I was told by an advisor that I should never start a company with a friend or my husband because no investor will invest. Is that true?
The answer is complicated and varies by investor. Admittedly, certain relationships do create concerns for investors, like family members, especially if the founders are married. Even then, the barrier is not insurmountable. There are a few issues with pre-existing relationships, whether friendship or more.
First, what will the CEO do when loyalty to the friend or family member conflicts with the company’s best interests, or even with the truth when negative events occur and the politics of blame run amok?
Second, will employees believe they have a fair chance at career advancement if they are not a friend or family member of the CEO? Many family-owned companies fail to attract the best talent into the company, as savvy executives with skill and ambition know that the key spots are reserved based upon the relationship with the CEO.
Third, what happens when there is a breakup? Any rupture of the bonds between early employees and founders can disrupt a company’s culture. Broken marriages and friendships can positively split a company down the middle if not handled correctly.
That said, there are advantages to working with friends. When you work with a friend, you are working with someone known. From an investor standpoint, I would prefer that the team has been through tough times together. The alternative, really, is having a founder hire total strangers who interviewed well, which is highly unreliable. Indeed, many great startups started with co-founder friends.
I admit that I have substantially less faith in the wisdom of the previous paragraph when the founders are married or otherwise family, but I am not wholly unpersuadable (just mostly so). Some investors definitely just see family and spousal businesses as red flags and move on.
One key for me is whether the agreements governing the relationship are arm’s length and expectations are clearly enforced. What performance would you demand from a stranger in the position and do you ask it of your friend? What are the consequences of failure? Are you really measuring results and will you police the company’s interests when needed? Inevitably friends overcompensate friends. I personally do not have an issue with some slight “friendship bonus,” meaning you are slightly overpaying for peace in your relationship, but the overall arrangement must be based upon merit and performance.