Choosing Cofounders: Maximizing the New Venture’s Human Resources

As we noted in the preceding section, it is considerably harder to “know thyself” than you might at first assume. With a little hard work, however, it is possible to formulate an accurate inventory of your own human capital—what you bring to the new venture in terms of knowledge, skills, experience, and personal characteristics. This, in turn, can help you determine what you need from other people (e.g., cofounders and employees) in terms of these basic dimensions. Once you have drawn a bead on this issue, though, things do not necessarily get simpler, because knowing what you need is no guarantee that you will find it—or that you will recognize it when you do. Superb cofounders do not appear, conveniently, just when you need them. On the contrary, identifying such people usually requires considerable work. Accomplishing this task is very worthwhile, because choosing badly can have disastrous consequences. These points raise an important, practical question: How should entrepreneurs go about selecting potential cofounders—what guidelines should they use in assembling the human resources required for their new ventures? Answering this question involves many activities, but perhaps most central among these is developing skill at what is known as social perception—the process through which we come to know and understand other people.¹

This is a key task because unless we form accurate perceptions of others, it is impossible to determine whether, and to what extent, they possess the knowledge, skills, and characteristics we seek. For this reason, developing skill at this task is very useful for entrepreneurs.² Unfortunately, perceiving others accurately is more difficult than it sounds because other people do not always portray themselves accurately. On the contrary, they often seek to disguise their true feelings or motives, and frequently seek to present themselves in a favorable light. If we accept these external masks at face value, we can be seriously misled. To perceive others accurately, therefore, we must learn to be adept at distinguishing reality from image where other people are concerned. In this respect, developing skill at dealing with two related issues—impression management and deception—is extremely useful.

Impression Management: The Fine Art of Looking Good—and How to Recognize It

At one time or another, virtually everyone engages in efforts to make a good first impression—to present themselves in a favorable light.³ To accomplish this goal, individuals use a wide range of tactics. Most of these, however, fall into two major categories: self-enhancement—efforts to increase their appeal to others—and other-enhancement—efforts to make the target person feel good in various ways.

Specific strategies of self-enhancement include efforts to boost one’s physical appearance through style of dress, personal grooming, and the use of various “props.”⁴ Additional tactics of self-enhancement involve efforts to appear highly skilled or describing oneself in positive terms—such as explaining how the person engaging in impression management overcame daunting obstacles.

Turning to other-enhancement, individuals use many different tactics to induce positive moods and reactions in others. A large body of research findings suggests that such reactions, in turn, play an important role in getting other people to like you.⁵ The most commonly used tactic of other-enhancement is flattery—making statements that praise the target person, his or her traits or accomplishments, or the organization with which the target person is associated.⁶ Such tactics are often highly successful, provided that they are not overdone. Additional tactics of other-enhancement involve expressing agreement with the target person’s views, showing a high degree of interest in the person, doing small favors for him or her, asking for his or her advice and feedback in some manner, or expressing liking nonverbally (e.g., through high levels of eye contact, nodding in agreement, and smiling).⁷

These are not the only strategies people use; for example, individuals sometimes employ intimidation—pretending to be dangerous or angry in order to wring concessions from others. This tactic does not generate positive reactions to the people using it, but it does often produce the results they desire. Have you ever known anyone who relies on this approach? Such people are far from rare, and they often enter meetings with an approach suggesting, “I’m mad as hell and I’m not going to take it anymore!” If this tactic is recognized for what it is, its impact is reduced; but for some people it works well in many situations.⁸

Do other tactics of impression management actually succeed? The answer provided by a growing body of literature is clear: yes, provided that they are used with skill and care. For example, one large-scale study involving more than 1,400 employees found that social skills (including impression management) were the single best predictor of job performance ratings and assessments of potential for promotion for employees in a wide range of jobs.⁹ Overall, then, it appears that impression management tactics often do enhance the appeal of people who use them effectively. We should hasten to add, however, that the use of these tactics involves potential pitfalls: If they are overused or used ineffectively they can backfire and produce negative rather than positive reactions from others. For example, people often form very negative impressions of others who play up to their superiors while treating subordinates with disdain and contempt—sometimes known as the slime effect.¹⁰ The moral of these findings is clear: Although tactics of impression management often succeed, this is not always the case, and sometimes, they can boomerang, adversely affecting reactions to the person who uses them.

