Solo founders may have a winning business idea, but investors tend to view the lack of a team to inform and support them as too risky an investment.
You have a great business idea, you’ve been thinking entrepreneurially since making money off your classmates at school, and you have the drive and gumption to give it a go. Next step is attracting finance.
It turns out, though, that solo entrepreneurs find it tougher to win over investors than the start-up next door with a small team at the helm.
Nine out of 10 start-ups fail, let alone get off the ground. Data from CB Insights shows that lack of product demand and running out of cash are the top two reasons.
Steve Hogan, managing partner of Tech-Rx in the US, which tries to salvage start-ups in crisis, says companies founded by one person – that is, no partners – are the most likely to fail.
He’s not alone in his view. Flying solo as CEO – “chief everything officer” – can be riskier because not only do you lack complementary skill sets to support better decision-making, but you also lack a team that shares and supports your vision.
“What’s wrong with having one founder? To start with, it’s a vote of no confidence,” former Y Combinator president Paul Graham once famously claimed.
Dropbox founder Drew Houston found this out 10 years ago when Graham told him to go away and come back when he had a co-founder: “You couldn’t even talk one friend into coming on board?” Graham asked when Houston approached him about funding.
Two weeks later, Houston returned with college classmate Arash Ferdowsi, got the cheque and Dropbox is now worth US$10 billion.
The three Hs of co-founders: hustlers, hackers and hipsters
All investors have well-defined selection criteria and being a solo founder might not match. For example, on its website European-headquartered Oxygen Accelerator answers, “I’m a single founder – can I still apply?” with a straight-up “no”.
Ashley Brown, program director of KPMG Energise, one of the largest energy and natural resources accelerator programs in the Asia-Pacific, says founding teams of two or more is a key part of its selection criteria.
“Co-founders have the ability to bounce ideas off one another, to test their hypotheses … before making big commitments,” he says.
Brown is a firm advocate of the three Hs: a Hustler (business savvy person who makes sure the company makes money), a Hacker (someone with an engineering or IT background who creates the actual product), and a Hipster (who focuses on customer experience and interface).
“It is very uncommon to find one person strong in all three areas,” Brown says.
“Typically, a founder will recognise they’re stronger in one or two and find a way to augment their other capabilities, either by giving up equity to bring somebody on board at a level that is going to drive the business forward, or through mentors and advisers.
“Often there are gaps across all three disciplines, which can be quite a challenge to overcome, but if you don’t address them it can lead to not being able to push on with the business or scale it in the way it needs to be scaled,” he says.
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Karen Lawson, CEO of corporate start-up accelerator Slingshot – which provides start-ups with seed funding, a corporate partner and mentoring program – agrees.
“Across the corporate sector today, people are being put in teams because the collective skill sets make the business stronger,” she says.
“Running a business solo is hard work, especially from a mental toughness and resilience perspective, and a reason we believe having someone with you on the journey is important.
“There are highs and lows beyond the kinds of stress levels you will get in a corporate. More often than not you have your house and kids’ education on the line, and there isn’t any financial safety net.”
Lawson also believes that expecting one person to have the skill sets required by the whole business is unrealistic.
“If you’re a single founder you’re going to have to outsource a lot of tasks and relationships to people who, because they’re not founders of the business, are suppliers,” she explains.
“[That means] you’re probably paying higher costs and not getting the same commitment, and certainly for any start-up without a tech founder, there is going to be an impact on growth and scalability.”
Weighing the risks of going solopreneur
Although KPMG Energise prefers ventures with co-founders, Brown concedes it has opened its doors to a handful of solo founders.
As an accelerator, KPMG Energise is an exception to the general rule in that it does not take equity, but Brown says all types of investors weigh the same risks.
“A founding team of one is a bit like putting all your eggs in the one basket,” he maintains.
“Multi-founder start-ups are more resilient. If one of the partners has a significant life event or decides to bail out, there is a better chance the business can continue.”
“Across the corporate sector people are being put in teams because the collective skill sets make the business stronger,” Karen Lawson, Slingshot
Anyone intent on founding a business alone needs to be honest in recognising their strengths and weaknesses and how they are going to minimise risks and overcome challenges, he says.
Like Brown, Lawson concedes there can be exceptions to the solo founder rule but, nine times out of 10, Slingshot recommends that its corporate clients work with co-founder start-ups.
To date, those that have gone through a Slingshot-run accelerator program have a combined market capitalisation of more than A$42 million. More than 80 per cent are still active or have been acquired.
“As a start-up, it’s a long and challenging road,” she says, “but with the right people you can really change the odds.”
Australia may have a growing appetite to fund start-ups, but solo founders will need to prove they can handle the workload or the money will go to the team next door.
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