Bad for Business Series #2 - Choosing your partners well

This post is part of my weekly Bad for Business Series, where I share the lessons learned working at my startup Comseal Systems back in 2003/2004.

On my previous post (#1 – Type of firm and headquarters location), I mentioned that choosing your partners is one of three important decisions you need to make just before starting your company. I will stick my neck out and say that, in business, this is the most important decision you’ll ever need to make. Having a great business idea is, by itself, pretty worthless, as most VCs would gladly tell you. Everybody can dream, after all, and you certainly can’t spend your life living in the clouds when your idea needs people to make it real.

I will not, at this stage, discuss how to split equity between co-founders and company control issues. I’m sure there are better sources for this out there.

Once again, let’s assume your idea is mature enough and you’re simply establishing a team of co-founders to take it forward. These are the steps you should take to come up with a short-list of potential partners:

1. Identify potential partners in your existing network of friends and business acquaintances (make sure you know them for long enough). Even if you do know them for ages, follow this process in its entirety. Personal relationships are just one of the many parts of business, so you need to make sure you make the right choices.
2. Use your networking skills to identify likely candidates if you’ve fully explored your network of friends and business acquaintances (at least 6-12 months before actually starting your business)
3. Do not reveal the fact you’re setting up a business. See whether they are willing to chat with you because they actually like to do it, instead of selling themselves off to you.
4. “Date” with them for a sufficiently long period in order to really get to know them and the people they associate with. Do your utmost to understand their personality and behaviour patterns  in order to check whether they meet the criteria I’m describing below. Of particular interest are topics such as industry trends, entrepreneurial success, management, tax and legal environment, people relationships.
5. When the time is right, reveal that you’re thinking of setting up a business, but do not tell they are part of the equation. See if their behaviour changes and find out what they think about your idea, about setting up business, risk aversion, etc.
6. Finally, if your partner checks all the right boxes, tell them you’d like to consider bringing them along as part of the founding team. Again see if their behaviour changes and start involving them in business planning discussions.
7. Make it clear that you are in an “open relationship” and keep dating and understanding your potential partner until you actually sign the social contract.

My first advice is to align your choice of partners with the strategic outcome you wish to achieve. There’s absolutely no reason to make someone part of your team if they don’t have the skills, social network, personality and creativity to truly add value to your business. The key question is “What is the business rationale for this person to be a co-founder in my business?”. The answer you’re looking for should be:

“I need a person to take full responsibility, with a high degree of autonomy, for a key part of my business that needs to perform better than if I did it myself.”

I particularly like this answer as two things have to happen for it to be true:

• You no longer think you know it all, which would result in attempts at micromanaging and, inevitably and as a defensive reaction, lack of trust and transparency in the work environment
• You accept that you have limited time to focus on everything and that your time is best used doing the things you need to drive forward yourself

If the “perform better than myself” part is hard to swallow then sorry, but you’re not looking for a partner – you’re looking for a mediocre employee. Good employees, the ones you’ll likely never recruit with this stance, tend to perform much better than yourself in their areas of expertise. That said, partnering (or hiring) with someone simply because you don’t have the time to do something yourself is also a poor strategy; people should have real challenges and cleaning up after you shouldn’t be one of them.

Complementarity, in terms of areas of expertise, ways of thinking and personality is what you should be looking for.

In what concerns expertise,  if your potential co-founders share the same technical background (e.g. IT) , you should be looking for a team that can excel in terms of R&D/Product/Service Development, Sales (including Customer Support), Marketing, Finance, Management. You need a good enough reason to assign people to these roles and interest/personality fit alone isn’t enough. Ideally you should look for someone that has received formal training on a specific area of business, has sufficient technical know-how to understand your product/service and has professional experience working on a similar role.

Personalities and ways of thinking in the co-founders should be diverse, but not polar opposites. This will allow people to see issues from different points of view, which will minimise groupthink and its consequences.

In addition, would-be co-partners must have the following basic characteristics:

• Open-mindedness and ability to listen
• Good interpersonal skills with people hierarchically above, at the same level and below
• Somewhat sceptical; ability to ask the right questions at the right time
• Previous business or management experience, even if they’ve only participated in university clubs
• Initiative
• Leaning towards perfectionism, but not losing sight of priorities
• Leaning towards optimism, but being flexible and adapting to circumstances
• Autonomy, including when using IT
• Well-organised and good time manager

Overall you’re looking for a well-rounded person that can excel on a particular field.

Still, even if your co-founder does seem to be ideal, what do you really know about him/her? As always, please remember to always manage your downside: how will your partner behave should things go south? To me, this is what makes the real difference. You can consider everything I’ve mentioned above as a good starting point. If you don’t pay attention to the following points, you might well end up disappointed:

1. Who has influence over them?

It’s quite unlikely that you’re the most influential person in your partners’ life. Take time to understand what motivates the people who are close to them and their expectations in what regards your business. If your potential partner is in a relationship and company’s goals are misaligned with the couple’s, problems can quickly arise. If you can understand whether, from a power/dependency perspective, their relationship is unbalanced, you can be sure that if the co-founder is the one with less power, most issues arising will tend to have a negative impact on the company.

