseline of something that's really hard to build. But it's critical of trust for us, to be able to have that already gives us a running start and being able to be a successful team. Unfortunately, that misleads us about several levels of things that we are taking on. First off, we oftentimes are the people that we know that the most, those who are the closest to when it comes to the social realm, those are the people that we are least having the difficult conversations with, we run the other direction from having tension filled conversations with the people that were closest to, in some ways, it's an irony of it. But we also are telling ourselves that the friends that I have, they're really good at what they do, we can make an assumption that my friends are going to be the superstars that we need to be able to succeed at being able to do this.
We don't test our assumption about the quality of what our friends and family are gonna be able to deliver when it comes to that. We don't tee up the difficult issues to see whether we're gonna be able to deal with them well together. And we also are taking what is a very different domain and extrapolating from it. When we know someone in the social sphere, a lot of times we might get surprised when we see them in the professional sphere. So I don't know Steve, if you have you ever went to work with one of your parents? Did you ever go with mom or dad to work to see what the workplace was like?
I did. I did.
Who did you go with?
I went with my mother.
Okay, what kind of work did she do?
She worked for a local branch of the government.
Okay, and so when you went to work with her, did you see the same person in the government's sphere when she was working there? Did you see the same person as what you saw at home?
Yeah, not entirely. And in fact, the thing that really highlighted this, for me was COVID. During the two years of lockdown, you know, kind of seeing my wife, you know, the professional version of my wife versus the personal version of my wife was quite different. And in fact, she had the very same observation about me.
Okay, fascinating. That's a great microcosm. That's a better one that I should ask you about, I guess in the future, when you're stuck at home with your spouse, and you saw them in that very different context. We actually just had a very interesting one. So [inaudible] University for our MBA program, we develop the first ever online version of the founders dilemmas course, very sophisticated asynchronous version of it and I have the students as part of that do role plays every week to be able to exercise their muscles be able to build a difficult conversation skills and other things like that. One of the women, absolute Rockstar in the program, she was doing her roleplay one week. And I chose that one as the one to post and had the rest of the students have like the online dialogue about that roleplay. Her husband happened to be in the room, when she was watching the roleplay, that she could then be able to weigh in on the comments be able to see how it came out.
And she didn't realize that it was standing there until he said, I don't recognize you. Like he was seeing in this business, the simulated business context of how she was doing in a difficult conversation and the MBA program. And he was not recognizing the woman that he had been married to for a while. And that's a great example of what you're talking about with your wife and the professional version of your wife versus the at home version of her and how you just don't recognize that person. And yet we make the bold assumption that we know these people really well that they're going to be the same in the workplace, that they're going to bring the same kind of compatibility and the things that we have seen like in the social sphere to it. And so those bold assumptions that we make about the quality of what they're going to do about the style, and how that's going to be the same across the two of them. These are very different compartments of life.
And yet, we were making bold assumptions that we can extrapolate and be able to import from one into the other one. And so when those are tested, when we have the rude awakenings around it, and then you layer on that we can't have the difficult conversations around it, we're not going to find it easy to bring that kind of thing up, to be able to deal with it even proactively. Let alone when things are, you know, really hitting the wall that they're you're going to be able to deal with those together. And so because of that, the fact that we have a lower chance of having difficult conversations together, and at the other end of it, that we don't protect ourselves across these two domains. If something goes awry in the venture, that's going to have all sorts of repercussions at home. And yet we don't do any disaster planning around it, we don't create a kind of equivalent of a founder prenup.
In this case, there's even the marital prenup that would be needed for this kind of thing. What happens if we are disagreeing within the venture, which one of us is going to back away from the venture, which one is going to drop out of it? Those kinds of disaster planning scenarios that we should be discussing upfront, or the last of the things that we want to bring up in that thing that I did to the analog of personal life, when we're getting married. And this when we're at HBS, when we would be doing a reunion, I would ask you in that room, these very, you know, senior people in the world, how many of you are married? So sea of hands around that, to keep up your hand if you have a prenup with your wife? Or your husband? And how many hands do you think were up in the air at that point, Steve?
I guess like less than five.
You're nailing it, in terms of like, almost no hands that were up there in the air. And then the kicker I went to one of them one time, and said Tell us how you were able to be able to craft this plan. Like when things are going awry within the the Couplehood. Now you were able to be able to tee that up ahead of time. What do you think that person said about why they were able to do it?
That's a great question. I couldn't even hazard a guess.
Second spouse, got burned the first time, had to learn the hard way. And they finally learned that you have to be able to tee those kinds of things up. Because it's not going to be have you think about the 50% chance of getting divorced. And the same kind of thing within founding teams. A lot of times, unfortunately, these people issues, we can try to educate people about it, a lot of them will take that to heart and they'll be able to act on it. Other things, though, are so deeply rooted there the natural human biases that lead us Orion, things like that. And this is one of them that I find that unless you've gotten burned by it, you will not be able to bring up the difficult conversations and be able to tee up the disaster planning rather than it being the rosy scenarios rather than it being the kumbaya within the team. And so those are the hurdles, the risks that founding good friends and family are going to be causing for you.
And so that's the price that I found was that those teams were even less stable than the stranger teams, the acquaintance teams who didn't really know each other. And if you think about it, it's that the social teams are starting from negative territory. Like the the the acquaintance teams are starting from zero relationship. They're not having the baggage of the relationship, but they also don't have the knowledge of each other or anything like that. They're starting from ground zero, the friends and family teams have to get to zero. They have to work from the negative and the baggage in order to be able to just be able to have a running star to be able to have an effective team. When you don't know the people that acquaintances and the stranger things like that. You will tee up the questions around that. How do we know we're going to be compatible?
We're just heading into this dating rather than we're immediately getting buried as the friends and family that were co founding together things like that. They might be more likely to craft projects together to be able to test out and see whether we're compatible, whether we have to do these things well? Three months from now let's evaluate if we should continue. Like teeing up the difficult conversations, taking a more productive testing of each other approach and things like that, if you were to say to your spouse, you know, we're co founding together, but I'm not sure you're going to have to go to the distance. Maybe we should be able to try this out for three months, and be able to see whether you're gonna be able to perform and things like that, that's gonna be, you know, the toughest thing to bring up, you're gonna avoid doing that. A stranger, you're gonna bring that up, you're going to be able to say, that we don't know each other.
And so it's gonna be a very different starting point for the relationship much more productive one, when you're acknowledging the uncertainties, rather than papering over them or not even realizing that you're papering over them. And so all of those things are where you have the negative territory, that the strain that the friends and family teams are causing for themselves. Back to just one of the themes that we talked about, when you're following your gut, that it's the most hazardous in my dataset, this is on 20,000 founders, and so a pretty broad base, it's American, so apologies that our Canadian listeners, but American startups in the tech and life sciences realm. And so you'd expect these to be anything much more professionalized than maybe the typical family, businesses, small businesses and things like that. And yet, within my data set, more than half of the companies are friends and family within the founding team.
And so the most common of those decisions that you make, that are the things when you're following your gut, that seems to make the most sense. And yet, as we just talked about a bunch, those are the most hazardous, those are the teams that are the least likely to be stable, to be able to go the distance together, and other things like that, because of these issues that they're facing. And so that's just what that microcosm of when you're following the gut, when you're following the heart that Steve Jobs have been talking about, how critical it is for you to inject the head in be thinking a lot more deeply before you default to the decisions that seemed to be the right ones, and take a much better approach to being able to deal with those risks that were that we were just talking about.
