Founding Team Vs. Solo Founder, Which Is Better?

It’s commonly believed that founding teams are better than solo founders. But there’s evidence that proves otherwise.

After the dust settles and all the financial ducks are in a row, startup investors typically look at three crucial factors to determine whether a startup is a good investment.

This revelation comes on the heels of research conducted by Stanford finance professor Iya A. Strebulaev and his team. They surveyed 885 venture capital professionals at 681 firms and identified these three crucial factors as:

• Passion
• Experience
• Strong team

Interestingly, Strebulaev argues that these three factors are part of the reason “the average investor evaluates 200 companies a year and invests in just four.”

Notice the third factor — a strong team. Passion and experience are definitely necessary to combat the rigors of entrepreneurship. But a strong team…hmmm.

The bias in the VC industry towards companies with strong teams makes it difficult for bootstrapped companies with solo founders poised for success to get the funding necessary for growth.

Here’s the thing.

A bootstrapped company with a solo founder isn’t less likely to be successful than companies with teams. In fact, the opposite can be true.

Having a team isn’t necessary for startup success. Research shows that “companies started by solo founders can survive longer than companies founded by teams.”

Two reasons have been suggested for this phenomenon. First, solo founders who raise capital through crowdfunding and other avenues have a wide range of skills that support their success, including understanding how best to outsource and delegate work.

In contrast, founding teams tend to have a narrow focus on the existing skills within their teams. There are also instances where one founding team member has to pick up the slack of others because the other founding team members are missing in action.

Second, it’s common for disagreements and tensions to arise among co-founders. Solo founders avoid these tensions because they’re essentially making decisions on their own.

This certainly doesn’t mean that companies with solo founders are immune to challenges.

So, should you form a founding team or go solo? Let’s explore both options.

Why Are Investors Biased Toward Startups Founded by Teams?

A Harvard Business Review article suggests three reasons investors are biased towards startup teams (and why one of those reasons isn’t an accurate predictor of company success). These three reasons are:

• Prior startup experience
• Product knowledge
• Industry skills

Aside from these three tangible features, VCs also tend to focus on their gut feelings and intuition when assessing a startup team. Focusing on these instincts doesn’t lead to the best outcomes, however, since “60% of new ventures fail because of problems with the team.”

The article further explains research conducted by the Harvard Business Review that studied 95 new startup teams in the Netherlands. The aim was to determine whether prior startup experience is enough for a startup team to work well together.

It isn’t. The startup teams that thrive have entrepreneurial passion and a shared strategic vision, despite having average levels of previous experience. The Harvard Business Review article previously mentioned describes a discussion the author had with an investor at a venture capital firm.

This investor was considering investing in a software company based in Stockholm because she was impressed by the company’s financial performance, as well as the credentials and experience of the team. But she was underwhelmed during their pitch because they didn’t share the same vision.

The team broke up a few weeks later “because they had different goals for the company, the team members didn’t communicate efficiently, and the team members failed to share their knowledge which led to bad team dynamics and weak decision making.”

Startup founders with a wealth of experience who don’t share the company’s vision aren’t always willing to share their knowledge with the team. As in the case of the investor, the team she was considering lacked a shared vision and, therefore, the sharing of knowledge was lacking. In other words, the business relationship became counterproductive.

The situation described isn’t unique to that startup. If you carefully scrutinize startups that have founding teams and fail, you’ll realize that the lack of common passion and vision is the main contributor to their demise.

How You Choose To Put Together Your Founding Team Affects Its Success

Research conducted by the University of Maryland’s Robert H. Smith School of Business explains that a founding team’s formation strategy (aka how the founding team chooses to put itself together) is based on “the combined knowledge within the team of who knows what and how the team uses this shared knowledge to efficiently and effectively solve problems and make decisions.”

The best formation strategy that leads to startup success uses a hybrid approach. In this approach, there is the right mix of founders liking each other because of shared values and experiences, and having the best complementary skills and capabilities.

But only about 10% of startups actually use the hybrid approach because it’s difficult to find a founding team that has a perfect combination of resources, skills, experience, mindset, trust, and passion.

Do More Founders Mean More Growth?

Through our SaaS founder community MicroConf we began compiling a State of Independent SaaS Survey report in 2020. The 2021 report revealed some interesting results from the 534 companies that responded.

Of the companies surveyed, 56.35% were started by solo founders. But what’s really interesting is the growth patterns of the companies with one founder versus those with founding teams.

As the graph above shows, there’s a sharp decline in MRR growth for founding teams with more than three founders. Also, while more founders are related to more growth, two founders aren’t 2x the growth of one founder and three founders aren’t 3x the growth of one founder.

With minor incremental gains and a complete dropoff after three founders, you might begin to question whether or not the added challenges of communication and potential for failure are worth it to invest in teams vs. a solo founder.

Investor Bias Raises Critical Concerns

Both the studies conducted by the Harvard Business Review and the University of Maryland raise critical concerns about the traditional approach investors use to select startups. Investors are essentially searching for perfect teams. These teams are rare.

Also, the research has concluded that thriving teams have passion and a shared strategic vision. Solo founders possess these qualities and, therefore, shouldn’t be excluded by investors. Excluding solo founders causes investors to miss opportunities that can provide a great ROI.

