Study Suggests Thinking Twice About Friends and Family Startups

Just as your parents used to counsel you against loaning money to family and friends, so it is that a new study stands as a cautionary tale about going into business with those very same people.

Jennifer Alsever’s February 24 post at CNNMoney relays the findings of a Harvard Business School professor whose study showed that in-fighting among co-founders resulted in a 65% failure rate at “high-potential” startups. The professor, Noam Wasserman, also said that within that 65 percent of failures, the businesses started by family members, married couples and friends failed most often. Why? According to Wasserman, it is because friends and family often shy away from the tough conversations necessary to make a business work, especially if the enterprise takes a turn for the worse.

Wasserman conducted the study for his book “The Founder’s Dilemma,” surveying some 10,000 business founders. He explains that while co-founders bring different skill sets and points-of-view to a startup, partnerships also bring great potential for conflict, whether it be over money, credit, blame, leadership, or strategy.

Family and friendship ties exacerbate those dynamics. And because the relationships are personal rather than business-only, the partners often simply avoid hurt feelings until its too late.

Mark Suster, a venture capitalist in Los Angeles, said he has seen Wasserman’s findings borne out on the streets all too often. “The fact of the matter is that co-founders spend most of their time fighting,” said Suster. “But no one talks about it.”

Wasserman said that the most successful co-founding teams are comprised of people who had worked together before. The fact that the foundation of their relationship was business rather than personal had a lasting effect.

Despite the trend toward a falling-out between co-owners, Wasserman found that only 16 percent of the 10,000 companies he contacted had a single owner. According to Alsever, Investors remain suspicious of single-owner shops, and prefer management teams to individual entrepreneurs for a number of reasons, from creative spark to acceptable division of labor. But they do look closely for teams that get along. In meetings with start-up co-founders, angel investors check out their interaction, eye contact, body language and tone while also listening to the pitch itself. If the chemistry is there, the investor will usually open his checkbook.

Angel investor Paul English, who flourished in the co-founder experience as one of the forces behind Kayak.com, told Alsever that co-ownership also has a practical purpose. “[I]f one gets hit by a bus, someone else can run the company,” English said.

Reference:

Alsever, Jennifer. “Fighting Co-Founders Doom Startups“; CNN Money. February 24, 2014.

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