When Comseal Systems had to close down, some of my partners were immediately shielded by their loved ones. While this is understandable given the emotional impact this had on my partners, it effectively prevented me from meeting up with them and discussing how to deal with the issues the company faced: creditors were calling me nearly every day and I had no solutions at hand. Needless to say, in being overprotective, their loved ones tend to see others as adversaries trying, unconsciously or not, to cause further harm. A vicious cycle is easily created and, as you despair to try to move things forward, the more likely it is that their loved ones will prevent you from doing so. Even as my company was in a position to be legally dissolved, it took me years to actually get my partners to agree that there was finally no risk to do so. Again, the risk-averse personality of their loved ones has a great deal of influence and you end up managing not only the company but these much deeper power struggles.

2. How financially capable are they?

You need to make sure partners have a financial commitment towards the company. Most people think of it being equity alone, but in reality you need to consider other issues. Being a startup it’s likely that you will rarely receive a proper salary. Are your partners financially able to support themselves for a year or more? Make them prove it and make sure you have a clear and thorough discussion on this issue. In addition, try to ascertain how expensive their lifestyle is and if it can, realistically, be maintained. Again, loved ones’ financial expectations are of particular importance.

At Comseal Systems we were able to pay ourselves 1.5 month’s salary during the entire year of activity, right at the very beginning. After than limited cash flow kept us giving priority to employees and suppliers in order to keep things moving. One of my partners had to leave a couple of months before activity was stopped and find himself a “real” job, so cash-strapped he was.

3. What are their motivations/ambitions?

Why on Earth would anybody want to join you in business? Find out what is it that attracts them. Good motivations include:

• Good rapport with the rest of the team
• Passionate about business idea
• Personal challenge
• In-line with career goals
• Financial upside

These are often apparent if they’re truthful. If you’re a good judge of character, it won’t take you long to figure out whether these motivations hold true during the “dating” period I’ve mentioned above. If you’re not a good judge of character, then you must partner with/get mentoring from someone who is. Of particular interest are the more obscure corrosive motivations you definitely need to rule out:

• Higher equity share at the expense of having less partners on board
• Power position, desire to control
• Better social/self image due to owning a business or doing business with you/other partners
• Access to money/means to defraud tax/law/customers/suppliers to the potential partner’s personal gain
• Working less than usual
• Earning more than usual
• Excessive focus on financial upside
• Leverage other partners’ knowledge to his/her personal gain

It’s definitely not an easy task to rule these out, but you should do your best effort and you will learn one way or another. I also strongly recommend doing a reference check using references other than the ones they gave you. You will never lose out from doing a proper reference check.

During my time at Comseal Systems a few people I knew  were interested in purchasing equity and participating in the company, but believing they would add much more value to the business, they wanted to have more power and equity. We did a trial run with them working part-time for a short period of time and the value they brought, which they had sold to me as coming from their extensive business network, was absolutely none but disruptive noise and added expenses. We were seeking people who would help us, they were primarily seeking a way to help themselves.

4. How will they react if things go south?

You never know people until they’re pushed beyond their limits. That’s when all their inner fears and tensions creep up and can cause havoc in an organisation and in personal relationships. A badly performing business is one of the many ways that can happen and you should keep this in mind during the “dating” period. How did they react to unexpected events in their professional life in the past? If there are no clear examples, how did they overcome personal challenges in their lives? You should be particularly concerned in understanding what they learned out of those situations, if they changed and if they are now able to cope with failure without jeopardising their relationships with the rest of the team.

This is also where I’ll discuss the topic of doing business with friends. I chose four people I trusted, who were close to me and I had plenty of similarities with to join me in starting Comseal Systems. You couldn’t have a better working environment than people you had already worked a lot with in the past, who you got along with, who knew your secrets and you knew theirs. No skeletons in the closet that could come creeping out. Much of it was true in fact; I’ve hardly had such a great working environment as the one I had at Comseal Systems. When the company started entering into financial difficulties, though, things got much more serious. Suddenly everyone abandoned the company and focused on getting their personal lives back together (as you would expect, as I didn’t take into account the points I’ve mentioned above), leaving me alone in charge of what was left of the company. They distanced themselves from the company and our relationships degraded as we only met again afterwards (save exceptions) to discuss how to close down the company. The emotional toll for doing business with friends can be huge as you not only face financial disaster if the company fails, but your support network can also be severely damaged, taking longer for you to get back on your feet.

That’s about it. It’s not an easy task to choose your partners well, but if you rush through the process you might end up regretting it later. Take your time as having a good, well-rounded team will most definitely compensate for delaying starting your new business for a few months. Don’t bring on board more people than you need and make sure you have a team that you are comfortable, at every level, to be working with.