Team Formation & New Venture Teams PDF

CHAPTER 4 TEAM FORMATION CREATING A NEW-VENTURE TEAM Those who launch or found an entrepreneurial venture have an important role to play in shaping the firm’s business concept. Stated even more directly, it is widely known that a well-conceived...

CHAPTER 4 TEAM FORMATION CREATING A NEW-VENTURE TEAM Those who launch or found an entrepreneurial venture have an important role to play in shaping the firm’s business concept. Stated even more directly, it is widely known that a well-conceived business plan cannot get off the ground unless a firm has the leaders and personnel to carry it out. As one expert put it, “People are the one factor in production... that animates all the others.” Often, several start-ups develop what is essentially the same idea at the same time. When this happens, the key to success is not the idea but rather the ability of the initial founder or founders to assemble a team that can execute the idea better than anyone else. The way a founder builds a new-venture team sends an important signal to potential investors, partners, and employees. Some founders like the feeling of control and are reluctant to involve themselves with partners or hire managers who are more experienced than they are. In contrast, other founders are keenly aware of their own limitations and work hard to find the most experienced people to bring on board. Similarly, some new firms never form an advisory board, whereas others persuade the most important (and influential) people they can find to provide them with counsel and advice. In general, the way to impress potential investors, partners, and employees is to put together as strong a team as possible. Investors and others know that experienced personnel and access to good-quality advice contributes greatly to a new venture’s success. The elements of a new-venture team are shown in Figure 4.1. It’s important to carefully think through each element. Miscues regarding whether team members are compatible, whether the team is properly balanced in terms of areas of expertise, and how the permanent members of the team will physically work together can be fatal. Conversely, careful attention in each of these areas can help a firm get off to a good start and provide it a leg up on competitors. Figure 4.1 Elements of a New-Venture Team  There is a common set of mistakes to avoid when putting together a new-venture team. These mistakes raise red flags when a potential investor, employee, or business partner evaluates a new venture. Table 4.1 Common Mistakes Made in Putting Together a New-Venture Team ▪ Placing unqualified friends or family members in management positions. ▪ Assuming that previous success in other industries automatically translates to your industry. ▪ Presenting a “one man team” philosophy—meaning that one person (or a small group of people) is wearing all hats with no plans to bolster the team. ▪ Hiring top managers without sharing ownership in the firm. ▪ Not disclosing or talking dismissively of management team skill or competency gaps. ▪ Vague or unclear plans for filling the skill or competency gaps that clearly exist. The Founder or Founders A founder’s or founders’ characteristics and their early decisions significantly affect the way an entrepreneurial venture is received and the manner in which the new-venture team takes shape. The size of the founding team and the qualities of the founder or founders are the two most important issues in this matter. Size of the Founding Team The first decision that most founders face is whether to start a firm on their own or whether to build an initial founding team. Studies show that more than one individual starts 50 to 70 percent of all new firms. However, experts disagree about whether new ventures started by a team have an advantage over those started by a sole entrepreneur. Teams bring more talent, resources, ideas, and professional contacts to a new venture than does a sole entrepreneur. In addition, the psychological support that cofounders of a business can offer one another can be an important element in a new venture’s success. Conversely, a lot can go wrong in a partnership— particularly one that’s formed between people who don’t know each other well. Team members can easily differ in terms of work habits, tolerances for risk, levels of passion for the business, ideas on how the business should be run, and similar key issues. If a new-venture team isn’t able to reach consensus on these issues, it may be handicapped from the outset. When a new venture is started by a team, several issues affect the value of the team. First, teams that have worked together before, as opposed to teams that are working together for the first time, have an edge. If people have worked together before and have decided to partner to start a firm together, it usually means that they get along personally and trust one another. They also tend to communicate with one another more effectively than people who are new to one another. Second, if the members of the team are heterogeneous, meaning that they are diverse in terms of their abilities and experiences, rather than homogeneous, meaning that their areas of expertise are very similar to one another, they are likely to have different points of view about technology, hiring decisions, competitive tactics, and other important activities. Typically, these different points of view generate debate and constructive conflict among the founders, reducing the likelihood that decisions will be made in haste or without the airing of alternative points of view. A founding team can be too big, causing communication problems and an increased potential for conflict. A founding team larger than four people is typically too large to be practical. There are three potential pitfalls associated with starting a firm as a team rather than as a sole entrepreneur. First, the team members may not get along. This is the reason investors favor teams consisting of people who have worked together before. It is simply more