Weekly Thoughts: Partners
Here is something that caught our eye this week:
Second year MBA students graduate in late Spring, and as some of that group embark upon a search for a small business acquisition, we tend to observe a consistent seasonal uptick in advice requests around this time. We often get asked for our opinion on working with a partner, and lately, we have noticed a trend towards “solo” searchers in place of search fund partnerships. The data supports our casual observation, with Stanford Business School reporting that funded partner searches have declined to 28% from a peak of 64% in 2008/2009 (with the caveat that there is notable year-to-year variability). The decline in popularity of a partnered search is further supported by Harvard Business School professors Royce Yudkoff and Rick Ruback in their HBR Guide to Buying a Small Business:
“A partnership is very expensive; your search will cost twice as much, and your benefits will be cut in half. In perhaps only this instance, we think Gordon Gekko in the movie Wall Street offered some sage advice: ‘If you need a friend, get a dog.’ A dog is much cheaper and will give you unconditional love even if you don’t find and close a deal quickly.”
We do enjoy a good Gordon Gekko monologue, but we also know that almost every day, an unexpected situation arises which gives the Chenmark partners reason to pause and be thankful for each other. While we feel that we are still very much in startup mode, we frequently comment that there is no way we could have gotten our firm to this point without each other. In our opinion, the process of searching for, closing, and then supporting the operation of small businesses involves significant uncertainty, an extremely steep learning curve, and considerable emotional volatility, challenges which we feel are better faced together. Thinking more broadly, it turns out there is an active debate regarding whether or not one should have a partner when founding a business, search fund, other venture.
It seems that the best argument against partnership is the cost. Two people cost more than one, three cost more than two, and equity is precious. In addition to this hard cost, the biggest potential detractor of value in a partnership is a lack of cohesion or teamwork. Y-Combinator’s Sam Altman makes this point in his online Startup Playbook where he notes:
“Cofounder breakups are one of the leading causes of death for early startups, and we see them happen very, very frequently in cases where the founders met for the express purpose of starting the company. The best case, by far, is to have a good cofounder. The next best is to be a solo founder. The worse case, by far, is to have a bad cofounder.”
The Chenmark partners were able to address some of these issues since, as family, we knew from the beginning we would be in this for the long haul, which fueled a collective willingness to deeply sacrifice search-phase earnings in favor of longer-term upside. The result was a start-up budget that was 50% less than that of the average funded solo searcher. In addition, while we must split the economics, we believe that our partnership dramatically increases our probability of success, which improves the expected value of our individual stakes.
While not everyone can work with family (although perhaps more should!), our perspective on finding the right partner is the same in business as it is in marriage; if you have to ask, he or she is probably not “the one”. For those in search of more guidance, entrepreneur Sean O’Sullivan of SOSV provided some good insights into what makes a solid founding partner:
“How do you know you’ve got the right founder? You both see the world as being unacceptable the way it is, you know that together as a team you can make it better, and you are both willing to spend the next seven years trying to make this vision come true, even as your friends who work for bigger companies are making more money and buying better houses and cars than you can, as you plow your earnings and your learnings back into the business. You watch each other’s backs. You support each other and respect each other. You play nicely. And in general, you love their perspective and their advice. They help make you grow as a human being and as a leader. You trust them.”
Our final point on this topic is that it’s important to remember that while we are out trying to maximize equity value, life happens. There are sick days, sleepless nights, delayed flights, crappy motels, great deals, pleasant surprises, disappointing negotiations, inside jokes, childcare disasters, and lots of coffee. The mundane daily aspects of business building are where the magic happens, and for us, sharing these moments with each other is ultimately what we find deeply rewarding about our business venture. As we work to change the small business world, we are glad we have found others to help us paddle.
Have a great week,
Your Chenmark Capital Team