By now, it should be obvious that being able to “cut through” these various tactics of impression management is very important for prospective entrepreneurs engaged in the task of choosing prospective cofounders and initial employees. Accepting others’ statements about their skills, experience, and past accomplishments without due diligence (carefully checking on the accuracy of such information) can lead entrepreneurs to form inflated views of the people who are using such tactics. Similarly, failing to recognize flattery, exaggerated agreement or similarity, and related tactics can lead entrepreneurs to go with their hearts instead of their heads in assembling the initial teams for their new ventures. Developing the ability to recognize such tactics when they are used requires considerable practice, but simply calling them to your attention is useful; some research findings indicate that where impression management is concerned, to be forewarned is to be forearmed. Certainly, we are not suggesting that you adopt a cynical approach to other people—that, too, can be harmful. But accepting the information or outward façade presented by strangers without due diligence is not only naÏve; it can also be very costly to the fortunes of a new venture.

Utilizing the New Venture’s Human Resources: Building Strong Working Relationships Among the Founding Team

Assembling the resources needed to perform a task is an essential first step; indeed, there is no sense in starting unless the required resources are available—or easily obtained “on the fly.” But this is only the beginning; the task itself must then be performed. The same principle holds true for new ventures: Assembling the necessary human resources—an appropriate pool of knowledge, experience, skills, and abilities—is only the beginning. The people who constitute the founding team must then work together in an effective manner if the new venture is to succeed. Unfortunately, this key point is often overlooked, or at least given very little attention, by new entrepreneurs. They are so focused on the opportunity that they have identified and wish to develop that they pay scant attention to building strong working relationships with one another—working relationships that will permit the new venture to utilize its human resources to the fullest.

Growing evidence suggests that such relationships are an essential ingredient in new ventures’ success.¹¹ For example, in one recent study of 70 new ventures, higher levels of cohesion among the founding team (positive feelings toward one another) were strongly associated with superior financial performance by these new ventures.¹² In view of such evidence, a key question arises: How can strong working relationships between founding team members be encouraged? While there is no simple answer to this question, there are three factors that appear to play a crucial role: (a) a clear initial assignment of roles (responsibilities and authority) for all team members, (b) careful attention to the basic issue of perceived fairness, and (c) development of effective patterns and styles of communication (especially with respect to feedback) among team members.

Roles: The Clearer the Better

A major source of conflict in many organizations is uncertainty concerning two issues: responsibility and jurisdiction. Disagreements—often harsh and angry ones—easily develop over the question of who is supposed to be accountable for what (responsibility), and over the question of who has the authority to make decisions and choose among alternative courses of action (jurisdiction).¹³ One effective way of avoiding such problems is through the clear definition of roles—the set of behaviors that individuals occupying specific positions within a group are expected to perform, and the authority or jurisdiction that they will wield. Once established, clear roles can be very useful.

For example, consider a new biotechnology venture with two cofounders. One holds an MD and is a practicing physician with a specialty in cardiology, while the other holds an MBA. To maximize their effectiveness as a team, these individuals should negotiate clearly defined roles at the outset. One possibility: The MD runs the laboratory, since it is conducting medical research and he is intimately familiar with the rules and regulations governing such activities; he is also responsible for interfacing with other MDs and for choosing the drugs on which to focus—after all, he is an expert on the symptoms and causes of various medical conditions. The other founder, in contrast, handles business-related aspects of the company (e.g., purchase and maintenance of equipment, setting up the company’s computer systems) and, because of his business expertise, oversees hiring of new personnel and financial tasks ranging from securing new capital to maintaining required records. If these roles are specified clearly in advance, the cofounders will truly work in a complementary manner—each will provide unique skills, experience, and knowledge that the other does not possess, or possesses to a lesser degree. The result? The company will operate smoothly and efficiently.

Imagine, however, that the MD decides that he should take an active hand with respect to the company’s finances. This would not be surprising because bright, talented people often think it will be fun to do something that they have not done before. Since the MD lacks knowledge in this area, he will have to spend considerable time acquiring a working knowledge of financial statements, tax regulations, and so on. This is inefficient. Moreover, his partner, who holds an MBA, might find this to be irritating at best and downright insulting at worst. The result? Conflict between the cofounders will occur, and the company will operate at lower efficiency.

The moral is clear: Once the founding team has come together to form the new venture, its members should stick to the principle of complementarity. This implies dividing responsibilities and authority in accordance with each founder’s expertise and knowledge. Anything else might well prove costly and detract from the new venture’s success. This sounds very simple, but the sad fact is that many entrepreneurs are highly energetic, capable people, used to “running the show” in their own lives. Unless they can learn to coordinate with their cofounders, though, they might run the risk of seriously weakening their own companies.

