by David Gage
April 4, 2012
Contrary to the romantic notion of a passionate dreamer going it alone, most start-ups are founded by partners, not solo entrepreneurs. Think of some of the high-tech companies that have risen to fame and stunning capitalization in almost no time: Google, Facebook, LivingSocial. All started by partners.
The trend isn’t limited to cutting-edge tech firms. Partners also founded some of the best-known companies of the 20th century: Black & Decker, Warner Bros., Hewlett-Packard. And then there are 3M, Costco, Microsoft, Intel, and Apple. Partners, too, founded them.
Partners—whether they are family members or not—are extremely important because their presence boosts the chance of success. It seems like common sense; after all, there is strength in numbers. Generally speaking, partners mean greater resources: more skills, energy, capital, psychological support, networking capabilities.
Need further proof? A study published last year by the National Bureau of Economic Research tried to determine whether having partners is really an advantageous strategy for entrepreneurs trying to commercialize inventions. The results were impressive. Projects run by partners were five times more likely to reach commercialization, and their average revenues were approximately 10 times greater than projects run by solo entrepreneurs.
Research from Marquette University backs that up. The researchers investigated a sample of nearly 2,000 companies, categorizing the top performers as “hypergrowth” companies. Solo entrepreneurs founded only 6 percent of the hypergrowth companies. Partners founded an amazing 94 percent.
One for all and all for one! Even Alexandre Dumas knew there needed to be three Musketeers—not one.
So why wouldn’t all start-ups begin with co-owners at the helm? Because there is also a dark side to the partner story.
There are no hard numbers that spell out how many companies die premature deaths as a result of partner difficulties. Private companies are not obliged to undergo a postmortem, but estimates often run to more than 50 percent failure within a few years.
We know that many business advisers regularly warn entrepreneurs not to start businesses with partners, offering horror stories from past clients. “There are too many risks involved, and it’s extremely difficult to extract yourself from partners,” they warn.
The risks are numerous. Many would-be business owners are under the dangerous misconception that completing certain legal documents fully prepares them for partnership. If anything, these legalities give partners a false sense of security that they have done all they need to do to protect themselves.
If we accept that partner problems are a leading cause of start-up failure, we have to ask: Why aren’t we doing more to educate and train entrepreneurs to maximize the benefits and minimize the risks of co-ownership? Why aren’t organizations that fund entrepreneurial research helping start-ups prepare better for the challenges of having partners? Why aren’t VCs asking start-ups to do more to ensure their survival?
As advisers to entrepreneurs and business students, we are not guiding them out of harm’s way. We are not teaching them sufficiently about either the risks of having partners—turf battles, personality clashes, values conflicts, money disputes, distrust—or how to minimize them.
The box office hit “The Social Network” helped bring this issue to light in 2010, when moviegoers turned out en masse to watch the story of Mark Zuckerberg and his ill-fated Facebook co-founder Eduardo Saverin unfold on the big screen. A high-profile multimillion-dollar lawsuit between the two was eventually settled out of court.
And Saverin wasn’t the only one to haul the Facebook co-founder to court. How do we prepare entrepreneurs for the Winklevoss twins of the world—those who publicly allege they hold partner status, even though they may not?
But helping future Mark Zuckerbergs mitigate their risks is not sufficient either. We need to also teach them how to proactively create healthy partnerships.
PREPARATION FOR SUCCESS
Reviewing the curricula of our peer business schools reveals that very few offer courses for entrepreneurs who want to learn how to set up healthy business-partner relationships. Courses on leadership, managing teams, choosing among legal entities, and identifying funding are valuable to entrepreneurs, but miss the mark when it comes to having partners.
Developing and maintaining good relationships with partners is not the same as leading an executive team or managing a company of a thousand employees. The intimate dynamics among partners are quite different from the dynamics of any employer-employee relationship.
True co-owners tie their futures and fortunes together in a unique way. Partners have a fiduciary duty, and a loyalty, to one another that employers do not have to their employees, even if they give them honorific “partner” or “associate” titles.
Business schools aren’t the only ones behind the partner curve. Incubation labs, economic development centers, the Small Business Association, venture funds, and even other private organizations focused on helping entrepreneurs seem to miss the importance—and the challenges—of having partners.
To address some of these deficiencies, I developed and have taught a graduate course at Kogod for the past 10 years on managing private and family businesses. It covers the range of partner issues described above, delves into the value of co-ownership, and gives students concrete strategies to minimize the risks. In my view, more schools need to experiment with courses to help students understand partnerships.
ABSENCE OF ATTENTION
If we are going to improve our performance in teaching about partnership, it will be important to create a sound base of research for the lessons we convey. To date, there is very little scholarship available on this subject.
One reason for this is the complexity of the field. How many times have you heard the famous line, “It’s not personal, it’s just business” from “The Godfather”? For partners, family business owners, and even mafiosi, it couldn’t be further from the truth. Almost everything that occurs among partners in closely held companies is both personal and business. Co-owners constantly describe their partner relationship as a marriage, but hasten to add, “Except I spend more time with my business partner!”
Recognizing the duality is advantageous. Researchers need to develop a realistic conceptualization of the challenges that partners face, one that fully appreciates the interpersonal-business pairing of partnerships.
Anything less will be too simplistic to be helpful. The focus has to be on the individuals who do business together, not on the business itself.
