Don’t Start a Company with Your Friends

When we’re launching a new business, we naturally turn to our friends. They’re the people we trust for sharing information and covering our backs. By recent estimates, 40% of founding teams include people who were friends socially before building their startups. But according to new research, starting a company with your friends is a risky endeavor.

When Harvard Business School professor Noam Wasserman studied nearly 10,000 founders of technology and life sciences startups, the least stable founding teams were friends. Each friendship in a founding team increased the rate of founder turnover by 28.6%. Even teams of virtual strangers were more likely to stick together.

Of course, there are times when a founder needs to leave, but in many cases, it’s emotionally and financially devastating. Wasserman references a famous quote paraphrasing John D. Rockefeller: “A friendship built on business can be glorious, while a business built on friendship can be murder.”

But there may be a way to get the benefits of friendship without the costs. Wasserman discovered that the most stable teams were past coworkers. And other research on high-tech startups demonstrates that when founding team members have collaborated in the past, their ventures have faster growth rates.

If you work together before launching your company, you can increase your chances of success. Take it from Peter Thiel, the cofounder and former CEO of PayPal and first outside investor in Facebook, who has become a billionaire by making big bets on companies. “Founders should share a prehistory before they start a company together—otherwise they’re just rolling dice,” Thiel writes in his provocative book Zero to One. “When I consider investing in a startup, I study the founding teams. Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much.”

You can get to know a friend well through hanging out socially. But you can only get to know a cofounder well by collaborating. By working together prior to founding a startup together, people are able to answer some fundamental questions:

• Do we share a core set of values?
• Are our working habits compatible?
• What are our comparative strengths and weaknesses?
• How will we handle conflict when it inevitably arises?

This isn’t to say that friends can’t build successful startups; it’s just higher-risk and lower-odds. If you do plan to start a company with friends, Wasserman notes in The Founder’s Dilemmas, you need to “proactively analyze the potential consequences.” Friends are less likely to acknowledge the elephant in the room, striving to preserve their personal relationship until it blows up, taking the company down with it. With that in mind, when I work with entrepreneurs who are friends, I make sure they read Difficult Conversations. They often describe it as a life-changing book that enables them to start talking about tough issues before it’s too late.

In sum, friends don’t let friends start companies together... unless they’ve tested and grown their professional relationship by collaborating first.

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Peter Thiel recently visited Wharton to discuss these dilemmas and more on what causes entrepreneurs to fail. Here’s his speech and our conversation:

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Adam is the Wharton Class of 1965 Professor of Management and Psychology, and the New York Times bestselling author of Give and Take: Why Helping Others Drives Our Success. Sign up for his free newsletter on work and psychology at www.giveandtake.com/Home/Newsletter

Image credit: Vooza.com.