So fascinating that the complete stranger recipe is empirically more successful than the friends and family recipe, and I have several follow up questions for you. But before we get to those follow up questions, I want to stick on this this question or thought of, you know, to partner or not to partner. So when I chose to not partner, I thought that I could build out what I refer to as partner proxies. And in fact, many entrepreneurs who choose to work on their own think that they can build out these proxies. So what do I mean by that? I mean, maybe I can bring on an engaged board of directors, maybe I can join a CEO peer group, maybe I can hire a CEO coach, maybe I can hire very senior executives and almost kind of treat them as partners. In your experience to these partner proxies, for lack of a better way to put it, do they tend to be effective? Like do they actually replicate the benefits of a partnership while avoiding some of their common pitfalls? Or are these just kind of too watered down to be generally effective in your experience?
No, they definitely are something that should be considered. Let's just walk back to the metaphor they were using before, but it is actually a very much a tool. It's a simple tool, but it's a very effective one I find. And that is the checklist. And so when you're heading into starting anything new, had a create that checklist of what are the maybe top 10 things that we have to be good at doing, in order for this to have the best chance at success? And then take for you the what parts can I be able to provide? What are the skills I have or the context and other things like that that are on that list? Check those off for yourself. And then for all the uncheck boxes on it, you need a game plan for how you're gonna be able to check those off? How are you gonna be able to bring those aboard? How are you gonna be able to find ways to be able to set the deck in your favor by being able to have a fully complete checklist.
And each of those unchecked boxes should have a game plan for it. Sometimes it is the things they were talking about. There are substitutes for co founders, if you have a bunch of uncheck boxes, that cluster into a co founder would have that, then you should think about very seriously, a full time co founder is going to be fully engaged and all the other benefits that come from that co founder. By the way, that's also one of the key checks and one of the key biases that we have when we're looking at co founders. And some of them we call homophily within academia horrible term. But essentially what it means is birds of a feather flocking together, we all have a natural inclination to find a lot more attractive hanging out with people who are like us who have a baseline come from similar backgrounds, educational backgrounds. Now they're growing up backgrounds, racial, gender, etc, all sorts of slices that have been shown to have very powerful homophily needs.
The things that they're able to satisfy have we found, feel a lot more comfortable. That's great within the social arena, within founding teams that can be death. That can be all sorts of real problems that it causes. Because then in your checklist, you're gonna be doubling down, you're gonna have a double check boxes, you're gonna have, I'm the techie who is gonna be able to do the technology really well. And by the way, my best friend from the computer science program, he's going to co found with me, what kinds of things is he going to be good at doing? Well, the same things that I'm good at doing, you're gonna be double checking boxes. And what that means is A, that's going to come at the expense of the uncheck boxes, you're not gonna be able to be using your equity and the other things that will attract co founders on the right people, you're going to be doubling down on things rather than filling holes.
And also, that's going to cause heightened tensions, both of you are going to want to make the tech decisions, you're not always going to agree on them and things like that. And so be able to use that checklist A, it can be a really good check on the muffle Lee, that is the natural inclination that all of us have. But B, it also shows us where we have to focus a little bit more of our planning around each of those uncheck boxes should have a game plan for how we're gonna be able to have those capabilities. And it might be that you're going to be doing and so the you were talking about, like the the Board of Directors might be able to fill that in, or it might be an advisor that you can tap to be able to fill that in for you. It might be the peer group that you're talking about, like the CEO, peers and the coach that might etc. Maybe for some of those things, you'll be able to get that on board, maybe you need a little bit of say you're a business founder.
And you need a little bit of the tech guidance about what the structure of the market of the infrastructure of what you're going to be creating is, you don't need a full time yet. But you need some initial guidance about it. That's where maybe someone who is a CTO who could be able to be an advisor to you, and be able to give you a little bit of guidance about those types of things and how to architect it. Or another one, they might be able to have as a game plan around it maybe out to outsource, maybe the tech development is something that early on, especially they might want to outsource. But outsourcing is a skill unto itself, being able to manage the outsource to tech development, you might not need that skill on board full time. But maybe that CTO advisor that you have, can be able to play that kind of role asking that person to spend a couple hours a week with you on that.
And then ad hoc as issues come up being able to do that. And so I think a lot of those substitutes for the co founder, as long as it's being driven by being able to make sure they have all the right things on board, that is your game planning around all of your biggest holes, and how to be able to fill it in those can work very well. But when it comes down to if there are clusters of things, if there are ways in which a co founder is going to be able to take them on better, is going to be more dedicated, because they are full time and focused and other things like that. That's where you should be thinking about having a co founder instead of some of those proxies that you were just talking about.
So let's return to the idea of partnering with somebody that you know, and like socially. You are a vocal proponent in your book through your podcast and through other means of prospective partners purposely front loading those difficult conversations, as you've already alluded to today, before, you know pursuing an entrepreneurial undertaking together. Now, presumably there is no shortage of difficult conversations that these prospective partners should have. But I'm curious if I asked you to maybe boil it down to you know, the one or two or three most important difficult conversations for these folks to frontload. What might those conversations be? And how if at all do you structure these conversations in the form of a personal prenup, if you will, which is another concept that you talked about in your book and also on your podcast?
Yeah, so the answer boils down to the biggest things that we had talked about a little bit while ago. The three R's to me are the biggest ones that are the elephant in the room that A, founders avoid discussing. And B, you avoided at your peril, because those are the highest risk factors that you face when you're making these early decisions around whom to have on the team and how to be able to involve them. And so having discussions around the relationships were best friends, how might that be tested by the things that we are heading into? What's going to happen in terms of avoiding the conversation about one of us is not scaling well, and how that's going to be able to be handled within our team. The role is in decision making both of us you know, as best friends, we want to be equal partners, we want to be able to have decisions by consensus.
Well, if there's two of us here, what happens if we disagree on something, now we're going to be making 1000s of decisions, if we even just disagree on 1% of them, that's going to be major problems for us. It's going to slow us down because tensions and other things like that. So how are we going to handle the roles is going to be that we're co CEOs, so that we're equals or is there gonna have to be at some point a hierarchy that's going to be instilled. That is going to be one person who's going to be able to resolve the gridlock and the divergences that we have around that titles. When we first go to that MVC and we are presenting to that person we're going to show the team slide on it, and we're both listed as co-CEOs are they gonna like that, are they gonna like that we punted on that demo conversation, or should we be really figuring out who's gonna be working for whom, and other things like that? So the roles and decision making part is the second of the typical conversation and the rewards.
Founders, a lot of times punt on the ownership one, and that's at their peril. The classic one that you might remember from class theme, with Zipcar, co founders, and how they punted on it, because they didn't want to have to blow up the company by not at by having a difficult conversation around ownership. They said, Let's just shake 5050, let's do the let's get this out of the way. And that 5050 Split ended up being what caused some major problems within the team, as one of the co founders became the heart and soul. And the other co founder didn't even quit her day job and come on board. And so the three wards part of it as being the third of the arenas, they have to be able to tee them up. And we're founders, the last thing they look forward to having is that difficult conversation about ownership about contributions about unequal contributions about the risk and uncertainty that we face going ahead, going forward with involvement, who's going to be really dedicated to the venture.
