Four Questions to Ask Before Partnering to Start a Business
By Jackie Luo, TCV Growth Partner.
Starting a business is tough. Doing it with partners seems to make it a bit easier, but it has its own challenges. For entrepreneurs who have built successful businesses, they often attribute their success to having a strong founding team. My personal experience is a good example. My business partners and I spent 7 years building a software business, which we sold a couple of years ago. Our strong partnership was critical to our success. Without that, I am not sure we could have survived.
Having partners in the startup phase of a new business has a lot of advantages. You pull together the initial starting capital. You all work long hours and are underpaid. Without ownership, who else would do that? On the practical side, you don’t have to hire employees in the beginning when cash is scarce, because the partners can cover all aspects of running the business: technical, marketing, sales, and finance.
A strong partnership can really help a business take off, but it is not easy to find it and sometimes even harder to sustain it. Many partnerships fail, for different reasons, and consequently the businesses fail too. We probably have all heard and witnessed these failed partnerships. When the early going gets tough, some partners quit. Or later, when things get better, one partner gets greedy, which threatens the growth of the business. Even worse, some partners end up suing each other in court. College buddies end up being strangers with animosity. Husband and wife teams end up in intertwined legal battles around business ownership and custody of their children. There are plenty of examples like these.
As an entrepreneur with the good fortune of having had successful partners, I would highly recommend going into business with partners. However, I would also suggest that you be very strategic about your choice of the partners. Unlike hiring employees, looking for business partners is not easy. Many things need to align.
So before you partner with someone to start a business, I suggest you consider these four questions. They seem a little overwhelming, but you must resolve them if you want to build a successful business.
1. Do you share the same life goals? You may wonder why this is relevant, after all, you are going into business together, not getting married. But sharing similar life goals is important. Building a business is a serious commitment, which will consume most of your time and energy in the foreseeable future. Partnerships don’t have to be forever, but you need to be aligned in your goals at least long enough to build the idea to a viable business, which could take anywhere from a few years to a decade. Consider this scenario for example. One partner is prepared to live frugally on his or her savings for a couple of years before taking profits from the business. But the other partner, having just quit a well-paying corporate job, is prepared to live on savings for only 6 months and needs good income after that. These two are obviously at different phases in their lives. The partnership probably won’t work out, unless magically the business takes off in 6 months and owners can withdraw steady and decent profits from it.
2. Do you share the same goals for the business? To discuss the goals, you should at least talk about competitive strategies, growth targets, company cultures, funding approaches, and exit plans. Do you want to raise money for the business, or mainly bootstrap it? Do you want to sell the business when it reaches a certain scale or pass it on to your children? These questions may look irrelevant in the startup phase of the business, but it’s better to discuss them early. If your expectations on them are far apart, then you probably shouldn’t partner.
3. Have you outlined roles and responsibilities? You decide to work together because you believe each brings a complementary set of skills and capabilities. But don’t assume anything. Write down what you expect of each other, including the areas of expertise, responsibilities, and time and resource commitments. For example, if one partner is working on the business full-time but the other is only working on the business part-time, how do you divide the responsibilities and ownership in the business? Also, don’t assume one partner’s prior experience is where this partner wants to focus on in the new business. For example, one partner was a CFO in the job before joining the business, but he or she may want to focus on sales and marketing by joining this startup. If that is the case, is the partnership still good for the business?
4. Do you have an exit plan? An exit plan is like a prenup before marriage. You may not think it’s necessary when going into the partnership, but it will save you a lot of headache and money in a worst-case scenario. I am sure one of the reasons you want to build a business is to make a lot of money and provide financial freedom to you and your family. You want to protect it. So before you agree to partner with someone in the business, you should talk about contingencies. What if one partner changes his mind 1 year, or 5 year into the business, how do you transition the ownership shares? What if one partner dies of accident or becomes disabled? How would the business support the partner and the family through that?
Building a business is tough work. You will encounter ruthless competition, constant shifts in market trends, and endless challenges in managing employees. Hopefully you won’t have to deal with headaches from problematic partnerships, if you have carefully thought through these 4 questions and more. Of course, no amount of planning can guarantee the outcome. But, because you have considered these 4 questions, you have an exit plan if things don’t work out.
By Jackie Luo, TCV Partner