Peter Reinhardt, CEO of San Francisco-based technology company Segment, met one of his co-founders in middle school. The pair later joined forces with two other undergraduates at the Massachusetts Institute of Technology, and dropped out as a group to pursue the entrepreneurial dream. They moved into a house in Silicon Valley in 2011 and secured significant funding from an incubator programme.
But the first year and a half was “dark”, says Reinhardt. “We burned half a million dollars.” Their first two business ideas failed, and Reinhardt tried to keep everyone motivated by avoiding anything his friends could perceive as negative. It created friction.
When their third iteration – a customer data platform now used by the likes of Deliveroo and Levi’s – first showed signs of success, Reinhardt remembers feeling elated – and exhausted. “I realised I’d been intellectually dishonest,” he says. “I so wanted to keep the team excited about what we were working on. I never wanted to deliver bad news.”
Reinhardt’s experience reflects both the pitfalls and rewards of starting a company with friends. High-profile examples of those who have succeeded abound: Ben Cohen and Jerry Greenfield, the seventh-grade school friends who create their eponymous ice cream; the founders of Airbnb, Microsoft and Hewlett-Packard. But these stories obscure a lesser-known truth: unfortunately, many businesses founded by friends don’t survive.
In The Founder’s Dilemmas, Noam Wasserman – then a professor at Harvard Business School – studied 10,000 technology and life-sciences start-ups, of which 40% were founded by friends. His research, published in 2012, showed that companies with friend-founders were less likely to work – and each social connection on the founding team increased the likelihood of a founder leaving by 30%.
Right now, amid the deepest global recession in years, Americans are starting new businesses at the fastest rate in more than a decade, according to US Census Bureau data, and a similar trend is being observed in the UK. Many of these will have been founded by people with pre-existing relationships. Given that one in five start-ups fail within a year and only half make it to five years, how can these budding entrepreneurs ensure their friendship becomes a positive tool for building their business – and not something that leads to its demise?
‘Date’ each other and ask tough questions
Wasserman, now Dean of Yeshiva University’s Sy Syms School of Business, says that when people are starting a company, it can be very comforting to have a familiar face along for the ride. But he says founding with friends is like playing with fire: “It can either forge a stronger team and relationship, or it can blow up the team and relationship.”