None of us has co founded before, are we ready for the roller coaster ride for a lot of the tensions that it's going to cause possibly for the family and other things like that? And so the three R's are the biggest ones, that they would have to be able to make sure that we they are tackling ahead of time. And by the way, just going back to one of your other, one of the earlier things that we talked about, when we're talking about the due diligence checklist that people have, the three R's should be at the top of the list. The biggest risk factors that founding teams are facing, being able to evaluate how well have they architected themselves, the VCs, who are not probing the relationships or roles in decision making the rewards and other things like that. And also, by the way, you're asking about why are those neglected? A lot of VCs insist that that's just between the co founders and themselves.
If they've worked out an equity split, then what is my business to be able to do it in class, we used to show a video inside an actual pitch that a young Stanford team was giving to Tim Draper. And one of the VCs that I brought in as like a an EIR, some of the irony of the venture capitalist being an entrepreneur residence within the Entrepreneurship Center at HBS. But he insists that that's just between the co founders, the equity split. Tim Draper, the first question he asked that Stanford team was how have you guys split the equity? Tim sees it as a critical thing that we have to evaluate A, unto itself, have they structured it well, that they're going to be able to avoid the Zipcar problem? But also, this is an indication of can they handle the difficult conversations is a microcosm for him of their relationship as a team? And are they going to be able to do things that another one of the questions that he and other investors ask a team member is?
What is the biggest weakness of your co founder, with the co founder right there? They are. And so the ways in which they are doing due diligence on the three R's on the relationships, their roles in decision making, the rewards and things like that is one of the other things that is a critical thing for founders to evaluate themselves, and also maybe look at through the lens of what are investors going to think, when we're giving them the answers about what we've done when it comes to the three R's?
That's fascinating. I want to ask you a few questions that some of our listeners might have. Again, we're still in the domain of before taking the entrepreneurial plunge, but I have a few questions for you that aren't necessarily specific to partnerships. So my experience as an entrepreneur taught me that, you know, I often say that the only way to learn how to be a CEO is to be one. But in your book, I was struck by the fact that you spoke a lot about how one can prepare for the entrepreneurial journey, and indeed how that preparation can and should begin many years before one decides to officially take the entrepreneurial plunge. So I'm wondering if you can maybe just reconcile these two ideas for us, that on one hand, there are indeed steps that one can and should take before becoming an entrepreneur. But on the other hand, in so many ways, there kind of are no real ways to prepare for it. How would you respond to that?
So this actually is reminding me of a debate that the Wall Street Journal asked me to engage in about a decade ago. I think it was 2012, like, right around when the when my first book was coming out. And that debate was can entrepreneurship be taught? And I thought it'd be fun for them to ask me to argue that no position, that it can't be taught. But they asked me to argue the Yes, position and stuff. And to me, what came to mind was the analogy and I think I might have even used this within that debate. Like when we were writing up the two sides of it, about the analogy to chemistry students. And so there's an inclination within founders, that the only way you can learn is by diving in failing, learning the hard way and over time, we'll be able to figure it out. We don't say to chemistry students, you know, here's a chemistry lab right here. You walk in the first day and let's just have you go into the lab and start mixing chemicals.
Yeah, go figure out what blows up and avoid the next time. And otherwise, you know, figure out what things might be compatible as chemicals are added. Instead, we armed them with the best of what we've been able to learn about chemistry, we've been able to give them you know, some of the framework, some of the knowledge, and some of the approaches that are productive ones to be able to be good in the lab, we're never going to be able to eliminate any explosions in the lab. But we can take off the table, the ones that we really learned are the things we can warn you about and have you be prepared for and other things like that. And then you'll be much more effective in the lab. If you have that knowledge, when you start doing more unique things, you're going to be able to handle them a little bit better, because you know, the foundational elements of it. And you'll be able to find a lot more of the knowledge enhancing things that we could really prepare you for same thing when it comes to founding.
There's a lot of things we've been able to learn about in terms of the risk factors that we've talked a whole bunch about in terms of the key decisions that you might not even realize that you're making, when you make them, about the longer term implications of those decisions, etc. We can be able to prepare you for that journey, that we're never gonna be able to take away all of the explosions, we're never gonna be able to take away, you know, all of the learning by hitting a pitfall and having to adjust to it and being able to recover and things like that. But we can start you with a much higher baseline, we can start you with being able to have a much better running start and building a lot of those muscles around. When things blow up, you're having the resilience to be able to have built your muscles about how you react to it well, and you make the failure into productive learning experience and other things along those lines.
And so that's just in terms like the overall perspective on it, you're never going to fully, perfectly prepare, but doing some preparation will be much more healthy for being able to do that well. And so, yes, once you get into the founder position, once again, the CEO position, that's where you'll be able to be in the ultimate realm of being able to learn what it takes. But there's lots of things that the founders out there who have learned the hard way can have you benefited from the tuition that they paid. The researchers and the academics who have been able to nail down some of the well supported lessons that they can impart to you. Those are the kinds of things that ahead of time you should be trying to do. And then you hopefully will be able to dive in and be able to be a lot more effective as you head into it.
Can you talk to us about the role that you think passion ought to play as one contemplates taking the entrepreneurial plunge? And specifically in your whether this is data based, experienced based, opinion based, whatever the case may be? How important do you think it is that the leader of a company is deeply passionate about the product or the service that they're selling into the market?
So passionate is actually the one of the first things that I love to tackle in classes, the first day of founders dilemmas and also one of the key early things that we're doing now. So own podcast. So I have my own Founders Dilemmas Podcast that we launched. Heading into the second decade of the book, this is the first day of that podcast where we're tackling that. In class added time, I asked the students to give me their read on a whole bunch of questions ahead of time that then plant seeds for the rest of the semester. One of those is how much do you agree with this statement? Now that as a founder, passion is one of the critical elements of magic? And how many students do you think disagree with that, Steve?
My guess is the overwhelming majority thought that passion was a very, very important part of the recipe in the success formula.
Yeah, on a scale of one to five, you're exactly right. There's almost all fours and fives, there's almost no one who's in the disagree relm, let alone strongly disagree or anything like that. But that very much captures like we think that passion is the critical ingredient. There's all sorts of ways in which it is the magic, like when you're evaluating founders, which ones do we want to do, it's the ones who are so passionate about the idea that they'll blow through the brick walls, that they'll be able to see through the roller coaster ride, persist through it and things like that. So that is definitely true, that it is a critical thing to have in some ways. But we also have to appreciate that passion can be apparel, that there are a lot of negatives that come with passion. There are a lot of things that we have to work against to not have a cloud our thinking about it.
So for instance, if we just step back when you're talking about here now, before they were taking the plunge ar the things that are probing around that, we talked very briefly before about the three circumstances that would be evaluated, the market circumstances, the career circumstances and the personal circumstances. Let's just start off with where founders usually focus, the market circumstances. A lot of times, I've seen a pain myself and founders when they're pitching investors, things like that. Let's start off with a personal story about when I was really in need of a solution to this pain. And now we have a solution that we've come up with. This is what we want to be able to bring to the world. Well, when you have that passion for the product, passion for the solution. Is there any chance that you might miss read the market's passion for it? You're assuming you really want it and that you'd be willing to pay a price that We'll be able to build a sustainable venture for it.