Unfortunately, researchers who want to study partners often feel slightly out of their element. They are typically experts in one discipline—psychology or business—but not both. Researchers from different disciplines may need to collaborate—as partners!—to study this topic effectively.
Another hurdle is the fact that closely held businesses are truly closely held. They are private, which is an advantage for co-owners but a barrier for researchers. Researchers will need to provide partners with an incentive to share private information. Without a reason to open up, partners will likely remain something of a mystery.
MEDIATION AS AN ACADEMIC RESOURCE
As the founder of a firm that specializes in preventing and resolving co-owner disputes, I have learned that mediation is not only a process that partners usually agree on when they have serious differences. It is also a process that opens the door to the private, inner workings of partners.
I discovered that the confidentiality of mediation helps partners open up and discuss things they would otherwise never reveal to a stranger, from plans to sell the company to “creative” and sometimes ill-conceived methods for taking money from the business.
Behind this shield of confidentiality, partners in mediation quickly realize that they only hurt themselves if they play their cards too close to the chest. Mediators, like myself, strive to convince the parties that to be effective, we must know everything that has transpired. We need to understand how their partnership works.
Part of the conflict resolution process involves separate, individual caucus sessions in which each partner has a chance to lay his or her story completely on the table. They are often quick to seize this opportunity, because they believe that if they don’t disclose something, another partner almost certainly will—and no one wants to be seen as withholding key information, or appear to have something to hide. Partner mediations have thus been fertile ground for learning about what makes partners tick—and stop ticking.
CASE IN POINT
Here’s one example, from more than two decades of mediating business partnerships, that illustrates one of the common challenges partners face and for which they are ill prepared: determining ownership percentages.
These partners, who ran a company in an emerging medical device industry, were not neophytes by any stretch of the imagination. Numbering five in total, they included a successful CEO from a regional consulting firm, an attorney, a seasoned marketer, a physician-investor, and an established medical researcher.
As all partners must do, they had to determine their respective percentages of ownership. From the starting gate, each began jockeying for as large an interest as possible. Like forty-niners staking their gold rush claims, each of the five fought for his share of equity. Eventually they followed the conventional advice of their advisers and “filled in the blanks” of an operating agreement. The storm appeared to pass.
Exactly one year later, the consulting firm CEO (now the CEO of the new company) and the researcher claimed that they had all agreed to review everyone’s performance after a year’s operation, and then adjust their percentages accordingly. The lawyer and the marketing director disagreed vehemently, claiming that the idea of revising the percentages had been raised but then dismissed. The physician-investor, a friend of both the marketing director and the CEO, demurred, saying he was unable to remember the decision.
The resulting deadlock took a toll on their relationships, their motivation, and their productivity. Worse, their employees were becoming aware of the disagreement. With threats of lawsuits hanging in the air, the partners agreed to try mediation.
The convoluted dynamics among the partners quickly became apparent in individual discussions with mediators. The mediation was an in-depth study of the complexity of determining ownership percentages, and it revealed how tightly the partners’ egos were wrapped around these percentages. Since they were united around the goal of growing and selling the company in a few years, they were acutely aware of the value of every percentage point.
With the help of the mediators, the owners eventually resolved the equity battle. In brief, some of the partners agreed to reduce their percentages to free up equity for certain key employees, and they shifted certain management responsibilities to resolve underperformance issues. The details can be found in my book on having partners, The Partnership Charter: How to Start Out Right With Your New Business Partnership (or Fix the One You’re In).
Four things are important about this case study. First, mediation provided an opening to better understand how partners operate. Second, the plot line is very common: some variation of this true story occurs in most partnerships.
Third, despite it being a common problem, there is almost nothing written to help entrepreneurs with a more rational process for determining equity percentages. And finally, this story describes but one of the many challenges partners may face.
THE BOOK—AND BEYOND
The lessons I learned from scores of mediation clients became the blueprint for The Partnership Charter. The book talks on the interpersonal side about personalities, values, expectations, and fairness. On the business side are roles and responsibilities, decision making, governance, money, and ownership. Partners also have to decide how they will handle differences.
A scenario-planning process forces partners to prepare for the uncharted waters that lie in front of them. Some of the what-ifs they need to prepare for are unique to having partners:
• What happens if a partner hires a key employee whom the other partner(s) dislike(s)?
• How will you decide how to respond to an unsolicited buyout offer from a competitor?
• What if the partners decide to close the business and the company has nothing but debt?
Though mediation has taught us a great deal, we need to investigate the inner world of partners with more typical research paradigms and techniques. The research topics are many, but could include the importance of financial transparency, whether establishing a governing board mitigates conflict, and whether a partnership with a best friend improves, or lessens, the chance of success.
Despite the gap in partnership know-how, we have learned a significant amount about what causes partners to “fall out” with one another. While there are numerous topics partners must address, the most important step they can take is to engage in a comprehensive planning process.
To get the ball rolling, my business partner and I have also set up a website for The Business Partner Institute, an organization that can help people to share research ideas and explore interdisciplinary collaboration.
By joining efforts—as partners do—I have no doubt that we can dramatically improve the short- and long-term success rate of start-ups.
David Gage, Ph.D., is a clinical psychologist and mediator, co-founder of BMC Associates, and adjunct professor at the Kogod School of Business at American University. This article was published in the Spring 2012 edition of Kogod Now. Dr. Gage’s book on effective partnerships, The Partnership Charter: How to Start Out Right with Your New Business Partnership (Or Fix The One You’re In), was published in 2004.