CHAPTER 9
Building a New-Venture Team

Liability of Newness as a Challenge

As we note throughout this textbook, new ventures have a high propensity to fail. The high failure rate is due in part to what is known as the liability of newness, which refers to the fact that companies often falter because the people who start them aren’t able to adjust quickly enough to their new roles and because the firm lacks a “track record” with outside buyers and suppliers. Assembling a talented and experienced new-venture team is one path firms can take to overcome these limitations. Another way entrepreneurs overcome the liability of newness is by attending entrepreneurship-focused workshops and events.

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 model. Stated even more directly, it is widely known that a well-conceived business plan, one that flows from the firm’s previously established business model, cannot get off the ground unless a firm has the leaders and personnel to carry it out.

The Founder or Founders

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 50 to 70 percent of all new firms are started by more than one individual. 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.

Qualities of the Founders

The second major issue pertaining to the founders of a firm is the qualities they bring to the table. In the previous several chapters, we described the importance investors and others place on the strength of the firm’s founders and initial management team. One reason the founders are so important is that in the early days of a firm, their knowledge, skills, and experiences are the most valuable resource the firm has. Because of this, new firms are judged largely on their “potential” rather than their current assets or current performance. In most cases, this results in people judging the future prospects of a firm by evaluating the strength of its founders and initial management team.

The Management Team and 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.

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.

Provide Expert Guidance

Although a board of directors has formal governance responsibilities, its most useful role is to provide guidance and support to the firm’s managers. Many CEOs interact with their board members frequently and obtain important input. The key to making this happen is to pick board members with needed skills and useful experiences who are willing to give advice and ask insightful and probing questions.

Lend Legitimacy

Providing legitimacy for the entrepreneurial venture is another important function of a board of directors. Well-known and respected board members bring instant credibility to the firm. Achieving legitimacy through high-quality board members can result in other positive outcomes. Investors like to see new-venture teams, including the board of directors, that have people with enough clout to get their foot in the door with potential suppliers and customers. Board members are also often instrumental in helping young firms arrange financing or funding.

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.”

Board of Advisors

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.

Lenders and Investors

As emphasized throughout this book, 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.

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.

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