Below is a guest post written by Ryan Robinson. He gives some valuable advice to consider when looking to start an entrepreneurial venture with a close friend, and analyzes both the pros and cons of doing so:
We’ve all heard the horror stories, of great businesses utterly collapsing because the founders were good friends and the relationship turned sour.
It’s natural. It can be incredibly stressful launching a new business, especially if you’re starting it while keeping your day job.
In business, things often get complicated. Difficult, impersonal decisions constantly need to be made in the name of creating the best future for the company.
Many entrepreneurs that start a business with a friend wind up with broken finances and ruined friendships.
In fact, if you hedge your business decisions on the wisdom of statistics alone, stoically ignoring your friend’s frantic excitement about “this cool business idea” seems to be the safest route.
Heartless, yes, but a Harvard Business School study showed that among technology founders, the group that is made up of friends proved to be the most unstable, with a founder turnover rate of nearly 30%.
Surprisingly, the group composed of total strangers fared better. Add to that the even gloomier 9-out-of-10 failure rate of startups in general, and you’d begin to wonder why on earth you would even consider starting a business with a friend.
In fact, it’d be entirely safer to stay in the comfort of your day job and preserve your friendships, right?
What if it’s you who came across a great business idea and your gut says you need your talented friend to help turn it into a stellar success?
My advice: Ignore the statistics.
I grew my last business, Case Escape with my best friend to over $160,000 in revenue in our first year alone. It’s continued to grow ever since.
You can do it too, but first you need a strong foundation for how to manage your newly complicated relationship. Even more importantly, you need to establish ground rules and get some things in writing before you even get started.
Good friends starting and running a business together don’t often equate to a happy ending. Failed partnerships do happen and will likely lead to damaged friendships, or even end up with former partners not being friends at all.
Take the case of dot com era entrepreneur Scott Testa, who launched a startup with a tech-savvy friend he had known for 15 years. Testa told The New York Times that the venture felt like it was made in heaven at first. But after a while, stark differences in the founders’ growth strategies created a humongous rift between them.
Even though the business was relatively successful right away, they ended up not talking to each other and selling the company much sooner than planned. With shattered hopes and hurt feelings, the two friends became estranged acquaintances.
If you want to become a successful entrepreneur, you often have to beat the odds and embrace learning experiences disguised as failures along the way. Going against the flow is a behavioral trait hard-wired into entrepreneurial DNA. If you’re too risk-averse, then you’re likely not ready to launch a business yet anyway.
After some serious consideration, brainstorming, and weighing the pros and cons (more on this later), if both your business idea and premise of involving your friend as a partner come out as a positive, then you may need to risk failure and your friendship, in order to get your business off the ground.
Many ventures founded by friends do succeed, and in fact represent some of the world’s most prominent brands.
Apple with Steves Wozniak and Jobs, Microsoft with Bill Gates and Paul Allen, Google with Larry Page and Sergey Brin.
Hewlett-Packard with Bill Hewlett and Dave Packard, Ben & Jerry’s with Ben Cohen and Jerry Greenfield.
However, as John D. Rockefeller put it, “friendships based on business are much better than businesses founded on friendships.”
Certainly, life wasn’t always a joy ride for these founding partners. Varying tastes, priorities, and approaches often lead to conflicts. A little caution will go a long way, and you need to know the advantages and disadvantages of starting a business with your friend.
Pros: The Advantages of Starting a Business with Your Friend.
We spend time with our friends largely to have fun and often because we share some common interests. Our friendships provide genuine companionship, comfort, affirmation, and support. In today’s punishing business landscape, finding those qualities would seem like a major plus in your founding partnership.
Having friends as business partners offer the following benefits.
You have a co-founder that you truly know and trust.
Bringing on board years of experience understanding how your friend reacts to certain situations, what their belief systems are founded upon, and knowing what can trigger each other’s tempers can be very valuable when starting a business. In this respect, friends can generally solve problems by intuitively drawing on their respective strengths and treading lightly on known character flaws.
You have a co-founder who will likely share many of your same beliefs.
Most of the time, friends share the same interests general belief systems. As birds of the same feather, you and your best friend business partner will likely find it easier to agree on the literally thousands of crucial decisions coming your way, despite having different personal preferences when it comes to details.
You can communicate more emphatically and meaningfully.
Years of building a genuine friendship, playfully insulting each other, and sharing major life events or struggles have broadened your communication channels with each other, for some serious articulation of business goals and strategies.
You can assign and assume roles naturally.
You can both be technologically savvy or creative types, but over the years, you and your best friend know exactly which specific role in the company you will both be best suited for.
Cons: How Founder Friendships Can Ruin Your Business.
Now for the other side of the equation, what needs to be taken very seriously when starting a business with a friend. You’ll find that the very same benefits we derive from friendship can also cause major potential problems when we transport those friendships into the less forgiving world of business.
Familiarity breeds contempt.
Knowing so much about one person can sometimes erode mutual respect. Similar to the struggles within marriages, this is also a major minefield for business friendships because you’re so embedded with the knowledge of one another’s personal lives.
Situations can quickly get awkward and uncomfortable.