likely that people who have gotten along with one another in the past will continue to get along in the future. Second, if two or more people start a firm as “equals,” conflicts can arise when the firm needs to establish a formal structure and designate one person as the chief executive officer (CEO). If the firm has investors, the investors will usually weigh in on who should be appointed CEO. In these instances, it is easy for the founder that wasn’t chosen as the CEO to feel slighted. This problem is exacerbated if multiple founders are involved and they all stay with the firm. At some point, a hierarchy will have to be developed, and the founders will have to decide who reports to whom. Some of these problems can be avoided by developing a formal organizational chart from the beginning, which spells out the roles of each founder. Finally, if the founders of a firm have similar areas of expertise, it can be problematic. The founders of Devver were both technically oriented leaving the firm without a leader on the business side. Recruiting and Selecting Key Employees Once the decision to launch a new venture has been made, building a management team and hiring key employees begins. Start-ups vary in terms of how quickly they need to add personnel. In some instances, the founders work alone for a period of time while the business plan is being written and the venture begins taking shape. In other instances, employees are hired immediately. One technique available to entrepreneurs to help prioritize their hiring needs is to maintain a skills profile. A skills profile is a chart that depicts the most important skills that are needed and where skills gaps exist. A skills profile for New Venture Fitness Drinks is shown in Figure 4.2. Along with depicting where a firm’s most important skills gaps exist, a skills profile should explain how current skills gaps are being dealt with. For example, two of New Venture Fitness Drink’s skills gaps are being covered (on a short-term basis) by members of the board of advisers and the third skills gap does not need to be filled until the firm initiates a franchising program, which is still three to five years in the future. Founders differ in their approach to the task of recruiting and selecting key employees. Some founders draw on their network of contacts to identify candidates for key positions. Others ask their existing employees for referrals. An increasingly important approach for recruiting employees is via social media sites like LinkedIn, Twitter, and Facebook. The founder of a small firm can broadcast to his or her LinkedIn contacts or Facebook friends that s/he is interested in hiring qualified employees, without paying for a job posting.  Figure 4.2 Skills Profile for New Venture Fitness Drinks The Roles of the Board of Directors If a new venture organizes as a corporation, it is legally required to have a board of directors—a panel of individuals who are elected by a corporation’s shareholders to oversee the management of the firm. A board is typically made up of both inside and outside directors. An inside director is a person who is also an officer of the firm. An outside director is someone who is not employed by the firm. A board of directors has three formal responsibilities: (1) appoint the firm’s officers (the key managers), (2) declare dividends, and (3) oversee the affairs of the corporation If handled properly, a company’s board of directors can be an important part of the new-venture team. Providing expert guidance and legitimacy in the eyes of others (e.g., customers, investors, and even competitors) are two ways a board of directors can help a new firm get off to a good start and develop what, it is hoped, will become a sustainable competitive advantage. ROUNDING OUT THE TEAM: THE ROLE OF PROFESSIONAL ADVISERS Along with the new-venture team members we’ve already identified, founders often rely on professionals with whom they interact for important counsel and advice. In many cases, these professionals become an important part of the new-venture team and fill what some entrepreneurs call “talent holes.” Next, we discuss the roles that boards of advisers, lenders, investors, and other professionals play in rounding out new-venture teams. Board of Advisers Some start-up firms are forming advisory boards to provide them direction and advice. An advisory board is a panel of experts who are asked by a firm’s managers to provide counsel and advice on an ongoing basis. Unlike a board of directors, an advisory board possesses no legal responsibility for the firm and gives nonbinding advice. As a result, more people are willing to serve on a company’s board of advisers than on its board of directors because it requires less time and no legal liability is involved. A board of advisers can be established for general purposes or can be set up to address a specific issue or need. Most boards of advisers have between 5 and 15 members. Entrepreneurial firms typically pay the members of their board of advisers a small honorarium for their service either annually or on a per- meeting basis. Boards of advisers interact with each other and with a firm’s managers in several ways. Some advisory boards meet three or four times a year at the company’s headquarters or in another location. Other advisory boards meet in an online environment. In some cases, a firm’s board of advisers will be scattered across the country, making it more cost-effective for a firm’s managers to interact with the members of the board on the telephone or via e-mail rather than to bring them physically together. In these situations, board members don’t interact with each other at all on a face-to-face basis, yet still provide high levels of counsel and advice. The fact that a start-up has a board of directors does not preclude it from having one or more board of advisers. For example, Coolibar, a maker of sun protective clothing, has a board of directors and a medical advisory board. According to Coolibar, its medical advisory board “provides advice