All entrepreneurs need to form a network of informal and formal relationships in order to be successful. The entrepreneur’s desire to be opportunistic and act quickly can sometimes cause them to make mistakes in their partner selection that can prove damaging and/or expensive to the business in the longer term. I hope that by sharing a few of these negative experiences, entrepreneurs might gain some ideas and insights into how to improve the quality of their decision-making about partner selection.
First, I will recount some of my experiences with partnership formation between founding entrepreneurs. All too often, I have had to spend time, several years after a venture has formed, unraveling the partnership and clarifying original intentions and commitments. More than one person starts most companies, consequently the relationship between founders is critical to long-term venture success. Co-founders can provide complementary perspectives on decisions to be made, and improve the speed and quality of decision-making. All too often the selection of partners is based on friendship or other similarities that may not be the best basis for the decision. While friendship or similar backgrounds might be important, for instance in the alignment of core values or creating a pleasant work environment, individuals who are too similar can have the same blind spots or limited experience base. This can reduce the quality of decision-making.
Partners need to enjoy working with each other, but not necessarily be friends. They should take the time to get to know each other, and only then formalize their relationship. Importantly, while flexibility and adaptability are critical to the early stage of a venture, there is a need to document the relationship through a formal agreement. This agreement is usually in the form of a contract that outlines expectations about business objectives, how partners will make decisions, and what happens if one of them wants to leave the venture. Some formal ideas about each partner’s roles and responsibilities can also be useful.
Other strategic relationships are critical to venture success, as an example I will discuss the relationship between entrepreneur and investor. Many of the comments made about the relationship between entrepreneur and investor can be applied to other strategic relationships. It is important to understand what an investor can bring to the table, and what help the venture needs. In general, the right investor brings a good deal more than money to the venture, based on their experience, and existing relationships. While this may seem obvious, it is surprising how many times an entrepreneur takes money from an investor who is unable to add much additional value, rather than waiting for a strategic investor. Often, entrepreneurs who are action orientated, make the choice of an investor with limited ability to add value, because attracting the strategic investor is harder or involves a lower valuation. In general, this is because the entrepreneur really does not understand the true value of the right investor.
I met with an entrepreneur this week, who rather than accepting an investment from a VC, had taken an initial investment from Business Angels who had limited ability to help him with his business. He chose the VC when he needed a second round of finance, because the VC team had in-depth experience in the area and could actively help grow his business. In addition, the investment from the VC gave the company a level of credibility that allowed them to attract customers and strategic partners. Finally, the VC also was well positioned to attract further rounds of finance from other VCs.
Clearly, it is important to be strategic in your choice of partners, investors and customers. While the attraction of a concluding a short-term agreement and taking advantage of an opportunity maybe too much to resist, there maybe a good strategic reason to search for a partner who can provide many levels of benefit. Having a contract with a market leader might be challenging and take time to consummate, but it says a great deal about the company to other potential partners.
Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.