Four Things to Get Right When Starting a Company

Most VCs and entrepreneurs believe start-ups are inherently iterative, that a string of mistakes doesn't prevent success, but may even be the path to it.

Generally, that view is correct, but there are a few choices made early on that have implications so deep as to be functionally irreversible, with profound implications for outcomes.

Product and business models are evolutionary by nature, but we see four things a young company must get right:

• The founding team
• The core values
• Where the company is located
• The initial investors (and their terms)

A good company usually begins with co-founders: the notion of a lone Edison willing a giant company into existence is rarely correct. Almost all successful start-ups have multiple founders, from the Central Pacific's Big 4 to Google's Brin and Page. Simply finding a co-founder serves as a critical exercise in validation.

Co-founders also bring diversity of talent and high dedication, and mitigate the loneliness and stress of life at a young company. And only a strong co-founder has both the perspective and authority to challenge another co-founder's ideas, helping a company remain an intellectually honest enterprise rather than devolving into theocracy (compare Shockley vs. Intel, e.g.). Moving forward without a co-founder is risky and moving on with a bad co-founder almost unimaginably costly.

It's also important to cultivate a balanced team from the start. Unbalanced teams grow more so over time, as like hires like, resulting in an operation with lopsided competencies. In technology companies, engineering talent needs the balance of a business and operations team.

Unfortunately, it can be hard to persuade different camps of their mutual necessity. Engineering departments fetishize the theory that if you build a better mousetrap, the rest takes care of itself. The business side has its own misconceptions, including the idea that a great salesman can peddle any idea, no matter how bad. In reality, both sides of the company should be built concurrently.

With the possible exception of Google from 1998-2000, an extraordinary product, absent a strong business vision early on, is not enough (e.g., most of Nicolai Tesla's inventions; Web 1.0; Twitter 2006-2011) and vice versa (e.g., Crystal Pepsi; MySpace 2003-2007). Bill Gates and Paul Allen represent the acme of pure engineering, but they were business hustlers from the start — right down to their first product, which they sold before it even existed.

As the early team comes together, it has a short-lived opportunity to decide how it wants to do business, because culture entrenches at compound rates with each new hire - somewhere after two dozen employees, culture tends to cement. Although "culture" gets dismissed because of what large PR departments do with the term, corporate culture (or values, or philosophy - the label's irrelevant) really does matter.

A set of genuine values makes life much more efficient. Start-ups get complex quickly and having a coherent philosophy reduces cognitive load and improves results. ZocDoc has core principles that allow it to quickly evaluate any proposal, creating a coherent consumer experience and happier company; Facebook's "focus on impact" steered it in a much more ambitious and successful direction than its competitors.

Assessing philosophical compatibility allows you to shut down many analytical branches without effort ("this is not who we are, let's move on"), rather than analyzing each new decision from first principles. Companies that do not appear to have strong core philosophies, or that abandon them, tend to wander — Apple under Sculley and H-P post-Platt, for examples. Your philosophy is your corporate constitution and one of the most valuable pieces of IP you'll create.

Geography is another important factor; pets, spouses, and houses scale with each hire, and just as with culture, each new employee makes things more permanent. All industries have their own foci and there's no reason not to head there immediately.

Good location also makes funding easier — VCs, for instance, like the option of visiting their investments regularly and tend not to fund things far from their offices — and an entrenched entrepreneurial culture makes recruiting more effective. Even fifty miles can make a difference: the start-up culture around Stanford is vastly more developed than around UC Berkeley, much more disparate than the quality differential of their engineering departments would suggest.

Finally, your early money comes with terms and conditions that serve as defaults for many financings to come. Many companies succumb to the richest valuation from the quickest checkbook they can find. But first money often comes with board representation, and early board members cannot be easily dislodged. Investors who are not aligned with the vision of the company, who push for early exits or a carousel of CEOs, destroy value relentlessly. And other terms from early financings also can be imprisoning; voting is a particularly difficult to subsequently revise in the company's favor.

Entrepreneurs must reserve time in the early life of a business to be reflective. There is enormous pressure to do things, to the exclusion of thoughtfulness; quietly thinking about values or board representation seems useless when there's so much product to be developed. But for most things, the future provides ample time to correct mistakes and a quick cycle of failure and improvement serves the company well. Other decisions are, unfortunately, more permanent.

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Bruce Gibney and Ken Howery are partners at Founders Fund.