Is it possible that you're overestimating the number of people out there who in the same category, or overestimating the pain that they're feeling around in their passion for getting the solution? It's possible that you're going to be overestimating it, it's unlikely you're going to underestimate it, and much more probable that in your passion, you're going to overestimate it overestimate how much you're going to be willing to pay for it, or even that they're gonna be willing to pay for it. And so all of these kinds of things, that's just one domain of being able to evaluate whether this is going to be a business that you can build, where your passion might get in the way for it. By the way, down the road a little bit, as you're starting to introduce the product, is it very possible that in your passion for the product, that when it comes to the A B testing that you're going to be doing, when it comes to doing all the Lean Startup things that you shouldn't be doing, that you might be seeking, confirming information for your passion.
Rather than disconfirming information. Very highly likely that in your passion, you're going to be looking for the things they're going to tell you that yes, this is something that you want to go forward with, rather than the yield to really test and get the real knowledge about it. Now, when it comes to pivoting, one of the key things is actually on my my own podcast yesterday, we had a question that we tackled during a Q and A episode from one of our listeners about pivots. And a lot of times there's ways in which a founders passion is going to lead them to not be able to see the need to pivot, to be able to understand where the product market fit isn't happening and other things along those lines. And so that passion can be a parell just in that one domain of the market circumstances, then you get into. Let's focus on quickly the other to the career circumstances in your passion for becoming a founder, is it possible that you are going to overestimate your readiness?
That you're going to be saying, I'm ready to dive in? Well, you've never seen what the beginning of founding means in terms of all the things you have to be able to do well, six months down the road, are you under estimating the challenges and how they're going to change and other things along those lines. And so in your desire, your passion for founding as possible, you're going to overestimate your readiness and not really build the foundation for yourself. And then overestimating when it comes to personal readiness. If you haven't saved a cushion, and you have a family, that's going to be at risk. And other things like that are you may be that passion, and is that may be causing you some perils, when it comes to really making sure that you're gonna have to have the stability that you're going to need, the paycheck that you're going to be going without is that going to cause problems within the family.
You're overestimating the quickness with which you're going to have dollars rolling in, is that going to cause problems for being able to go without that paycheck for a longer time, with having family obligations that other people are dependent on you, and other things like that. And so any of those three arenas, your passion is going to cloud it going forward, there are times that the passion is going to lead you to underestimate some of the things that are going to be dealing with them. And so in that sense, complementing the passion as a magic, you have to also be able to think about the passion as a peril, and where the promise of passion might have to be. This is a key way in which the follow your heart, but check it with your head is critical for you to be able to make sure they're thinking a little more clearly than when it's just head and when, when it just aren't. And when it's passionate, it's driving your decisions.
So it makes perfect intuitive sense to me that passion can be helpful in what might be obvious ways. But untethered levels of passion can present dangers. In fact, that starts to touch on a paradox that I'm going to ask you about in a few questions with respect to the role that persistence ought to play in the entrepreneurial journey. But let me just ask you a quick follow up about passion. And I guess the question is, like, what, what should one be passionate about? So for example, the company that I ran, we sold software to trucking companies. I was not passionate about trucking software. In fact, I'd love to meet the person who is passionate about trucking software, they'd probably be a pretty odd duck.
What I was passionate about was kind of the journey, the entrepreneurial and leadership journey, independence, freedom, autonomy, leadership, working with teams building. Like that's what I was passionate about, frankly, the widget that I sold, whether I was selling software, or Sewer Cleaning Services, was almost irrelevant to me. I'm curious, your response to that, is passion about the product or service that one is selling? Is passion about the journey? Is there some other element of passion that is more or less important, that one should be mindful of as they're evaluating the question like, should I be an entrepreneur?
Yeah, that's a great question. And we can frame it from several perspectives. Let me take an initial crack at it. One of them is a type of person who is passionate for the idea that they came up with, I want to bring this to the world. After I'm done with it, I'm probably going to go back and do something outside of the founding arena. But this particular idea, I really want to bring it to the world versus someone who is passionate for being a founder. And then what is the idea I'm gonna pursue. And those each come with some benefits. And those each come with some minuses. And so if you have the idea that you are, and we talked about some of the downsides of being passionate for the idea, but the fact that you want to really bring this to the world actually might be in some ways a healthy thing, because then you have an idea that can then frame, what is the checklist of the things that we have to have on board, that we are going to be able to make sure that we are bringing the best team to be able to bring this idea to fruition.
A lot of times if you've built a team first, and then you go and look for the idea. Now we all want to be founders together. And now let's figure out what the venture is going to be. A lot of times, the ideas that you've come up with might not fit the team's profile, you're going to be forced fitting the ideas into what the team can do, you might be taking weak ideas because of it. Or you might be causing problems for the team and product fit, and things like that. And so coming out at first with, either I'm passionate, be a founder, or we as a team are passionate about doing something together. And now what's the idea we're going to pursue? Each of those has challenges that are going to come with it, you have to be conscious of those and be able to make sure that you're discussing and having people check each other in terms of are we coming to any of the the problems of that?
Are we taking weaker ideas than we should, if you haven't come up with anything really good that maybe it's that in the future, we should come back together as a team. But that right now we are possibly predestined in ourselves to fail, because we're taking a bad idea. And so there are things that you know, the directionality should be something that you're gonna be thinking about. First, is this going to be love for founding or love for idea? Now, what are some of the things just to think a little bit more deeply about it beforehand? To me, the key thing that you should have the passion for is solving the pain, identifying the pain, making sure that it's really a pain out there, and then being open to whatever the best solutions for being able to do it. But also being able to watch for the fact that maybe the solution, I'm not the right one to be doing it.
And so if you can be following the pain in the world, that that's where it's gonna be a lot more successful, that you're really being able to build a high impact organizations that's going to be able to solve some of the things out there in the world that others haven't. And that's gonna be a lot healthier than being wedded to an idea that maybe you're not seeing the fact that it's not a good one for the world. And they should pivot about it being wedded to, I'm going to found no matter what, I think those are a lot worse in terms of that being what you're passionate about doing.
Let's talk about the decision of whether or not one should even pursue the entrepreneurial path. Some of our listeners are reasonably earlier in their career, maybe they're second year business school students, and they're wrestling with this very question. And of course, this is a very, this is a deeply personal decision. So there is no recipe, there is no formula that one can follow to evaluate whether or not they should become an entrepreneur. But I guess, you know, knowing what you know now, the contexts and experience that you now have through decades of research. Are there any frameworks that people might use to think this question through? Are there questions that they might ask themselves or their personal assumptions that they should challenge? If someone's thinking through in their late 20s, early 30s, should I take the job at McKinsey, or Goldman? Or should I strike out and do something more entrepreneurial? What are some of the questions that they should be asking or frameworks they should be thinking through to, at the very least just inform that question?
So one of the key frameworks that I found is the three circles that we were just talking about, the business circumstances, the career circumstances, the personal circumstances. And when you have the checklist that comes out of that of the career circumstances, what are the things that we need to be able to have, for me to be able to do well? A key thing is the blessing of time, if you know that you're founding tomorrow, and you're evaluating the circumstances, and you have some unchecked boxes on your readiness, whether it's career wise, or even on the personal side, the unchecked boxes, I've saved up money so I can go for however long I need, being able to be a founder without a paycheck and things like that. If you're doing it imminently then it's a problem. Because you can't change your map. You can't change the circumstances for yourself.