Perceived Fairness: An Elusive but Essential Component

Try this simple exercise: Think back over your life and remember a specific occasion when you worked with one or more persons on a project. The context is unimportant—it can be any kind of project you wish—but try to recall an incident in which the outcome was positive; the project was a success. Now, divide 100 points between yourself and your partners according to how large a contribution each person made to the project. Next comes the key question: How did you divide the points? If you are like most people, you gave yourself more points than your partners. (For example, if you had one partner, you took more than 50 points; if you had two partners, you took more than 33.3 points, and so on.)

Now, by way of contrast, try to recall another incident—one in which you also worked with partners but in which the outcome was negative; the project failed. Once again divide 100 points between yourself and your partners, according to how large a contribution each person made to the project and its outcome. In this case, you might well have given them more points than yourself. If you showed this pattern, welcome to the club: You are demonstrating a very powerful human tendency, often known as the self-serving bias. This is the tendency to attribute successful outcomes largely to internal causes (e.g., our own efforts, talents, or abilities) but unsuccessful ones largely to external causes (e.g., the failings or negligence of others and factors beyond our control).¹⁴ This bias has been found to be a strong one, and it has serious implications for any situation in which people work together to achieve important goals. Specifically, it often leads all the people involved to conclude that somehow they have not been treated fairly. Why? Because since each participant in the relationship tends to accentuate his or her own contributions and minimize those of others, that person usually concludes that he or she is receiving less of the available rewards than is justified. Further, since each person has the same perception, the result is often friction and conflict between the people involved.

In other words, this tendency raises thorny questions relating to perceived fairness—a key issue for entrepreneurs. Because of the self-serving bias (and other factors), we all have a tendency to assume that we are receiving less than we deserve in almost any situation. In other words, we perceive that the balance between what we contribute and what we receive is less favorable than it is for other people. In specific terms, we perceive that the ratio between what we are receiving and what we are contributing is smaller than that for others. In general, we prefer this ratio to be the same for all, so that the larger any person’s contributions, the larger his or her rewards—a principle known as distributive justice. Most people accept this principle as valid, but the self-serving bias leads us to cognitively inflate our own contributions—and hence to conclude that, in fact, we are not being treated fairly.

What do people do when they perceive that the distribution of rewards is unfair? The answer is many different things, none of which are beneficial to a new venture. The most obvious tactic is to demand a larger share; since others do not view these demands as legitimate, conflict is the likely outcome. Another approach is to reduce one’s contributions—to reduce effort or shirk responsibility. This, too, can be highly detrimental to the success of a new venture. An even more damaging reaction is to withdraw—either physically or psychologically. Disaffected cofounders sometimes pull out of new ventures, taking their experience, knowledge, and skills with them. If they are essential members of the team, this can mark the beginning of the end for the ventures in question.

All this is bad enough, but even worse is the recent finding that while people tend to focus relatively little attention on the issue of fairness when things are going well (e.g., they are getting along well with their cofounders), they devote increasing attention to this issue when things begin to go badly.¹⁵ In short, when a new venture is succeeding and reaching its goals, members of the founding team might show little concern over distributive justice. If things go badly, however, they begin to focus increasing attention on this issue—thus intensifying this interpersonal friction.

Given the existence of this cycle, it is truly crucial for the founding teams of new ventures to consider the issue of perceived fairness very carefully. This implies that they should discuss this issue regularly to assure that as roles, responsibilities, and contributions to the new venture change (which they inevitably will do over time), adjustments are made with respect to equity, status, and other rewards to reflect these changes. This is a difficult task since all members will tend to accentuate their own contributions (recall the powerful self-serving bias). But since the alternative is the very real risk of tension and conflict between the founding team members and since conflict is often a major waste of time and energy,¹⁶ it is certainly a task worth performing well—and one that will help the new venture utilize its human resources to the fullest extent.

One more point: Issues of fairness arise not only between cofounders but also between companies that form business alliances. Such alliances can often be extremely helpful to new ventures, but in order to survive, they must be perceived as fair and mutually beneficial by both sides. Here is one example of an alliance that has been very successful. 8minuteDating is a young company with an idea that has taken the matchmaking industry by storm. At 8minuteDating events, single men and women gather at a restaurant, chat in couples for 8 minutes, and then move on to the next table, where they meet another person. This allows each person participating in the event to meet many potential partners in one evening instead of just one, as is the case in traditional dating. After the event is over, couples who like each other can meet again. Recently, 8minuteDating has formed an alliance with Tele-Publishing International (TPI), a company that runs the personal ad pages for 550 newspapers in the United States.

