Why start-up co-founders need to treat it like a marriage

09 March 2017

John Lyon, Professor of Practice, entrepreneur and venture capitalist, talks about the trials and tribulations of establishing a start-up and how co-founders can best get along to help their business grow.

I have run start-ups, as both the CEO and latterly Chair, for 30 years and have seen disaster, success, elation and despair. One thing is for certain - Entrepreneurial ventures are notoriously uncertain! If three problems (challenges) can be dealt with before lunch, that is a good day - four challenges or more could be one challenge too many.

When you have co-founders, they are more emotionally attached and they bring a lot of themselves into the venture - their values, their hopes, their dedication and for most a marriage. Co-founders are wedded to their venture and if it goes wrong, feelings of grief and despair are not uncommon.

Related course: Executive MBA with Entrepreneurship Specialism

So co-founders also need to be able to get along. It is easy when the going is good, but the test is during times of negative deviations from the plan, especially if external investors are looking in, with expectations that may not always be realistic.

How can such a co-founder relationship be improved? We would not cement a relationship with a significant other, on just one meeting (well most of us wouldn't) and co-founders need to manage in the bad times, the uncomfortable times, when no one else seems to believe in the business.

We should get to know our co-founders before we join an equity matrimony. We all come to the table with baggage, whether that be failure, disappointment or unmet need. We equally come to the table with networks, financial capital, educational standards, experience of prior business, lessons learnt.

What often is not seen is our cultural and hard-wired memories of life. All in all we are complex beings, and all of this complexity we bring with us. So how do we get to know our co-founders?

Well... spend time prior to the venture union, learning how each other acts in stressful situations, with people, with strategic planning and even up a mountain. There is a great need for simulations of board meetings and negative deviations from plan to see how we all would act and more importantly, how we would act with our putative co-founder.

How much impact does rejected investment have on a start-up?

I have raised more than £15 million of equity capital and I recall the first round of £250,000 seed capital when a member of the investment committee refused to invest on the basis that my co-founder and myself would never get on. 

Seventeen years later, we have gone through five rounds of funding, three commercial co-development deals and developed numerous patents and new medicine candidates. We are best friends and will be for the rest of our days.

So what did the member of that investment committee not see? We had spent nine months not only building a business model, but also getting to know each other in not just our professional capacity, but our motivations, hopes, dreams, and of critical importance, our values, ethics and who we were behind the roles that we played.

Without a good overlap (or in the case of ethics, a perfect overlap), problems will be stored up for the future.

How important is a shared vision to the success of a start-up?

I teach my students, investment comes with minuses and positives and not to always take the best deal on paper.

Some of those minuses could be a disruptive non-executive director who decides that the adopted strategy of the co-founders has to be changed or every minute detail has to be passed over him or her.

If the co-founders are not strong and of the same mind, they may be forced apart and the board becomes a place of disorder, war and a place where consensual decisions are never made. 

A strong Chair who can mediate to ensure all directors (including the co-founders) have a say with no hidden agendas and the more powerful directors do not abuse that power through forcing decisions or paralysing board duties.

Without vision, we perish; if that vision is not shared, we are likely to fail when we are on the cliff face hanging on with our fingernails. So co-founders need to search their hearts to ensure their motivations, aspiration and needs align - more than a due diligence tick-box exercise.

We are informed companies fail due to overtrading and not being able to manage cash flow - I would suggest many entrepreneurial ventures fail because the human chemistry is not aligned, especially between the co-founders - well worth investing in time and effort prior to the marriage!

John Lyon hosted the 'Investment: Take it or leave it?' on March 8 at The Shard, an event looking at when to take or leave venture capital and angel investment.