A 2012 Harvard University research paper, titled “Cost of Friendship” authored by Paul Gompers, Vladimir Mukharlyamov and Yuhai Xuan, has stated that “our results suggest that non-ability-based ‘birds-of-a-feather-flock-together’ effects in collaboration can be costly.” This applies to even professional investors. Using statistical analysis, the researchers sampled 3,510 individual venture capitalists investing in 11,895 portfolio companies from 1975 to 2003, and found that venture capitalists of the same ethnical background had decreased success rates. The report said, “The cost of affinity is even greater for venture capitalists with similar ethnic backgrounds. Being part of the same ethnic minority group reduces the probability of success by 25%.” The probability of a successful exit outcome decreases by 18% if two venture capitalists who previously worked at the same company before partnered up for a business venture. Similarly, the report said that the likelihood of success dropped by 22% if co-investors attended the same undergraduate school.

 

Normally, you would think that friends would make the best partners in business. Apart from positive chemistry, friends are more likely to forgive each other for mistakes, share the same ideals and passion and so on. Above all, they share the emotional burden that comes with starting a business together. So, what explains the startling results of the research paper that friends can lead to detrimental investment returns and decreased change of success of a business venture?

 

One possible answer is that it introduces group-think—desire for harmony in decision-making which will normally override rational alternatives. Friends are less likely to consider options that could endanger their friendships, if those could actually lead to increased investment and business success. The force of friendships can be so strong that it can be difficult to detach oneself and think out-of-the-box. For example, assume you are in a group of 10 friends and decide to go white-water-rafting. The majority of your friends prefer to go even when the weather is bad. The minority, maybe one or two friends, think it would not be a good idea, but would find it socially unacceptable to opt out. 

 

John D Rockefeller once said that “a friendship founded on business is a good deal better than a business founded on friendship.” Business ventures based on friendships will test even the most enduring friendships. Facebook co-founders Mark Zuckerberg and Eduardo Saverin, who were college-mates at Harvard, had fallout after founding the company. On the brighter side, there are examples of friendships which have survived the gruelling world of business. The best example of this is Bill Gates who founded Microsoft and Steve Ballmer joined the company in 1980 as the 30th employee.