If you're thinking ahead of time, as you're saying, like the business school students who are thinking down the road to I'm not going to found now but maybe three or four years out, I'm going to found, the more that they have some idea of what they're gonna found and what that checklist should look like for it, the more that they can start proactively using the blessing of time to be able to have a much more solid foundation for it. Versus the personal side, living the lifestyle of a founder before they found, someone who's taking a nice big paycheck coming right out of business school. And that person is living the life that they've always dreamed about living. They should scale back. If they really know that three or four years from now that they want to found because there's gonna be some rude awakenings you're going to have when they're gonna have to go without a paycheck.
There's also going to be some of the handcuffs are going to cause for themselves of taking on a mortgage, taking on like some other high price things that they're not going to be able to, those are going to turn into the deferred founding. The three or four year plan is going to turn into the either 10 to 15 year plan or the never plan, because you've taken on a lot of these financial commitments and other things like that. Instead, when you're graduating, figure out what are you going to be living on as a founder, and take every, all the rest of your paycheck and sock it away, save it up for this three or four years, so that you have a cushion. So you haven't gotten used to the cushy lifestyle that you're gonna have to live as a founder and other things like that. So those are some of the ways that you can be able to use the personal circumstances.
And then on the career circumstances or uncheck boxes, being able to prepare a lot better by having that lead time around it. If you are checking off, if you have on your checklist sales experience, and you don't know anything about sales, and you have that three to four years worth of runtime, figure out some way during that time, to be able to do some kind of a sales role.
Be able to have some way that you're able to learn all the ins and outs of it being able to have a checkbox there, being able to have that critical skill that you can build, this can be applicable to almost any venture. And so those are some of the things in terms of the ahead of time being able to plan around it. Some of the other key things you have to build is your self awareness about your strengths, your weaknesses, your holes, the other things like that, that you might want to be able to either fill up by having some experiences like the sales experience, or fill in by having some other people that you can bring on board are going to be the complements to you. If for instance, you're that passionate founder that we're just talking about. If you can find a partner, who is gonna be able to be the analyst, who's going to be able to bring the rationality of the head to it, to check your heart, and can be the in for your Yang.
Be able to have find those types of people out there by having that self awareness about what are some of my minuses? What are some of the people that are going to be able to counter that be able to have me be able to understand when am I going all heart to entropy pulling back on the reins and be able to have the head other things along those lines, give me another lens on it. When I would have VCs call me up, they're doing some due diligence on one of my alumni. Somebody took founders dilemmas. And I'm trying to see, you know, is it someone I should invest in? That the investor is asking about. The ones that I found the easiest to be able to give a glowing recommendation for are the ones that next two things that are often contradictory. The ones who are able to mix, we can boil it down to the terms that we're talking about, the heart and the head, they can bring the passion but also know when to pull back on the reins.
They can be the analyst and when they need to be but also be able to be the passionate founder when they can. And a lot of times, it's really hard to find that in a single person. And what I found within founders dilemmas, when of course that we did together, is a lot of times the students would break down into each of those camps, there'll be the ones that are very passionate. And they would have to be going through all of the failures that we were looking at in the class of the founders who made decisions that they would have made, and being able to see the implications of it, the repercussions, and we could take a little bit of that dosing of head and be able to throw it onto their passion. But there were also students on the flip side of it, the ones who are cautious about it, the I'm never going to found that's too perilous of a road for me to take, I wouldn't be able to go down it.
At the end of the semester, a lot of them will come up to me and say, you know, I've actually gotten more confident in my capabilities of being able to say, the unknown is what was keeping me from being able to dive into founding. I now have a much better roadmap through it, I'm understanding the decisions that I was fearing, I now actually see that there's a better way to make them that it's typically done, I have a lot more confidence that if an idea comes and hits me that I wouldn't be able to dive in and bring my head to it, it happens to be that the two of those types of students are the perfect ones to team up together. The ones who either you can yourself be able to bring those two together the passion and the analyst, or if you're a passionate person in the class, look for who's a really good analyst who might be able to be compatible with you be the Ying for your Yang.
Or vice versa, the analyst is gonna be able to have the idea person be able to bring up the idea and be able to be passionate for it, but be able to have it be the two of you together are gonna be able to pursue it. And so those are some of the things that people in school are going to be able to do thinking down the road and planning around it to three to four year plan driving, where you're going to do with the blessing of time, the finding people who are going to have to fill your holes with hopefully you're having the self awareness you'd be able to build in school or with your own experiences, and being able to have all of that come together that that longer term plan. But being able to found is gonna have to happen on time and in the most solid way because you've been able to take these frameworks been able to take the blessing of time and be able to put those pieces in place for the best foundation.
I love that framework that's super helpful. A lot of our conversation thus far has focused on those who are contemplating taking the entrepreneurial plunge, be it solo or with a partner. I'd like to Transition to kind of the CEO seat, if you will. And where I wanted to start is this question of just how close should CEOs or leaders more broadly be with their direct reports? The reason why I asked this is because this is actually something that I struggled with quite a bit when I was a CEO. And in fact, many CEOs struggle with this question of, you know, to what extent should I form more personal relationships with my direct reports? You know, on one hand, it's a very human desire, and it can lead to closer, more personal relationships. And in fact, maybe some CEOs view their senior leadership team as kind of a partner proxy to the extent that they are a solo entrepreneur. On the other hand, though, some CEOs are fearful about getting too close to the people that might ultimately become the subject of a difficult decision one day, like a termination, for example. So what does your research and your experience suggests with respect to this question of just how how CEOs should think about this question?
Yes, it's in some ways, a lot of the art of leadership is what you're talking about there. Like, it's kind of thing that's a little bit hard to bring some science to it, because it is really an art. But let me give you a little bit of the things that I have found within teams also within my own teams like now as a Dean, with my associate Dean's, my assistant Dean's and the department chairs I work with and other things like that. What you have to do is to develop that relationship on a professional basis. So we talked earlier about when you're starting as social and trying to force fit that into founding the professional, how that's very difficult, much better to start off with a professional and then be able to get closer to people and be able to find that balance within it. But a critical step on the way to it is bringing process and structure to it, bringing formality to what otherwise would be an informal relationship that is going to pose some of the challenges that you have.
When you build in a formal for instance, performance review process, that you're going to have to be able to do a performance review for those who work for you, that you're going to be able to build into it also the criteria that are being used, the the ways in which you're going to have to be rating them, to be able to identify things that don't just have you paper over issues with them. You can't just have to be, for instance, a review form that enables you to say great, great, great across all of the things that they're doing, you have to be able to grapple with what is their biggest weakness that they have to work on next, during the coming year. ways in which you can be able to have the process force you to grapple with it. It gives you that formality around it that makes it a professional exercise. Rather than that it's going to be causing problems on the social, you know, the interactions, interpersonal and things like that.
