If you are familiar with early stage investing, you may have heard the adage “invest in the team.” Understanding how to evaluate a company’s leadership is crucial to making an informed investment decision. The importance of team is why our startup rating algorithm takes so many data points on the founding team into account. These factors include the industrial and entrepreneurial past experience of founders, the presence or absence of complementary skill sets, and if founders have any prior exits.
One of the first things investors can look at when evaluating teams is the number of founders a company has. In this Chart of the Week, we broke down the number of founders per company for Regulation Crowdfunding equity raises from 2018 through the end of 2021. Unsurprisingly, the majority of companies had one or two founders. Specifically, 63% of companies had fewer than three founders. Companies with three founders represented just 7.4% of the total companies examined. Only 60 companies had four founders. There were just 16 startups with five or more founders.
Debate surrounding the optimal headcount for a founding team is ongoing. There is no definitive answer on the perfect number of founders. Many venture capitalists seek to fund founding teams of two or three due to the risk involved of having a single founder or more than four. A single founder could find themselves making decisions without outside input or perspectives. Such centralized decision making may not always be in the best interest of the company. Additionally, should the founder leave the company for any reason, it is questionable if the startup will be able to survive. Founders are often seen as providing the driving force and vision, so losing a founder has a deep effect on a startup. Alternatively, having four or more founders could result in a lack of efficiency when it comes to problem solving or decision making. The more people involved, the more difficult it can be to reach a unified vision.
Despite the advantages to having two to three co-founders, single founders could have good reasons for launching a company solo. For example, it is often hard for founders to find like-minded individuals that are equally as passionate about their product or service. Founder chemistry has a huge impact on the success of a company despite being intangible. Many solo entrepreneurs choose to bring on advisors or board members to fill the intellectual or advisory role of a co-founder without overstepping.
Regardless, founder count is definitely something to consider when making an investment in the online private markets. While there is no right or wrong answer when it comes to head count, becoming familiar with the composition of a founding team is a crucial part of due diligence.
Note: all data used for the Chart of the Week comes from the KingsCrowd database and represents a snapshot of the crowdfunding market.
