In various contexts, both in terms of new deals I am evaluating as well as some recent developments in the portfolio, I have been mulling over how I should be thinking about backing solo founders.
Classical VC guardrails tell me to stay away from solo founders. YCombinator has almost made the classic “two co-founders” team into startup dogma. In my past venture roles, I was taught to filter out solo founders in the first pitch meeting itself.
However, my lived experience of my own portfolio, as well as observing many more startups in various situations, tells me that this discussion deserves much more nuance:
1/ Anecdotally, at the pre-seed/seed stage, I have noticed that at least 20-30% of founding teams end up separating in the first 24-36 months.
Btw, this number aligns with the below analysis ChatGPT put together on this question:
So the reality is, as a seed investor, while you might be drawing comfort in backing the classical 2-person, “technical + GTM” co-founding team, it’s very likely to be a false signal, and if the company ends up surviving the valley of death, it will most likely fall back on one founder.
2/ Even in classical 2-3 person co-founding teams, one founder is usually the Alpha, the lead who inspires the core of the trust & conviction that investors build around the company. In almost all cases, the Alpha is also the CEO of the company (if the Alpha isn’t the CEO, then the team has bigger problems).
In my experience, until the Alpha doesn’t give up on the company, we all stay in the game, as even after team splits, the Alpha has the vision, tenacity, and storytelling skills to hire new talent, and even onboard another set of earned co-founders.
So, with the probability of founders splitting being significantly high, even while backing a full-stack founding team, the reality is that we as seed investors are really betting on the sole Alpha founder as the core kernel of the company.
3/ This is the one I have a real pet peeve with – another YC dogma that founders should always split the equity 50-50.
I understand what YC is trying to say by propagating this idea, and maybe it even makes sense in the specific context of its target persona: young, out-of-college people ganging up together on short notice to “attempt a startup”.
In my experience, this notion of a 50-50 split has turned out to be entirely disconnected from the overarching ground realities of how businesses the world over get built, how teams get structured as per both the risk each person takes as well as the tangible value they bring to the table.
One of my driving principles around early-stage investing is that, irrespective of tech or non-tech, AI or non-AI, Silicon Valley or India, some fundamental principles of “how to build a new business” never change. Things like you need to target a very clear customer persona, your value proposition should achieve both the job-to-be-done and do it in a differentiated way against competition, the core unit economics of your business should be profitable, you need to be present where your customer is to drive distribution, the lowest cost producer will always have an advantage, etc.
These are principles that keep getting repeated across generations – from Charlie Munger & Warren Buffett to Sam Walton and Jeff Bezos. You can almost call them “Business Laws of Nature”.
I have repeatedly stress-tested and validated these principles both as a repeat founder myself as well as a venture investor for more than 15 years now. Each and every time, I have found these principles to be true, and whenever anyone has tried to pitch, argue, or sell any notion that violates any of them, the person has lost, and the principles have held their ground.
A dogmatic 50-50 equity split rule is in violation of these business laws. I haven’t heard even one generational founder, be it 1st-generation or a family business, ever talk about it. These people have built companies that have stood the test of time and delivered true value for decades to both customers, employees, and shareholders. If this isn’t something that they have acted on or professed, I am inclined to believe that this 50-50 split is more of a Valley YC dogma and shouldn’t be taken as set-in-stone advice.
In fact, let me give you a different, and might I say radical, perspective from the non-tech, real operating business world. In his amazing book with a super-cheesy title – “How to Get Rich”, OG media founder Felix Dennis (who started as a college dropout, with no family money, created a publishing empire, founded Maxim magazine, & made himself one of the richest people in the UK) had this to say on ownership (sharing excerpts):
To become rich, every single percentage point of anything you own is crucial. It is worth fighting for, tooth and claw. It is worth suing for. It is worth shouting and banging on the table for. It is worth begging for and groveling for….
…Never, never, never, never hand over a single share of anything you have acquired or created if you can help it. Nothing. Not one share. To no one. No matter what the reason—unless you genuinely have to.
So, if you refuse to believe in the 50-50 equity split startup dogma, implicit in this is the argument that, more than solo or multiple founders, what really matters is whether the ownership split between the starting bunch of individuals makes sense from the perspective of the fundamental business laws of nature.
TLDR: the devil is in the details…
Therefore, my working POV is not to discount single founders straight-up. Especially if the founder is a compelling Alpha, has shown the ability to hire top talent, and execute on the business, it makes sense to dive deeper into the L2 and L3 level details around the genesis history, why the founder has chosen this operating model, what it says about their behavior patterns, and what their go-forward thinking is on this topic.
Note: if you are intrigued by this topic, check out one of my earlier posts – ‘Co-founder Breakups’, wherein I share some insights/patterns from various co-founder breakups I have witnessed over the years.