Consider Sara Blakely, founder of Spanx, who started her business alone with $5,000. Spanx now has a $1 billion valuation. Blakely couldn’t find investors when she was just starting Spanx because investors wouldn’t even give a second look to a solo founder.

Decision Making In Founding Teams vs. Solo Founders

The need for consensus can cripple decision-making among founding teams. The problem further increases when there are more than two co-founders. When multiple parties are involved, there’s rarely room for a quick decision.

Team decisions are also negatively impacted by “ polarization, common knowledge bias, and conformity pressures.” A study conducted by McKinsey and Company revealed that “managers at Fortune 500 companies may waste more than 500,000 days a year on ineffective decision making.” Although a startup isn’t a Fortune 500 company, many founding teams do have ineffective decision-making processes, and that does lead to wasted time.

The opposite is true for solo founders. There’s only one person making decisions, so decisions can be made more quickly and effectively.

Quick decision-making is important for entrepreneurs because it helps companies:

• Use resources optimally
• Prevent missed opportunities
• Increase competitive advantage

As Lalit Upadhyay, Founder of Polash Ventures states, “ The entrepreneurial journey is all about making the right decisions with confidence and positivity, firmly at the right time, one after another.”

Risky Decision Making

Generally speaking, founding teams are more likely to be risk-averse. “ Once they’ve taken the leap, many founders prefer to be conservative and hedge their bets. “ Solo founders are more likely to take risks. However, there are pros and cons to each approach.

More risk-taking can lead to more opportunities, and it can also lead to costly mistakes. TOMS’ founder, Blake Mycoskie, built the brand on the premise of a buy one, give one model where a pair of shoes was given to someone less fortunate for each pair purchased.

It’s a model that worked well for years, especially with the additional boost of celebrity endorsements. In fact, the company was valued at $625 million in 2014. But the shoe market is highly competitive and the business model Mycoskie had used to achieve success started to falter.

Mycoskie tried to pivot by forming the TOMS Roasting Company in 2014, but that didn’t help with sales. TOMS was eventually taken over by creditors in 2020 because of a $300 million loan.

So, although greater risk-taking by solo founders can lead to opportunities, it can also harm the company. That’s something solo founders should pay keen attention to.

Chander Chawla suggests creating optionality so that solo founders don’t become fixated on an idea. Instead, optionality allows them to:

• Be more flexible with their products
• Test different options
• Apply knowledge to different markets

Solo founders should weigh all the risks and learn to identify when to make adjustments so their business can thrive.

Founding Teams Face Issues Of Internal Conflict

CB Insights carefully analyzed 111 startup failures and created a list of the top reasons startups fail. The internal conflict between founders (and between founders and investors) was one of the top reasons identified.

Garry Tan, one of the co-founders of Posterous, left the company because of conflicts with his co-founder. He says that the conflicts arose when the company’s growth flatlined in 2010. The founders were at each other’s throats when they should have been working together to address the problems.

They hadn’t previously made efforts to nurture and strengthen their relationship as business partners. In fact, they rarely spoke directly and honestly with each other when things were going well. They had known each other for eight years prior to forming the company, but that wasn’t enough.

So Tan left, and the company was sold to Twitter in 2012. Twitter completely shut down the platform in 2013. Would things have ended differently if the co-founders had a harmonious relationship? Probably but now we’ll never know.

Solo founders tend to rely heavily on the teams they create. They have to hire the right people who have an entrepreneurial mindset, complement the founders’ weaknesses, and embrace the company’s vision. Otherwise, there will also be internal conflict among the solo founder’s team.

Exit Math Of Founding Teams vs. Solo Founders

Exits matter; it’s the time when founders and investors receive the fruits of their labors. That’s why TechCrunch recommends developing an exit strategy early in the game to prevent missed opportunities or leaving money on the table.

One of the biggest mistakes founding teams make is not paying enough attention to structuring the team well from an equity standpoint. Research shows that “the percentage of founders who are unhappy with their equity splits increases by 2.5x as their startups mature.” This leads to shaky exit strategies that cause unnecessary tension and could potentially harm the business.

A long period of negotiation among founders early on is recommended so that a fair equity split can be determined. Often, this results in an uneven equity split that matches each co-founder’s contribution.

Solo founders don’t have this issue because they own all of the equity. There may be other concerns when deciding to either sell the company or merge with another, but concerns about equity split within the company are nonexistent.

Final Thoughts

Despite persistent biases, solo founders can create successful businesses. Research shows that companies founded by solo founders last longer than those founded by founding teams. This success can be attributed to solo founders’ natural passion for the business, strategic vision, quick decision-making, and greater freedom to take risks.

But founding teams can also be good investments.

From an investor’s point of view, finding teams with the right combination of passion, strategic vision, and experience should be the goal. These teams also need to have a solid formation strategy, harmonious relationships, an effective decision-making process, and clear discussions about their equity stakes early in the game.

So, solo founder or founding teams? In our experience funding 59 companies so far, either way can result in a winner with the right idea, the right people, and the right execution.

TinySeed believes in accelerating the growth of bootstrapped founders and founding teams. Not only do we provide much-needed funding, but we also provide advice, community, and mentorship to help founders take their businesses to the next level. We’ve worked with growing brands that are killing it, like SavvyCal and Reftab, and we would love to work with you too.

P.S. — We invest in solo founders AND founding teams!

Originally published at https://tinyseed.com on December 7, 2021.