The Anna Karenina Principle for Startups
Unpacking the 'Happy Family' factors
Whether you’ve read the novel or not, you’ve likely seen the opening line of Leo Tolstoy’s “Anna Karenina”: “Happy families are all alike; every unhappy family is unhappy in its own way.” In other words, there’s only one way to be happy, where a set of factors are met, but there are infinite ways to be unhappy, where any factor can be missed in an endless variety of ways. It’s an idea that captures the truth of many relationships — and many startups. Who knew Tolstoy translates so well to tech!
In my career so far, I have invested across a variety of verticals, stages, and geographies — from fintech to software infrastructure, incubation to IPO, and the US to Latin America and Asia. With every context switch comes a fresh set of considerations. What matters to a fintech seed startup in LatAm is very different from what is top of mind for a late-stage software infrastructure company in the US preparing to go public. There are, however, a few fundamental drivers behind a company’s performance that cut across all these variations, that in themselves may not be sufficient but are absolutely necessary conditions for a startup to have any shot at success. Let’s discuss two of these all-important “happy family” factors.
A co-founder relationship with clearly defined roles
While there are some brave souls that embark on the startup journey solo, many startups have two or more founders and for these ventures, the fundamental building block of success is the co-founder relationship. It is the critical foundation upon which an entire business rests. If it does not have absolute trust, uncompromising accountability, and a clear division of responsibilities, then the biggest threat to any startup isn’t from external forces of competition but from internal strife. The single biggest killer of startups is interpersonal conflict - Research suggests that 65% of startups fail due to founder feuds. That is why most seed stage investors will tell you that their job sometimes seems eerily similar to that of a marriage counselor.
An instant red flag for investors is when we walk away from a pitch meeting sensing tension between the co-founders. It’s easy to read situations where people are talking over each other, sharing divergent visions for the company, and not being able to clearly define their roles. Once I was in a meeting where in the first five minutes of the call one of the co-founders introduced themselves as CEO and the other immediately cut them off to say that they hadn’t decided on titles yet. That was the defining moment of the pitch. That brief interaction had more impact on our investment decision than the rest of the presentation.
Startups can crumble under the weight of founders' ego. A recent example that comes to mind involves a tech startup that got off to a great start with some solid funding. But things went south pretty fast. The CTO, who felt that he was the brains behind the operation, wanted to retroactively revise the ownership structure and increase his equity stake vs. the CEO’s. He believed his technical expertise was the cornerstone of the venture. On the flip side, the CEO, whose strengths were in interfacing with investors, hiring out the team, and securing capital, argued that without him, there would be no platform for the CTO’s technical prowess to shine. This mutual lack of respect and recognition for each other's contributions led to a stalemate and ultimately, the company's dissolution.
There should be no ambiguity in the roles, responsibilities, and equity stakes of the founders so that the team can get on with the important work of building the business without distractions. The later in a company’s life such issues surface, the harder they become to untangle. It is not uncommon for such disagreements to fester and ultimately drive a painful restructuring where one founder has to buy out another, impacting business continuity and company morale.
We have all seen promising companies who were first to market lose their crucial first-mover advantage as they became embroiled in internal politics, even as their market lead slipped away. There is no room for fumbles in close games, and every game in the startup ecosystem is a close one.
An exec team that covers the founders’ blindspots
Once the critical co-founder relationship is sound, the next crucial step is having an all-star executive team around the founders to eliminate their blind spots and complement their skill sets.
A few years ago, there was a promising seed-stage startup with a stellar technical founding team that appeared to be destined for success. Their downfall ended up being the fact that they valued technical talent so far above business skills that they refused to hire anyone with a business or sales skill set. In fact, they acquired a reputation in the market being such product purists that they looked down on anyone with a commercial background. They were of the view that if they built a good product, it would sell itself. Well, they ended up building an incredible product but it proved altogether too sophisticated for most customers. After struggling to find the right go-to-market strategy, they ended up selling early to a platform that took over the core tech and shut down the remaining business.
To be able to attract top talent around themselves, founders need to be self-aware enough to recognize their limitations, humble enough to ask for help where they need it, and secure enough to cede control in those areas.
After a certain stage, it’s not a flex if the founder knows every single fact about their business better than anyone else on the team – rather, it indicates a failure to hire and/or delegate. You can not and should not wear every hat in your company because that isn’t a scalable mode of operation.
FTX has become a cautionary tale of what such a failure of leadership can look like at grand scale. At FTX, not only did senior leaders lack relevant experience for the roles they occupied (failure of hiring), none of them were empowered to challenge the CEO (failure of delegation). It was a one-man show with no checks or balances — no wonder it ran into issues at scale.
On a more positive note, if we look back at the corporate history of Google, we see a founding team that recognized and accounted for the limits of their skill set. As Google grew, Larry Page and Sergey Brin, who themselves come from a technical background, understood the need to bring in external leadership to manage the growing company and brought on Eric Schmidt as CEO in 2001.This decision was crucial in transitioning Google from a startup to a global tech leader. The team that gets you to one stage isn’t necessarily the one that will bring you to the next.
Team dynamics: the first factor on every investor’s checklist
With increasing capital fueling the venture capital machine, any promising idea instantly attracts at least five competent, hungry teams that all raise seed rounds in a relatively tight window and fight to become the market leader in a space. At the point of inception, the key thing investors are betting on is the founding team, the atomic unit of innovation at any venture. We’re looking for those who have the technical skill set to go from 0 to 1 and the emotional maturity to scale from 1 to 100.
Ultimately, the story at the heart of technological progress is a very human one.
It is a story not just of product innovation or market disruption, but of human relationships, ambitions, and frailties. The co-founder relationship, akin to a marital bond, requires trust, respect, and a clear division of roles to thrive. The executive team, much like a family unit, must complement each other, covering blind spots and building on each other's strengths. This human element is the real crucible where the fate of a startup is forged. Success looks like a low-ego, high-output team with diversity of thought, unity of purpose, and clarity of roles, transcending individual limitations to achieve collective excellence.
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