And so bringing process bringing structure to it, bringing the objective wherever you can, to be able to inject that in on a regular basis. Those are some of the things that I've found are important to be able to do within your teams, within the cofounding teams or within the larger company teams and other things along those lines. And then there's also being able to have people who are going to be able to be the objective people outside are going to be able to give you some perspective on are you getting too close, are you neglecting to really tee up or this person is underperforming? Those kinds of people who are going to be able to be the third parties, that they know enough about you and know enough about the situation, that they can be able to give you a little bit of that outside perspective. Developing those types of people, is another one of the key things that founders have to do that anyone in any kind of a leadership position, being able to have that check on you is another one of the formal things around that.
Some of the other things is just structurally being able to have things be strictly within us. So for instance, go back to the founding team example. When you bring family into your venture, we talked about a lot of the perils of doing it and other things like that, but people still will do it. A key thing is to be able to have the structure work for you. Don't have your mother who you're bringing into the venture, or your spouse or you're bringing into the venture, be a direct reports you have structurally their reporting elsewhere to someone else in the venture who is not so wedded to them socially, was going to be able to be the objective party on it. Don't be doing a performance review for a close relative of yours, have someone else be doing that performance review, have them be managing them on a regular basis, and be able to have that structure within the venture. Be able to have the way in which you're setting yourselves up that each of you is going to be able to have the best chance of in the long run being able to succeed.
And so those are some of the things that I've found, both from the research on founding teams and the key things that they do and some of the best practices and also just personally within the leadership roles that I've had back within when I was doing entrepreneurial stuff and leading the 19 people in the group or a practice that I had built or within the things that I'm doing now within the business school. Those are some of the things that I found useful.
So we talked about the role that passion should play in the entrepreneurial journey. I now want to talk about the role that persistence ought to play in the entrepreneurial pursuit. And the reason why I'm asking you this question is because I listened to an entire podcast episode that you did on this very topic. And it resonated with me because I wrote a blog post on this topic myself. And in that blog post, I framed the issue as a paradox of sorts, I noted that on one hand, we tend to celebrate entrepreneurs who persist at seemingly any cost. But on the other hand, we also celebrate those entrepreneurs who move on to new ideas with higher prospects of success, and we applaud them for the foresight and the objectivity and the courage that they demonstrated in making what must have been a very difficult decision to quote quit. So I guess the question is, and I know I recognize this as a difficult one like, which is it? Should entrepreneurs persist at substantially any cost? Or should we be wise enough to know when we'd be better off doing something else entirely?
So I think the second of those is definitely a clear answer to it. The key thing is the persist at any cost as you're appraising it. No, you should not be putting yourself through major pain, especially when you're not thinking clearly about whether this is an idea that the world needs, wants, and that I should be continuing to do, like the founders are very talented bunch. Founders should be impacting the world in the best ways that they can. And if they are plowing their energies into something that is an ill fated pursuit, then we are all losing from it, the world is losing from it, they are losing from it, it is not good to over persist. There's such a thing as throwing in the towel too soon, there's such thing as under persisting the people who don't go through what it's called the dip, the people who, yes, they're not playing through the pain, because there are some ways in which they still have some really good way that they're going to be able to have the solution that they're pursuing, pivot into being then able to, to impact the world and other things like that.
And so under persistence is a problem also, but over persisting through it means loads of failure, and the angst that comes from it, loads of personal costs, when it comes to it, ways in which you're being able to shift gears into a new venture that you're going to be able to, or a new pursuit. It might be there getting hired into something that you're gonna be able to harness the lessons in a better way and things like that, but the celebrating the entrepreneurship versus at any costs, that's definitely something that we should, that is a minus for being able to do it. And having a clearer idea of when it is time to move on to take your skills. A lot of times, also, some of the self awareness comes from realizing where's my sweet spot, maybe I am a starter and not a scaler, maybe I should be continuing on to the next starting. Rather than there's all sorts of ways in which if I continue to pursue this and not hand the reins over to someone else, even within a successful venture, that that's actually gonna be worse for me and worse for the world, because I'm not going to be the right fit for the next stage of what's going on here.
And so there's over persistence within the venture keeping in going when it shouldn't, there's even over persistence, when it comes to you your role, the ways in which yo maybe now there's a better fit for you and the things you should be doing next. And so that's very much the kind of thing of being able to invite other people in to help you understand it, thinking during the calm times about what are the signals, you should be reading out whether now this isn't the kind of thing that you should be continuing with, we can even go back to the three circles, the three circumstances that we're talking about before. Being able to read when the market circumstances have changed, being able to read when the career circumstances have changed, be able to read or the personal circumstances have changed. Maybe all of those lined up initially that you should dive in and be able to found, but maybe now at a different stage of life, maybe a career wise, you realize that what I should be as a starter and not a scalar.
Market wise, maybe it's changed. And now this is no longer such a great idea for the market, you're able to perceive what are the times that in each of those three arenas, things have changed, and maybe now's not the time to continue with this. And some of the other things they can bring to that thinking about it.
I guess the challenge is that as the entrepreneur, it's very, very hard to be objective. And I think I remember the example that you provided in class was of the founder of Pandora, that the music streaming service, correct me if I'm wrong. But I think the takeaway from that story is that this founder got basically punched in the gut what felt like 100 times and he just kept persisting and persisting and persisting. And now we're talking about him on this podcast. So you know, is it the fact that persistence has been kind of romanticized among business and entrepreneurial media? Is this just kind of the power of anecdotes? And how, if at all, can a founder or an entrepreneur be objective about his or her circumstances in the question of to persist or not to persist?
Yeah, no good memory for that case. So it was indeed, Tim Westergren, the founder of what became Pandora. And what he talks about, he had to pitch investors 300 times, getting a no after a no after a darn no, from investors. And that was the sequential rejection that he would talk about, in that case that he was having to persist through. And Tim is a great example of two things that you're talking about, and that we've been referring to one of them is possible over persistence, all sorts of ways in which very talented guy who he even 11 years into his venture, did not know if this is going to survive. He had all sorts of ways in which he kept getting tested in all sorts of increasingly problematic ways about whether to continue with this and other things like that. And even after a decade of plowing himself into the venture, it was possible he was going to have nothing to show for it, that suffer that major pain and a wasted wasted decade for it.
And so was it over persistence is what we grappled with within class, what are the signs that you should be looking at? Was Tim doubling down on his losing hand, when it came to the way in which when we are at the gambling table, and where he's facing losses? Are we thinking clearly about whether to double down or not? Or should we have stepped away from the table a lot earlier than that? Those are some of the things that are going on within the founders mind as he is facing a bunch of the rejection after rejection and other things along those lines. Are these signs that we should be reading and taking, you know, as taking to heart that maybe we're in our passion or misreading these types of things? But on the second thing, key thing with Tim, is a lot of times when people will seize on it and say, look, he persisted. So it's a good thing to persist. But A, the angst that he had for that decade, and B, what they're seizing on is it went public. And so he must have gotten rich from it.
When they went public, the VCs and the investors who were able to during Tim's times of desperation, negotiate really good investor terms are really bad founder terms, they had more than 75% of that company. At that point, a bunch of other people had a variety of other percentages, Tim only owed about 2% of Pandora at that point. And for the founder, who has gone through everything that he did, if you go and also allocate whatever he got out of the IPO from that 2% or so that he owned, and you allocate that across the decade, and all the other things that he could have been doing, etcetera, things like that, even from that perspective, it was very much possibly not worth that journey. But yet people will seize on it and save, but he did it. That is the magic that he had, he was able to get to IPO. I'll be the next table, we'll be able to get to IPO.
