5 Rookie Mistakes To Avoid When Choosing Business Partners

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5 rookie mistakes to avoid when choosing 

How to respond when a coworker says something offensive

BY WILLY DAS

Conventional wisdom has long held that an entrepreneur starting a new venture—but determined to ease the difficulties involved—is smart to have a partner. But finding “the One” is hardly easy, especially given that an estimated 65% of partnerships ultimately fall through.

Our study, published in May in the Journal of Entrepreneurship In Emerging Economies and previously in the Academy Of Management Proceedings, compared 347 first-time entrepreneurs with 210 longtime entrepreneurs when it came to how to choose a cofounder.

Among the findings were that first-time entrepreneurs are more likely to struggle at making a successful match than those equipped with experience. Experienced entrepreneurs form teams that are more stable and efficient, leading to better firm performance and less cofounder fallout.  

So, what are the right criteria? How exactly can novice entrepreneurs learn from veteran entrepreneurs to save themselves time, money, and heartache during the selection process?  

Here, based on key findings in our research and learnings from Lehigh@NasdaqCenter, are the top five mistakes to avoid. 

LACKING CLARITY ABOUT YOUR NORTH STAR

Neglecting to establish a strong justification for creating a partnership can hamper team performance and result in partner fallout. It’s imperative to partner for the right reasons. Inexperienced founders often realize later that their cofounder’s skills that made them decide in favor of a partnership are unnecessary in the long run. The cofounder’s skills should be relevant throughout the venture, not only in the early stages.

Inexperienced entrepreneurs are also prone to picking a partner in return for financial investment. A classic example of this is the early partnership between Mark Zuckerberg and Eduardo Saverin. Zuckerberg selected Saverin as his first business partner “because he was rich.” The relationship quickly went south, and Zuckerberg cut Saverin out of the company.

The tactic of adding founding team members dilutes your company’s ownership—a problem once other stakeholders join in the later stage—and is perceived negatively by external investors. So, consider other alternatives like crowdfunding websites or small business loans.

Some inexperienced entrepreneurs select a cofounder who would instead better serve the new venture only as an advisor or investor. 

RELYING TOO MUCH ON FAMILIARITY

Our research found that 87.7% of novice entrepreneurs favor familiarity, compared to 41% of long-time entrepreneurs. Likewise, novice entrepreneurs were more than twice as likely to prefer kinship ties (49%) as experienced entrepreneurs (21%). 

Selecting a cofounder who is too familiar—even with the advantage of strong, direct ties—increases the chances that your partner may behave unprofessionally, undermine your authority, and act like the arrangement guarantees a free ride. It may also run the risk of conflict and partner fallout.

Better to team up with people in your network who are less familiar, such as workplace colleagues, acquaintances met through mutual friends, and those known from informal social activities, like going to the gym.

Experienced entrepreneurs demonstrated the highest preference (47% versus 27% for newcomers) for forging alliances with former colleagues. Working with former colleagues increases predictable behavior, cuts the costs of coordination, and produces superior outcomes for team and firm alike. Opting for such connections also boosts your access to diverse resources and information.

Partners behave better, too, thanks to a mechanism called “enforceable trust,” keeping opportunistic antics like unfair equity distribution, profit sharing, and power struggles at bay. In short, be familiar with your choice of cofounder, but not too familiar. 

RUSHING INTO A PARTNERSHIP

Inexperienced entrepreneurs overlook the importance of spending time together outside the work setting. This creates friction about how to run the venture in the later stages.

Instead, arrange as many meetings as you can, both in social and professional settings, in what we essentially call “cofounder dating.” The more varied the meetings, the better. A courtship will give you a greater sense of your potential cofounder as a person and how they respond to different environments. Cofounding relationships are often likened to marriage. So be sure to date before you commit. 

ASSIGNING LOW PRIORITY TO SOFT SKILLS

Experienced entrepreneurs are more than four times more likely than novices (35% versus 8%) to favor soft skills.

Once you have a list of potential cofounders, carefully consider the unique set of skills, both soft and hard, they possess. Hard skills are technical, such as programming, web development, and project management. Soft skills, on the other hand, come from personal qualities that help an individual to thrive in the workplace, such as persuasiveness, teamwork, and conflict management. 

Your soft skills should complement those of your partner. The more different your soft skills are from those of your partner, the more likely your team will succeed. So if your soft skills encompass, say, leadership and critical thinking, look for partners adept at communication, problem-solving, and stress management.

FAILING TO CREATE A CONTRACT 

Plunging in without a partnership contract is one of the biggest mistakes the inexperienced can make. They also shy away from having hard conversations about the roles each partner will play and financial arrangements that will be mutually satisfactory. They forgo the opportunity to articulate, deliberate, and reflect on individual and joint expectations.

Proper contracting, with ownership structure and profit-sharing clearly outlined, is imperative for a successful cofounding relationship. A legal contract should be explicit and transparent. This is key to a lasting partnership. 

Identifying the right Robin to your Batman can make or break your venture. So, it’s extremely important to make the right choice. Cofounding a business is about more than creating a profitable venture. It’s also about sharing responsibility with a partner and sticking together when the going gets tough. Learning from those experienced at finding the perfect match can enable you to sidestep the most common pitfalls and even prevent a breakup. 

Willy Das is a postdoctoral researcher at Lehigh@NasdaqCenter, an exclusive education-industry partnership between Lehigh University and the Nasdaq Entrepreneurial Center in San Francisco.  

Originally featured in Fast Company on 11/09/2022.