Co-founding the right way

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Sep 29, 2022
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William Procter and James Gamble. Bill Hewlett and Dave Packer. Bill Gates and Paul Allen. Steve Jobs and Steve Wozniak. Shola Akinlade and Ezra Olubi. These cofounders are well-known entrepreneurs who founded highly profitable enterprises. Questions on how they found their co-founders, and built and maintained the relationship over the years arise. 

To break down the complexities surrounding business relationships and attempt to answer the question above, this blog post will clarify why a cofounder relationship is fundamental. Guidelines learned over the years that make a fine business partnership and traps to avoid when forming your founding team will be examined.

Let’s begin by defining who a co-founder is. A cofounder is often described as someone who setups a company with one or more other persons, even more, depending on the circumstances. As corny as it may sound, most people view cofounder relationships as being as significant as marriage because you often get to spend more time with them than you do with your spouse. In a 1989 study by Gorman and Sahlman, it was discovered that management team issues were to blame for 95% of portfolio company issues and failures in 49 reputable venture capital firms (usually between founding partners). More research has shown that this is the main cause of startup failure, looking at CB Insights, showing that 23% of business failures occur because of disharmony between co-founders. 

If a significant proportion of business failure has been linked to strained business relationships, a founder might as well do it alone and steer clear of the problems that come with interpersonal interactions in the workplace. Solopreneurs have their own motivations for doing so; some desire to have absolute control over the company without sharing ownership with another founder because they already have all the resources the company needs. Despite this, a large number of people still choose to develop alongside other businesspeople for a variety of reasons, such as

  • Financial reasons:  

Since most businesses are capital intensive, solo founders may not have the adequate resources required to launch and grow a capital-intensive startup. Finding a co-founder who has the financial capital to invest in the business becomes necessary

  • Social and human capital needs:

Social capital refers to the benefits gotten from one’s place in information and communication networks. New business ventures need to establish relationships with potential investors, recruit employees and gain access to other resources necessary for the growth of the business. The business may benefit from the cofounder's contacts as the primary founder may not have all of them.

Knowledge acquired via formal schooling and abilities developed through prior job experience is referred to as human capital. Typically, founders want a cofounder with expertise in the fields they lack. A technical founder, for instance, will require a co-founder with experience in business areas like sales, marketing, business development, etc. The complementary abilities will aid them in developing faster and more affordably because they can manage various business functions in the early stages without having to invest in hiring staff.

  • Support: 

A core founder may have abundant resources and the social and human capital needed to get started. However, the responsibilities involved might prove to be too much for one person to handle as juggling everything can affect efficiency. To avoid making decisions from a place of fatigue and burnout, the core founder will have to work together with another person to share the burdens of the business. 

  • Environmental context

Some environmental context requires building a founding team from the onset as certain industries are stiffer and more competitive than others. For founders who are in spaces where there is an urgency to develop the initial product and to own a larger percentage of the market, the core founder faces the urgency to find a cofounder to fill in the spaces in each area of capital. The complexity of the industry determines the need for additional founders. 

With knowledge of the benefits of cofounding, where might a core founder go to discover or meet one? The following resources can be used to locate other solo entrepreneurs that are looking for a business partnership:

  • From their inner circle: 

The inner circle refers to people with whom the core founder has direct contact. This includes friends, relatives, husbands and wives and siblings. Despite the belief and popular advice to avoid cofounding with someone from your inner circle, this arrangement works perfectly for some. A good example is that of Eventbrite, an event management platform cofounded by a couple, Julia and Kevin Hartz. The key to cofounding with members of your inner circle is to ensure that roles and responsibilities are clearly defined. Having open and transparent communication should also be made a priority. In order to safeguard the business from failing owing to conflict, dispute, etc. and to ensure a seamless transition, this must be done.

  • Through referrals: 

Founders may receive recommendations for potential business partners from members of their inner circle or a common friend. Consider your friend suggesting you to a terrific business and sales acquaintance of theirs. Amazing cofounder relationships through recommendations, relationships are also developed.