Well, unfortunately, it might be that you're gonna be the next team that goes through all the down parts of the roller coaster in the world falling in on you, and then having very little to show for it at the end. In terms of like the, the way in which you got anything financially and otherwise from it. A lot of times, and this is one of the key things that I love to doing the cases on some of my founders and stuff. People don't know who the founder was, a lot of times in these companies, they might know the the CEO got them to the IPO, like the later people and things like that. A lot of times founders aren't even recognized for the things that are going on. So I can ask you right now, like, who is the founder of Tesla? And do you know what the founder of Tesla was Steve?
Not Elon Musk. That's all I know.
Exactly. So A, that's one of the misnomers. People think that he founded it. But Martin Eberhard deserves a lot of credit for founding Tesla along with a co founder, but founding Tesla building it and being the CEO for the first four years before Elon Musk booted him out of there and things like that. But no one knows about Martin, no one knows about a lot of the key people who were the starters around it. And so founders won't even be getting credit for that. Even if it was something that turned into a going gangbusters, let alone not benefiting financially etcetera and things like that. It's one of the reasons that I love having founders on a pedestal being able to bring their names and their stories to the next generation and things like that. But a lot of times you also have to understand a lot of the costs that went into the persistence and the over persistence and the bumps in the road that they faced.
Yeah, I love how you highlighted the fact that we tend to focus only on one part of that equation, which is the outcome. It's visible, it's public, it's easy to understand. But what the overwhelming majority of people do not see as the journey and the cost and the sacrifice that it took to get there. Two kind of concluding questions for you. As I was reading your book for the second In time, I was struck by how many of the concepts can also apply to our personal relationships. And I know that you wrote a second book that touched on this in a much deeper way. Working with a partner, as you know, is very often equated with a marriage. So, you know, we can focus on spousal relationship. If you think that makes sense. We can focus on other personal relationships, if you think that makes sense. I'm curious of the countless concepts and frameworks within your books, what are the one or two or three that you think are most applicable or helpful in helping entrepreneurs manage and improve their personal relationships? Be it with their spouse or otherwise?
Yeah, no. So this is actually something back when I was creating founders dilemmas and the early years of it, that I was not tuning into at all, that there are lots of broader lessons that we can take, because these are the human factors and other things like that. And actually took one of the one of the people that took founders dilemmas a couple of years before you did, to put it on my radar to grab me by the lapels and shake me about it. This is back in 2010, second year of the course. And I had been founder founder founder focus for a decade. Every academic paper had the word founder in the title, I created the Founders Dillemas course I was writing the Founders Dilemmas book, everything was founder to me. Then I had a student who came to me and one of the things I loved was being able to have office hours being able to have students come by and we would chat about the biggest dilemmas they were grappling with and things like that.
This student came in and sat down to the chair across from me. And he said, Noam, I'm never going to be a founder. So at first I was saying about apologizing to him for snickering him into taking a useless course for him. But he said, I'm never going to be a founder. But your courses already changed my marriage. And I did not understand where he was coming from at that point. That's not at all what I was teaching in the course. And what he had for me, and this actually brought to mind at that point, I don't know if you would remember the last slide of the semester that would show you guys, there was a thank you slide to you. It was drawing on from the Talmud. And there was one of the great Rabbis, Rabbi Nina, who said that I learned about from my teachers, I learned more from my peers. And I learned the most from my students. Very true everyday a founders dilemma is that you guys would open my eyes to new things that I hadn't seen before.
All sorts of things that I'd be able to learn from you. This possibly is the biggest example of my learning the most from my students, was the question from that student, what the point from that student about how it had changed his marriage. But that's my opportunity to be able to learn when I have a surprise like that. I said, David, tell me where you're coming from. And he said, I'm a newlywed, we recently got married, and I found my co founder of life, and we're struggling, there's all sorts of challenges, we're having re architecting our lives now that we are a duo. Rather than being able to be solo operators. We're coming now to key inflection points where we're going to be making decisions together, we have to balance dual career stuff, rather than just having one career that we have to worry about key inflection point of life, where we're finishing school, and now going out to do careers, and we're setting the table for the next stage of life and things like that.
We're also struggling with a bunch of the roles within the family, how are we going to be able to handle that, he said that a lot of times, we were doing things where we were very much trying to, you know, find equality in the marriage, you do X, I will do Y, and we'll make sure that they equal each other in terms of the effort we're putting in and other things like that. And he said, now I'm walking in each day to home and saying, Honey, let's talk about this issue that we saw a founding team grapple with around roles and how they're allocating within the team. And we saw some best practices around it. And maybe let's try out some of the solutions that we saw in class for these things that were struggling with. Or the next day, honey, I just realized that we're avoiding a difficult conversation about something. And no one forced us to do a roleplay today where we had to build our difficult conversation muscles.
Let's do a little bit of that role playing here. So we can be able to get stronger at being able to do it. So it was his putting it on my radar. He was essentially grabbing me the lapels shaking me and say, Noam, your too focused on founder's. This is actually a life course not an entrepreneurship course. And there's all sorts of ways in which you're under estimating the things that people should be taking away from it. And so some of those things that he was referring to are some of the ones that I've found are some of the best ones around it. Some of these that we've also talked about through this, are there ways in which with your co founder of life, you were only looking at the rosy scenarios, and you're not grappling with the difficult the risks, the things that you're avoiding around difficult conversations? You have to build some of those difficult conversation muscles better.
I actually had an alum there's actually when I was teaching in the first year entrapreneurial manager course at HBS. There was a woman in that class Jessica Altar, who after that, and after we grappled with the founding team part of that course, she went on to found something that was a company that helped founders come together. And then she wrote a blog post that was featured by Steve Blank on his blog about founders having to build the having to get good at fighting. Now how to fight well. That was what she was talking about with in there, then that's one of the critical things that I find is critical within the marriage, being able to tee up those issues, being able to not let them fester. Being able to have that difficult conversation muscle built with your co founder of life is one of the first ones that I would extrapolate from there. And then when it comes to the roles that and the things that go on within the couple.
What that student said, what David had said was, I'm actually pretty good at cleaning, and my wife is a great cook. What we decided was, we're gonna be able to split those, each night, we'll take turns, I will clean and she will cook one night. And then the next night, we'll swap and we'll have the going back and forth that way. It's even and it breaks equal, and things like that. They said, The problem is that what we have is bird food half the time and a messy apartment the other half the time. And this is just not working when it comes to that. And when he walked in was he said, honey we've seen now within founding teams, first of all, you have to get off the scoreboard watching. The search for equality is going to mean they're gonna do all sorts of dysfunctional stuff, if we are watching each other to see how much is he really putting in, and is it equaling the amount that I am putting in, and other things like that, that's going to cause tensions and problems for us.
And also, we have to play to our strengths. That's what founding teams do they figure out, what is their lane, what is the set of skills, that they're going to be the best at being able to do it? What on the checklist is the thing that is checked off for them, and then they play to those strains. That's what they allocate the roles to, when it comes to that. So let me be doing the thing that I am strong in, but you'll be doing the thing that you're strong in, let's try to find ways that we can balance out in approximates, you know the effort and other things along those lines. But otherwise, let's not watch the scoreboard or anything like that. And let's play to our strengths. And so those are just a couple of things that those actually happened to map perfectly to the first two of our three hours that we were talking about. So on the relationship side and building out to be able to build a devote conversation muscles on the roll side, the second of the Rs.
