- Getting an investor to move from “not now” to “yes”
- Beware the bad investor
- All venture capitalists are not created equal
- Not much difference between angel investors and VCs anymore
- Friends rarely make the best business partners
- How to put a value on your technology startup
- There is only one way to meet a venture capitalist
- Raising capital is not always the only option
- How to attract the right talent to achieve financial success
- 5 facts to know before approaching venture capitalists
- How a venture capitalist knows your deal is weak
Over the life of the venture you will likely spend a great deal more of your waking hours with your business partners than you will with your spouse or any significant other who cares to hang about in a non-paid capacity for that matter. A lot of companies are started by friends, which is entirely understandable.
‘I want a new hoodie, but every hoodie out there sucks.’
‘Hey, you know what would be awesome?’
Jerry, Steve and Mike (there’s always a Mike) have been friends since grade 6 when they got detention for dropping Mentos into Cola during History class. Ten years later, they decide to become partners in the span of 90 minutes, ask the waitress for a pen and map out a plan on the proverbial napkin.
Maybe it will go great and they’ll build it up and have a great time doing it together. Maybe they’ll catch a sudden wave and be thrust into the golden glow of the venture sun and an IPO will make rock stars of them all. Maybe all of them will remain just as they are right now; decent, hard-working, logical, genuine friends. Maybe nothing will go wrong and all will go according to plan.
But maybe not. Perhaps it will go like so many others.
Jerry designated himself as CEO (well, it was his idea). Steve was put in charge of getting hoodies manufactured, and Mike was left with getting retailers to sell their line. And for a while, it works. They had pizza at their partner meetings, but Steve kept wanting to take notes at the meetings. Mike thought that was odd. Then Jenny, who was Jerry’s girlfriend, started hanging around a lot. She started showing up with a lot of designs of her own. Steve and Mike looked at each other, nodded and protested. Jerry thought they were being ridiculous.
‘She’s helping and not even charging us a thing. You guys should be grateful.’ They shrugged and went back to work.
Steve and Mike showed up every day at 7 a.m. Jerry was there most days but usually didn’t show up until 9.
‘I’m out having meetings.’
Steve and Mike didn’t know where these meetings were.
‘Why is he having meetings without us?’
Mike started getting orders. The hoodies were selling and he needed Steve to carry more inventory in order to keep up. Some of the stores were selling out and weren’t happy that the company couldn’t seem to keep the racks full. One store dropped them for another vendor that made a wider range of hoodie designs and wristbands. But Steve had a problem because he couldn’t afford to produce more inventory without more money. The company didn’t have more money.
Jenny and Steve started spending a lot of time together because she was making designs and Steve was getting these designs through production. They started having frequent lunches together. To discuss work … of course. This bothered Jerry, but he didn’t have time to talk to either of them about it as he was meeting with lawyers to create the share structure and a unanimous shareholder’s agreement.
Later, Jerry fired Steve over ‘recurring production and quality issues that were inconsistent with the brand promise.’ At least, that’s what he wished he had said. Steve sued for wrongful dismissal. Steve asked Mike to join him as he walked out. Mike stared at his feet. Jerry hired Sam, a Vice President in charge of sales and Mike was informed that he would start reporting to Sam.
Sales increased, production issues were solved, and a board of directors was created when the first round of investment was secured. Jerry and Mike had a beer the night the deal closed, but didn’t talk much. Things kept changing. The board needed reports. Jerry resisted. The board produced a contract with performance expectations. His lawyer produced a pen. There were just so many things they all seemed to need him to do and to know. And increasing sales wasn’t enough. They wanted to know about contribution margins, inventory turns, and they kept harping about accounts receivable.
In the end, Jerry was asked to resign. Moments after being walked out the front door, Jerry sat in his car staring at the keys in his hand, partly because he didn’t know where he was going to go, but mostly because he was more than a little numb. At the bar in which they bore their idea, Jerry picked up his phone and called Steve.
‘I just thought we could make hoodies.’
You just might have the best friends in all the world. If you want to keep them as friends, leave them there. Someone has to be CEO and that person has to evaluate the performance of the others. Are you ready for either position? When evaluations uncover less than acceptable performance, you’ll fire your friend(s). Even if nothing particularly nasty happens, your friends become your work friends and, after work, you will find that you want to hang with other people so that you don’t end up talking shop all night too. Of course, it could be worse if you’ve chosen family or a spouse as a partner, but that’s a whole other kettle of fish. In rare instances, choosing friends as business partners can work, but it just usually doesn’t.
Pick the right skills. Pick the best people as business partners. Be clear about roles, performance expectations and share structure. Don’t just talk about it. Write it up and have everyone sign. Clarity helps keep things simple and just might help keep you from getting burned.
Warren Bergen is President of Alberta-based AVAC Ltd.
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