  • Impersonal search: 

Impersonal search is one method used by core founders to identify potential cofounders. Finding suitable cofounders with the specific qualities, competencies, and capabilities the core founder requires for the company is the objective of the impersonal search. It entails using unconventional methods to locate a company partner via online forums, founder communities, and websites that match core founders with their cofounders based on a specified set of criteria

Now that the quest for a cofounder is done, you've finally discovered the right person—one who has the knowledge and experience to complement your own. Such how do you keep this relationship healthy so that it blossoms and the company doesn't fail because of a tense one?

  • Always compartmentalise: 

This rule applies to partnerships between cofounders developed within the inner circle. Paul McManus, a partner in a Boston venture capital firm, said that businesses started by friends or family run the risk of losing the company, the relationship, or both. Partitioning is required to prevent this scenario. Roles and obligations that are distinct from those shared at home (for spouses) or between friends should be made clear, and there should be clearly defined limits at work. Structures for reporting and accountability should be established as well. Founders may choose to enlist the assistance of a board member or advisor to mediate disputes.

  • Have challenging conversations: 

It is common to sidestep hard conversations and pretend that problems do not exist when building, especially with family and friends. This short-term move usually ends up with long-term consequences affecting both the individuals involved as well as the business. Founders should have conversations on creating a disaster plan, a document that outlines actions to be taken in worst-case scenarios such as a breakup, irreconcilable differences, etc. It is also important to state who takes the final decision, as well as the lead in the business. Open and honest conversations and check-ins should be carried out occasionally. Structures for having these kinds of conversations should be established. Avoid putting off difficult conversations hoping that they will eventually go away. 

  • Involve a third party: 

Here, the third person could be a reputable business mentor or advisor. This person can assist in problem-solving, facilitate group decision-making, and mediate potential conflicts. A third party's involvement helps to ensure that the connection is balanced, reducing the likelihood of excessive power control and the eventual bankruptcy of the company.

  • Put organisational structures in place: 

Disagreements over who should be CEO or take the final decision on matters should be mitigated. This can be done by carefully putting necessary and needed structures in place. The structure should outline the organogram of your organisation, the departments each founder will oversee, how equity should be split, work hours and responsibilities, designated titles, and terms for employing family/friends among others. This organizational structure should be in place from the beginning and can be evaluated as the business develops and evolves. Clarity and assumptions are avoided with the aid of structure. Structure helps prevent ambiguity and assumptions. 

Partnership pitfalls to avoid

  • Overlooking difficult conversations: 

According to  Noam Wasserman, one of the pitfalls to avoid in a business relationship is conflict avoidance, more like evading having difficult conversations that may lead to differences in opinions. Conflict avoidance makes founders take short-term decisions; sidestepping the current problems they face, refusing to acknowledge that a problem even exists. In the long run, resentment and anger build up putting a strain on the relationship. This can lead to dissatisfaction, inability to make a joint decision and an eventual breakdown of the leadership and startup. 

  • Varying founder motivations: 

Research has proven that there are 2 core founder motivations; building wealth and driving and controlling the growth of their startups. Other motivations like an intellectual challenge, prestige etc are important but wealth and control are the two main motivations. It is important to understand the motivation of your co-founder before setting out to build and scale a business venture. Varying motivations will result in clashes, disagreement, poor decision making and unnecessary conflicts. Although the two can seem complementary, subtle differences exist. A wealth-motivated founder will most likely optimize for bigger financial gains and less control, while a power-motivated founder will likely optimize for better control and less financial gains. It is necessary to build with someone who shares the same motivations as you do to ensure that you are both working towards a common goal based on shared motivation. 

  • Little industry knowledge: 

Between 1985 and 1986 a group of researchers carried out a survey to determine if startup growth was impacted by startup expertise. It was discovered that founders that possessed industry-specific knowledge had less failure rate than those who did not. Industry knowledge positively affected seed capital, legal incorporation and employment growth. This demonstrates the significance of selecting a co-founder with extensive experience in the sector you plan to build for. Even though so many founders think that hiring a cofounder with the necessary traits and talents but little domain expertise allows for "new thinking," the effects of inexperience quickly catch up with them. There will be errors. Blind spots are disregarded, and the firm soon suffers as a result. Even though your cofounder might not have as much industry experience as you do, it is crucial to launch a company with someone who does.

In the next article, we will delve more into some of the points raised in this first issue such as the various aspects that affect title designation (so you know why and how to create titles for your executive team), how to handle investors, and how to manage equity split.