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Reflection Notes from S353 Jan 15

· 4 min read

Reflected from today's S353 Entrepreneurship: Formation of New Business, Case SHED. 3 is the best number for the size of a startup team (even Google's Brin and Page had to bring Schmidt to balance out). 4 is usually not very stable. Do not split equity equally. It rarely works out.

Confession of a Stanford Sloan Fellow Series EP39

Reflected from today's S353 Entrepreneurship: Formation of New Business, Case SHED:

  • 3 is the best number for the size of a startup team (even Google's Brin and Page had to bring Schmidt to balance out). 4 is usually not very stable.

  • Do not split equity equally. It rarely works out. In the case of 3 founders, make sure:

  • There is a single largest shareholder

  • The equity stake of any two founders is greater than the third one's

  • Do not discuss equity split until there is a tangible idea to work on and everyone knows what his/her role is. Discussion on equity split, once occurred, is very difficult to roll back.

  • Do not form a partnership only based on common interests, or purely based on friendship. Every condition below has to be met before forming a startup partnership:

  • same value system

  • common interest areas (entertainment, mobile Internet, healthcare, agriculture... something)

  • a business idea that all parties agree to commit to (could be a vague one.. but there has to be one)

  • complementary skill set

  • Vetting on team members during GSB days is essential, but may not be sufficient. A man's true character and personality are only revealed when there is significant money at stake. TGIFs, study group discussions, coffee breaks at Coupa, study trips, all these interactions certainly help to understand someone's value system and integrity, but founders should not get too carried away on those findings. When there is no real money at play, it's not hard to get along with most people in GSB. GSB's environment, compared to real-life startup situations, is not stressful enough to put a man in a corner.

  • The concept of defensible and sustainable business model is over-rated (Monitor Group did go bankrupt). A startup play is to arbitrage on the constraint optimization. When other players in the market see the same potential, that arbitrage opportunity will diminish unless the company reinvents itself. Everything is in relative sense - a startup is only as successful as the founders are able to exit with respectable return before it's lost its edge.

  • Attending trade shows to get business ideas? This might work in the case of SHED, but I won't use that as the main source of idea generation. My problem, and my partners' problem, has always been that we have way too many ideas we want to work on, and we only have limited resources. I've never been in a situation like, oh my god, I have no idea what to start up with. Let me go attend a trade show to get some ideas. I get hit by ideas all the time.

  • How do founders know an idea is new? In our case, it's very simple. All three of us are very well informed and plugged in our own networks. If an idea pops up and none of us has heard about it before, almost by definition it has to be a new idea (otherwise we would have known).

  • The success of SHED case brings out a very interesting business strategy that is pretty rare but could be highly effective. Occasionally, a small player can leverage existing competition and play off against big players. For details, read Isaac Asimov's Foundation series.

  • Starting a new business without domain expertise is very possible, as Sarah Blakely of Spanx, Tory Burch of Tory Burch, and Scott and Eric from SHED have demonstrated. With enough passion and dedication, it's not that hard to catch up on the knowledge and experience. It's not easy, but can be done.

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