That's where a bunch of these things are able to map to there. And there's a variety of other things in the second of the books, Life as a Startup, I get into a bunch of the things that we can also learn from founders and apply to our personal lives, about being able to have the the ways that we can make key decisions better, seeing through the passion and being able to do that also dealing with failure, how we can get stronger from it. Now a chapter on being able to do that in our personal lives and in our professional lives when we hit the bumps in the road. Other things about being able to make decisions better, being able to grapple with uncertainties, being able to have setbacks become strengthening exercises, some of the key things that we can learn from founders, and the ways that they've honed a lot of those lessons that we can then apply to our own lives.
I love that, especially the perils of scoreboard watching. I love how you phrase that a you know, whenever my wife and I find ourselves slipping into, you know, a day or a week or a month where our relationship isn't where we want it to be, we often find that it's the result of scoreboard watching. So that's really, really interesting. Nonetheless, last question for you, many of our listeners are investors. In fact, the host is an investor, you know, spanning venture capital, private equity, search funds and other asset classes. So I'd like to ask you the final question today. From their perspective. Let's say that you're an investor and you first meet a pair of partners pursuing an entrepreneurial endeavor. I'm so curious to know, what questions are you asking them? What are you looking for, to help you understand whether or not this is a type of partnership that has a high likelihood of success? And are there any kind of watch outs that we should be aware of?
So bunch of things that we talked about in the due diligence checklist when it comes to the three R's. Those are key things that I'm looking for first. Have they set the right foundation? Have they been able to build the right architecture have they developed those, the ability to fight well, etcetera? So those are some of the earliest things that we're looking at from an investment perspective also, something we haven't even touched on yet that I know, in class, I actually hold off on introducing it until second half of the semester, because unfortunately, I find that it tends to swamp a lot of the students thinking and harm, they're grappling with a lot of the things that we've been talking about. And that happens to be the inclination towards founders to either keep extra control of their venture, or to give up the reins too much.
It's something that we call the rich versus King trade off. And it's a natural inclination of founders, especially when they are wedded to the idea when they have all sorts of other things that we've talked about in terms of the biases and other things like that. That there's gonna be lots of ways in which they have to tune into am I the right person at the right time for the company? Or is there going to be a point where I'm no longer the right person, but yet my wanting to remain as the visionary as the idea driver, as the if you will king or queen on the throne is going to be something that is actually going to start harming my baby, is going to start harming the company? And that's one of the key things I actually ran into the phrase rich versus king when I was doing venture capital. I've heard it as something that VCs were using as a test of a founder.
Now to be able to see when it comes time that we as investors are evaluating that there's going to be a need for a new CEO to take the reins, is the fighter going to be fighting it, hey, is the founder going to be fighting it. Is a founder gonna resist the fact that at this point, the skills don't fit what you can do best, that there's a better role for you within the venture that having someone else whose skills do fit, the next stage of the venture is gonna be the best thing for everyone, including the founder when it comes to like their equity stake and other things along those lines. And so it's at those key inflection points, that you have that rich versus King test, if you will be able to evaluate that early on, there are a bunch of people. So I don't know if you'd remember this case study from the course. But the one on Wily Technology where it had a founder, who was a tech visionary, who was the best person by far to be leading the company during the early technical challenges needed to develop the product and things like that.
But then at a certain point, and I was co authoring this with the chairman of Greylock partners. And so there's some irony in this, but at a certain point that Greylock partner was on the board said, looking forward, you're not the best person to be running this company, we need someone else, because we're gonna have to be able to build a company that has a sales team, and you don't know sales at all. You don't even know how to interview a salesperson, let alone manage them and structure, their compensation and other things like that. And that's just one function that you've never worked in. Because you've been the Ace techy throughout your life, this has turned into a rocket ship. This has outstripped your ability to learn, your ability to be able to have this fast growing company continue to be led by the right person. And so we need to change you need to be able to have a better role that you can fit into. And as someone else be able to take the reins.
And founders when they hear that kind of a message, especially if they were in this for be able to lead it throughout and be able to have their vision be the thing that they can bring to the world are going to resist that big time, it's in their natural inclination for them to do it. When you talk about heart versus head. This is going to be very much the heart recoiling from it. Jack Dorsey when he was replaced as the originally replaced as the the founder CEO at what had become Twitter, he had barely managed anything bigger than a project team. He was in a rocket ship. And he said that when he got the message that we need someone who can really take the reins on this far better than you're gonna be able to do Jack. He said that was a ton of bricks and the punch in the stomach. That it that's very much a natural inclination, when is the founder recoiling and having the heart react to that change.
And so being able to feel the way through that founder, is that founder going to understand where we're coming from, when it comes to what is going to be the best for the company, at least in their judgment, when it comes to that change. Sometimes founders are so self aware that they will initiate that change, they will say I'm realizing where this has gone, I'm doing a lot of things that I find painful is not what I wanted to get into, there's going to be a lot of ways in which I prefer to get back to my first love and have someone else take on the painful part of the CEO job and other things like that. That is very rare. That is very much the data shows that it is not common that the founders A, have that self awareness and be realized that taking the reins on it is going to be a better thing for them. The founders who initiate that are the ones who are able to actually have a lot more of a senior role that they've been able to have post succession.
More likely, they're gonna be able to stick around on the board of directors and have a substantive role within that compared to the founders who are fired by the investors and that it's a rude awakening for them at that point around that. But that is the key thing that is also key for founders to reflect on for investors to evaluate these key inflection points are going to be make or break for the company, and also for the founder. Are there going to be all sorts of problems at that point? It's very typical that that inflection point is a very messy and very risky one for the company and for the founder, or is this kind of thing that early on, we're going to be able to deal with it and have recurring conversations around it. There's all sorts of things that have come up now, more recently with firms Andreessen Horowitz, the Founder Friendly Firm and other things like that. The interesting thing going back to the Wiley case and my co author Ian with the the chairman of Greylock, Henry McCann's.
Henry, early on, like he said, Greylock is very much the founder, friendly firm. And so we were talking about what kind of case study might we be able to do on a Greylock startup, where you had to change out the founder? And I was like, Henry, we're not going to have any to choose from you guys are the friendly founder friendly ones who keep founders in that seat, etcetera, you say that you evaluate is this founder gonna be able to go the distance and otherwise we want to invest in it? And Andrew said, No, we are fallible. This is very much an art being able to judge it. Despite that 25% of the time, probably, we have to change the founder. We have to find a new CEO for that company, despite our filtering on that despite our being that founder friendly firm.
And so also If we didn't do that, then we wouldn't be doing our fiduciary duty to our investors, because we would be building worse companies, because we are struggling because of our founder friendly marketing, things like that. We're continuing to struggle with a founder who isn't suited for what are the next challenges on this rocket ship? And so that be able to evaluate that early on to being able to skate where that puck is going to be of that key inflection point? And are things going to be able to be in line and other things like that. Those are some of the other things that I would say that investors should be having early on on their radar, the watch outs as you were phrasing it, for being able to make sure that they're evaluating all of these things together.