Unknown co-founders increase the risk of startup failure

Choosing the right people to start a business with is one of the most crucial decisions for an entrepreneur. A new study shows that bringing in co-founders you don’t already know can be risky – even though it may have some initial benefits.

The researchers analyzed data from over 3 000 companies that successfully completed a crowdfunding campaign on Kickstarter. They wanted to understand how the composition of founding teams affects the ability to deliver products and build sustainable businesses.

Previous research and investor practice has often emphasized that teams with diverse backgrounds are stronger. The idea is that differences in experience and networks provide access to more resources and perspectives. But the new study shows that diversity in the form of ‘strangers’ in the team does not necessarily lead to better results – on the contrary, it can create problems.

Help and support with strangers in the team

The results show that companies that had at least one co-founder who was a stranger managed to attract more backers in their crowdfunding campaigns. On average, they attracted almost 50% more backers than teams where everyone already knew each other. This suggests that new contacts broaden networks and increase reach in the early funding phase.

When it comes to the operational side, the picture looks different. Teams of strangers were significantly less likely to deliver the products or services they had promised their funders. They were also significantly more likely to be inactive or defunct when researchers followed up on projects. In the survey responses, many founders indicated that the cause of delays and failures lay precisely in difficulties of collaboration within the team.

Benefits are offset by costs

The researchers found no evidence that the strangers contributed more varied or deeper skills. Despite assumptions that newcomers bring unique experience, the level of expertise was found to be broadly the same regardless of the relationship structure of the team. The potential benefits of wider networks were thus offset by the costs of lack of trust and coordination problems.

The conclusion is clear: starting a business with people you don’t know can provide a quick start but carries a higher risk in the long run. Relational trust, common ways of working and previous collaboration experience seem to outweigh network size or diversity. The lesson for entrepreneurs and investors alike is to look not just at what skills are in the team – but how well the members work together.

More about the article and the authors
The article The “devil” you don’t know: A test of the detriments and benefits of co-founding with strangers is published in the scientific journal Journal of Business Venturing. The authors are Jason Greenberg at Cornell University and Ethan Mollick at the University of Pennsylvania.