Ask the Entrepreneurs: Beating the Business “Divorce Rate”

[Note: Students in the Entrepreneurship program at Simon have submitted a number of questions and we encourage you to ask yours via the form on our Home/About page. We'll have one or more of our bloggers offer their takes — which should provide starting points for your thinking and more discussion.]

Question: Name two or three important characteristics that you seek in a partner that provides a substantial amount of capital for your business.

There are so many things to consider in partners that invest capital in your business. Partnerships in business are critical for any company’s success, but can be just as difficult as any marriage. I could argue, in fact, that business partnerships are more difficult than marriage because most marriages begin with a strong emotional and idealistic commitment. Business partnerships are usually based on simple economics so the fundamental basis of the commitment isn’t as strong. I wonder what the five-year failure rate of business partnerships is? I bet business partnerships fail at a higher than do marriages!

Anyway, bearing that in mind, if you don’t have the personal capital to finance your business you are still going to need funding. There are two basic ways to finance your business: debt or equity. Debt is almost always cheaper and it is an easier relationship, generally, to manage. Usually debt funding comes through a bank, the SBA, community or state programs or, possibly private investors.

Most of these people extending business loans are professional business partners and the terms of the relationships are established through legal agreements. The nice thing about the professional relationships is that the expectations are usually pretty clear and you can exit the partnership so long as each of you meets the terms of the deal.

If you take loans from friends or family it is absolutely critical that expectations are clearly established, in writing. I know that it seems unnecessary and it may be uncomfortable to go to so such a formal step with relatives or friends but not doing this almost assures you of gut-wrenching result. Trust me, it’s important.

The more costly second way to fund your start-up is through equity. This means selling shares in your company. It is complicated and there are very strict and extensive laws about taking investors. You cannot just ask anybody to invest. You will need a good business attorney.

If you go to the step of taking equity investments, I think that the best potential investor partners follow these pieces of investment advice from Warren Buffet:

• Never invest in a business you cannot understand
• Our favorite holding period is forever
• Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful"
• Wide diversification is only required when investors do not understand what they are doing.