Friends go to friends for support. There’s nothing wrong about that, but when one partner frequently slacks off and thinks the other will consistently pick up the slack, the costs will be incurred by the business. Endorsing unproven or incompetent friends to be part of your business will all but guarantee failure.
Everyone suffers from “Who’s-Really-the-Boss” Syndrome.
Unless roles are very clearly defined, a 50-50 business partnership carries the risk of leadership ambiguity. This can quickly trigger power struggles, affecting all aspects of the business including differing opinions on the company’s vision, strategy, and daily operations.
Your social networks overlap.
Because long-time friends generally share the same set of acquaintances, you start off with a more limited network, market, and support structure for your business than if your co-founder had been chosen based on expanding your business opportunities.
With these pros and cons in mind, I’m still a huge advocate of starting businesses with my talented friends. Each time I consider launching a business with someone whom I’ve already developed a personal relationship with, I force myself to take an objective look at how this decision is likely to play out.
Before starting a business with your friend, you need to ask yourself these crucial questions.
1. Do you share the same business goals?
It’d be a red flag if one of you wanted to build a lifestyle business that could last decades, and the other had the goal of creating a high-growth business that could be acquired within a year or two. These fundamental differences in growth strategies would lead to conflict.
2. Do you share the same values?
Just like dating, if your friend (and potential business partner) has a drastically different set of value and beliefs, you should think twice about mixing your finances and futures together.
3. Do your skill sets complement each other?
Make sure you’re starting a business with your friend because it would truly benefit you both, not just because you spend a lot of time together and you think it’d be fun.
4. Do your work habits align?
Be sure that you have mutual times you can work together on your business, especially while it’s getting started and you’re both likely holding onto your day jobs.
5. What’s your default strategy for resolving conflicts?
If you argue a lot as friends… chances are, that tendency will carry over into your business.
6. Which specific roles and responsibilities should each business partner assume?
Clearly define your complementary roles, and make sure they engage your interests.
7. How stable are your personal lives?
You don’t want to start a business with a friend who plans on selling their belongings and traveling the world for the foreseeable future.
8. Are you both willing to follow each others direction when the subject matter expert speaks?
Be sure you can both handle constructive criticism, and know when to trust your partner’s judgement.
From my personal experience starting and growing a business with my best friend, here’s my essential advice for finding success together.
Be professional while staying friends.
Instead of trying to keep your friendship totally out of the business, embrace your strong bond together and assume a high degree of professionalism when it comes to business matters. Refrain from joking about serious financial matters that’ll impact your business.
Get everything in writing from the very beginning.
You don’t need to immediately start out with a legal contract drafted by an attorney, but you absolutely must have a signed document in place that clearly specify your company vision, targets, roles, ownership breakdown, investment amounts, conflict resolution protocols, succession plans, and compensation amounts. Without this signed document, you’ll both be leaving yourselves up to potential complications that could adversely affect your business and friendship.
Formally discuss and record possible exits, outcomes, and the likelihood of total failure.
Given that well over half a million businesses shut down each month in the US, failure and loss of your initial investment is a very real possibility. If you and your partner lose your business investment, is that going to ruin your friendship? Have an open conversation about that scenario and talk through how you’ll both feel sitting on the other end of that rather likely outcome.
Clearly establish your goals.
Once you know what you want to ultimately want to achieve together, you can articulate what is required from each stakeholder. If you want to build an online tool and sell it to a large corporation within the next two years, you better assign clear responsibilities for who will be managing each part of your business, in order to hit that high target.
Establish separate business and personal bank accounts and perform appropriate bookkeeping.
I cannot stress this one enough. Never mix your personal finances together when starting a business partnership, especially with a good friend. Ensure that you have financial best practices in place, to make sure there’s no mismanagement of company funds, and that you’ll be well-prepared when your first tax season rolls around.
Set up a business entity.
Consider the various pros and cons of starting a partnership, limited liability partnership (LLP), corporation (Inc), limited liability company (LLC), S-corp, or other business entity. You want to choose the structure that best represents your business and your eventual goals. Regardless, you need to define ownership very clearly.
Define roles in your business.
From the very beginning, establish a chain of command and clearly define the roles each partner should assume. If the business was solely your original idea, and you have the relevant domain expertise, industry relationships, and plan to work on it full-time while your partner focuses solely on perfecting one component of your product, your ownership would likely be higher than that of your partners’.
It’s ironic, but a lack of communication ranks among the top killers of friendship-driven businesses. Don’t assume that your partner will always feel the same as you do, on key business matters.
Fully understanding and making strategic decisions from day one is a key component to achieving success in today’s business environment.
Before launching a business with your friend and putting your financial resources on the line in hopes of success, take a moment to ponder these complexities of business partnerships and discuss them together. You need road map that’ll help you find the way to your joint definition success.
Remember, some of the most powerful businesses ever established were founded by friends. However, many more have failed miserably and left ruined friendships in their wake. Think carefully before you start a business with your best friend.
Tell us in the comments the #1 lesson you’ve learned if you’ve started a business with a friend.
If you haven’t yet, but are considering launching with a friend, what are your biggest fears?