Why Investors Want Co-founders

I just read a blog post entitled “You can do it alone” as well as the ensuing discussion on Hacker News. Paul Graham says:

You can certainly start a business without a cofounder. What’s hard to do, empirically, is to start one that gets really big.

Well, it’s always hard to start a business that gets really big regardless of the number of founders. Paul doesn’t address the implied question: how much harder would it be for a single founder?

Regardless of the answer, I know first hand that it’s possible to be a successful single founder of a startup. Obviously it has advantages and disadvantages when compared to having co-founders: more effort, more potential reward, always on call, no safety net, etc. Ultimately it’s a personal decision, and I won’t give a generic opinion (although I have no interest in ever doing it again).

However, investors have their own reasons to prefer startups with more than one founder. These reasons are not always obvious to founders, or even to investors themselves in some cases. Let me put on my dunce investor hat and tell you a couple of mine:

1) Single point of failure. As someone who built network infrastructure for a living, I tried to avoid having one component that would take down a whole system if it failed. When a startup depends on a single person, it is much more likely to die if this person gets abducted by aliens (unless it’s just for a couple of days, and the memories of the experiments are erased. But I digress). I often wondered what would happened to IndexTank if I disappeared, and I believe it’s very unlikely that it would have survived. Two or more co-founders are like having your online business running on several availability zones of a cloud provider. I was like the US-East (N. Virginia) AWS data center for IndexTank. We eventually distributed the service across regions, but I couldn’t clone myself.

2) Higher motivation for an early exit, or not selling. If a company with three co-founders needs to sell for X so that they all feel they’ve “solved the money problem,” then one of those founders would be happy to sell for X/3. This is clearly a risk for investors; it lowers the expected value of the investment even if the companies prospects no different than if it had multiple founders. The converse is also true: if the single founder happens to be a megalomaniac world overtaker, then it will be harder to convince him to sell even when it would represent an excellent return for investors.

To sum it up, a startup with a single founder is a riskier investment, and there is no reason to believe the return will compensate for the risk. It follows that rational investors must try to convince a single founder to get a co-founder.

This is just one more example of ways in which investors and founders can have misaligned motivations. Being honest and open about this issue is good for both parties.

 

One thought on “Why Investors Want Co-founders

  1. The best system would self-organize, self-sustain and self-govern. Having at least two heads is good for nurturing a system until it is mature enough to defend itself and be its own advocate. In the long-run, management input tends to destroy all systems through either economic cost or tyranny.

    The anthropocentric view of history is the story of social interaction and organization. The first social institution was the marriage…things have become increasingly complex ever since! I speculate the commercial partnership followed somewhere close behind.

    “Though one may be overpowered, two can defend themselves. A cord of three strands is not easily broken.”

    Doing anything alone is, generally, a bad idea.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>