By Richard Sudek
Dave’s note: Our guest insight this week is by Richard Sudek, an associate professor of entrepreneurism at Chapman University Graduate School of Business. He is Director of the Leatherby Center for Entrepreneurism and Business Ethics, and Chairman Emeritus of the Tech Coast Angels, the largest angel group in the United States. Enjoy!
In working with entrepreneurs over the years, I have learned that the difference between success and failure is often centered on the people aspects of the business rather than strategy, finance, or operations. It is not that strategy, finance, and operations are not important, but rather failure of the business is more likely attributed to people issues. Nowhere is this more evident than with the issues related to business partners. Thinking about a business partnership like a marriage might be helpful in how you go about selecting a business partner.
You are likely to spend more time with your business partner than your spouse in the early stages of launching a business. This relationship may last 5-20 years. In many ways having a business partner is like getting married. You will spend a lot of time with that person (many years), you are likely to have employees (similar to having kids), you are likely to have arguments (but no make-up sex), you are likely to compromise (will not always win each fight), and the breakup can be messy and expensive (divorce court). When you look at it this way, you may want to spend some extra time considering how to select a business partner. Thus, when thinking about partnerships I suggest you think of the 5 C’s: Confidence, Competency, Complementary, Compatibility, and Contract. Let’s start with confidence, since this is about you rather than your partner.
Confidence is the first “C” because it refers to the confidence you have to launch your business. Sometimes an entrepreneur picks a partner because they experience some insecurity. This can range from emotional immaturity to functional insecurity. For instance, a good friend who now is in his 60s and was a very successful entrepreneur said he picked his first partner because he was insecure about his knowledge of finance. He felt he needed someone to compensate for this. It turned out that he really only needed a good bookkeeper and CPA. This partnership did not work well since the partner did not have much else to offer.
[Email readers, continue here…] This might be the toughest “C” for younger entrepreneurs to deal with since it is really about self-assessment and introspection. How well do you really know yourself? Know your limitations? Your strengths? Ability to admit your weaknesses? You need to ask the question: Why do I need a partner? Is this what the business really needs? Or is this what I need? If what you need and the business needs are not the same, you might be seeking a partner for the wrong reason. Seek advice from mentors and other entrepreneurs who have been down this path before.
Competency is related to assessing a potential partner. The more experience you have the more you learn how to assess competency in others. This can range from a functional area such as marketing, or a people attribute like trust. Again, many younger entrepreneurs simply do not have the experience to do this well. This is when asking for help is important. The same entrepreneur who picked the wrong partner in the previous paragraph said now he would have multiple people interview a potential person, perform more due diligence on their background, and be much more thorough. When he was younger, he had too much arrogance to ask for help. The older you get, the less you worry about what you know, and focus more on what is the best way to get what you need.
Complementary is for picking a partner with complementary skills. Most of us think of this in functional areas, however, this is not the only area to seek complementary skills. It is important not to have significant overlap. For instance, if you are good at marketing, don’t select a partner with a good marketing background. Find someone with technology, operations, manufacturing, or finance experience. Ask yourself, what skill does the business absolutely need?
But more importantly, are you complementary enough with this person to help make a complete CEO? Some of us act quickly and don’t think deeply. Some act slowly but think deeply. Some of us are more enthusiastic, or volatile, or quiet. The worst thing you can do is find someone similar in personality and functional areas. Two technologists who are introverted are unlikely to make a good partnership. Steve Jobs and Steve Wozniak were a great example of being very different, yet these differences made for a very effective partnership.
Compatibility is related to how similar partners are on the dimensions of work ethic, integrity, style, and eventual outcome of the business or the exit among other issues. This is more of a personal fit issue rather than a functional fit. In other words – are you both going to work 100 hours a week in the beginning? When one partner feels they are putting more effort into the business, it is likely that resentment will build over time. Is how you frame integrity – and how you view different difficult choices that involve ethical issues similar? Something as simple as how to lay-off an employee and how much severance to offer can create significant disconnect with partners.
One time I was brought in to coach two partners. They had raised over a half million dollars, had fifteen employees, and thought they had strategic planning issues. What they had was a relationship problem. I ended up doing more couples counseling than CEO coaching or strategy work. They had never had the “exit” talk. They had not decided how or when they were going to exit, and what their personal dollar goal was for an exit. Be sure your personal issues related to the business have been discussed and are compatible.
Contract is the last “C” and might seem the most obvious. Every partnership needs to have a partner agreement, or in marriage terms, a pre-nup. Do you know exactly how you are going to part ways if things do not go as you plan, or if you simply want to get out? Do you know how you are going to value the company, how long it will take to pay the amount, and what the penalties are if you are late in paying? Worse yet, what if your partner dies and you are stuck (both legally and emotionally) with the remaining spouse who does not know anything about the business or industry? Marriage is till death-do-you-part, but business partnerships include what happens after death. The problem with this level of detail is that it can be an uncomfortable discussion for most. Consider hiring a third party to walk you through this. Since that person should not have ulterior motives, as is more likely to ask the very difficult questions about what might appear to be an unlikely scenario questions.
Selecting a partner is sometimes necessary, and extremely difficult. Few of us are complete CEOs. So spend the time and energy to make the best decision you can. Ask for help to assess potential partners and to dig into personal values and issues. And always have a contract.