How did this occur? The founder of 8minuteDating, Tom Jafee, learned that Adam Segal, an executive with TPI, was having dinner with his mother at a restaurant where an 8minuteDating event was being held. Jafee introduced himself, and the two entrepreneurs quickly realized that they could form a mutually beneficial alliance: TPI would advertise 8minuteDating in its personal columns, and 8minuteDating events would distribute free coupons and sponsor other promotions to encourage its customers to try the personal ads. The alliance has worked like a charm: Both companies have benefited considerably. Both see it as fair and as helping them to attain their major goals. As Segal puts it, “The beauty of our alliance is that it can expand with 8minuteDating’s growth. Every time they start events in a new city, TPI will already be there with our personal ads in the newspapers. Talk about a match made in heaven.”¹⁷ So if you consider forming an alliance with another company, be sure to devote careful attention to the question of fairness: Alliances that are not perceived as meeting this essential criterion are unlikely to survive.

Effective Communication

Perceived unfairness is not the only cause of costly conflicts between members of a new venture’s founding team. Another major factor involves faulty styles of communication. Unfortunately, individuals often communicate with others in a way that angers or annoys the recipients, even when it is not their intention to do so. This happens in many different ways, but one of the most common—and important—involves delivering feedback, especially negative feedback, in an inappropriate manner. In essence, there is only one truly rational reason for delivering negative feedback to another person: to help that person improve. Yet, people often deliver negative feedback for other reasons: to put the recipient in his or her “place,” to cause him to lose face in front of others, to express anger and hostility, and so on. The result of such negative feedback is that the recipient experiences anger or humiliation in turn, and this can be the basis for smoldering resentment and long-lasting grudges.¹⁸ When negative feedback is delivered in an informal context rather than formally (e.g., as part of a written performance review), it is known as criticism, and research suggests that such feedback can take two distinct forms: constructive criticism, which is truly designed to help the recipient improve, and destructive criticism, which is perceived—rightly so—as a form of hostility or attack.

What makes criticism constructive or destructive in nature? Constructive criticism is considerate of the recipient’s feelings, does not contain threats, is timely (i.e., occurs at an appropriate point in time), does not attribute blame to the recipient, is specific in content, and offers concrete suggestions for improvement. Destructive criticism, in contrast, is harsh, contains threats, is not timely, blames the recipient for negative outcomes, is not specific in content, and offers no concrete ideas for improvement.

Research findings indicate that destructive criticism is truly destructive: It generates strong negative reactions in recipients and can initiate a vicious cycle of anger, the desire for revenge, and subsequent conflict. The message for entrepreneurs is clear: Effective communication between cofounders is one essential ingredient in establishing and maintaining effective working relationships. If this is lacking, serious problems might result. For example, consider a new venture started by partners who have followed the complementarity principle: one is an engineer and the other has a background in marketing. Although the marketing cofounder has selected a partner carefully, she harbors negative feelings about engineers. (“They never think about people!”) As a result, she criticizes the engineer’s designs for new products harshly. The engineer is offended by this treatment, so he begins to make changes in the company’s products without informing his cofounder. Since the marketing entrepreneur does not know about these changes, she cannot get customer input before they are made. The result? The company’s products bomb in the marketplace, and soon the new venture is in deep trouble. This is just one example of how faulty communication between members of the founding team can produce disastrous effects. The main point should be clear: Strong efforts to attain good, constructive communication between cofounders are very worthwhile.

Is all conflict between founding cofounders bad? Absolutely not. Conflict between team members can, if it is focused on specific issues rather than personalities and is held within rational bounds, be very useful. Such “rational” conflict can help to focus attention on important issues, motivate both sides to understand each other’s view more clearly, and can, by encouraging both sides to carefully consider all assumptions, lead to better decisions.¹⁹ In sum, conflict between founding team members is not necessarily a bad thing. Rather, it—like all other aspects of the new venture’s operations—should be carefully managed so that benefits are maximized and costs held to a minimum. Overall, strong and effective working relationships between founding members are a powerful asset to any new venture, so efforts to foster them should be high on every founding team’s Must-Do list.