to the company regarding UV radiation, sunburn, and the science of detecting, preventing, and treating skin cancer and other UV-related medical disorders, such as lupus.” The board currently consists of seven medical doctors, all with impressive credentials. Similarly, Intouch Health, a medical robotics and instruments company, has a board of directors along with a Business & Strategy advisory board, an Applications & Clinical advisors board, and a Scientific & Technical advisory board. Intouch Health says that its “diversified Advisory Board draws on the talents of seasoned executives, clinical and scientific authorities, clinical and scientific authorities, and pioneers from a variety of technical areas. Their expertise encompasses international business management, robotics, telemedicine, and computer software, hardware and networking.” Although having a board of advisers is widely recommended in start-up circles, most start-ups do not have one. As a result, one way a start-up can make itself stand out is to have one or more boards of advisers. Lenders and Investors Lenders and investors have a vested interest in the companies they finance, often causing these individuals to become very involved in helping the firms they fund. It is rare that a lender or investor will put money into a new venture and then simply step back and wait to see what happens. In fact, the institutional rules governing banks and investment firms typically require that they monitor new ventures fairly closely, at least during the initial years of a loan or an investment. The amount of time and energy a lender or investor dedicates to a new firm depends on the amount of money involved and how much help the new firm needs. For example, a lender with a well-secured loan may spend very little time with a client, whereas a venture capitalist may spend an enormous amount of time helping a new venture refine its business model, recruit management personnel, and meet with current and prospective customers and suppliers. In fact, evidence suggests that an average venture capitalist is likely to visit each company in a portfolio multiple times a year. This number denotes a high level of involvement and support. As with the other nonemployee members of a firm’s new-venture team, lenders and investors help new firms by providing guidance and lending legitimacy and assume the natural role of providing financial oversight. In some instances, lenders and investors also work hard to help new firms fill out their management teams. Sometimes this issue is so important that a new venture will try to obtain investment capital not only to get access to money, but also to obtain help hiring key employees. Bankers also play a role in establishing the legitimacy of new ventures and their initial management teams. Research evidence rather consistently suggests that the presence of bank loans is a favorable signal to other capital providers. Investors often take a seat on the boards of directors of the firms they fund to provide oversight and advice. There are additional ways that lenders and investors add value to a new firm beyond financing and funding. These roles are highlighted in Table 4.5. Table 4.5 Beyond Financing and Funding: Ways Lenders And Investors Add Value to An Entrepreneurial Venture Help identify and recruit key management personnel Provide insight into the industry and markets in which the venture intends to participate Help the venture fine-tune its business model Serve as a sounding board for new ideas Provide introductions to additional sources of capital Recruit customers Help to arrange business partnerships Serve on the venture’s board of directors or board of advisers Provide a sense of calm in the midst of the emotional roller-coaster ride that many new-venture teams experience Other Professionals At times, other professionals assume important roles in a new venture’s success. Attorneys, accountants, and business consultants are often good sources of counsel and advice. Consultants A consultant is an individual who gives professional or expert advice. New ventures vary in terms of how much they rely on business consultants for direction. In some ways, the role of the general business consultant has diminished in importance as businesses seek specialists to obtain advice on complex issues such as patents, tax planning, and security laws. In other ways, the role of general business consultant is as important as ever; it is the general business consultant who can conduct in-depth analyses on behalf of a firm, such as preparing a feasibility study or an industry analysis. Because of the time it would take, it would be inappropriate to ask a member of a board of directors or board of advisers to take on one of these tasks on behalf of a firm. These more time-intensive tasks must be performed by the firm itself or by a paid consultant. Those leading an entrepreneurial venture often turn to consultants for help and advice because while large firms can afford to employ experts in many areas, new firms typically can’t. If a new firm needs help in a specialized area, such as building a product prototype, it may need to hire an engineering consulting firm to do the work. Consultants’ fees are typically negotiable. If a new venture has good potential and offers a consulting firm the possibility of repeat business, the firm will often be willing to reduce its fee or work out favorable payment arrangements. Consultants fall into two categories: paid consultants and consultants who are made available for free or at a reduced rate through a nonprofit or government agency. The first category includes large international consulting firms, such as Bearing Point, Accenture, IBM Global Services, and Bain & Company. These firms provide a wide array of services but are beyond the reach of most start-ups because of budget limitations. But there are many smaller, localized firms. The best way to find them is to ask around for a referral. Consultants are also available through nonprofit or government agencies.