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A friendship built on business can be glorious, while a business built on friendship can be murder, goes a famous quote attributed to John D. Rockefeller. The startup world is littered with cautionary tales to this effect – think of Steve Jobs and Steve Wozniak, whose success poisoned the friendship that birthed Apple Inc.

But co-founding with friends is still one of the most common arrangements for new entrepreneurs. It can lead to rich payoffs, as long as the founders navigate the pitfalls and perils.

Take Montreal-based Naak Inc., founded in 2016 as a partnership among three friends, all French expatriates in Montreal. The company makes cricket-powder protein bars marketed to athletes as sports-nutrition products.

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William Walcker, left, and Minh-Anh Pham are co-founders of Montreal-based Naak Inc., which makes cricket-powder protein bars.

Christinne Muschi/Christinne Muschi/The Globe and

Two of the founders, William Walcker and Minh-Anh Pham, met while working together at a previous company. Mr. Walcker and a third co-founder, Antoine Domergue, met in university.

At first, the three-person partnership seemed ideal, but cracks began to show, especially between Mr. Domergue and the other two. “We were not on the same page on how fast we wanted to grow,” says Mr. Walcker, “and how many hours a week to put in.”

Mr. Walcker and Mr. Pham wanted the business to scale rapidly and enter new markets, whereas Mr. Domergue was in favour of a more cautious approach. Similar disputes kept cropping up, and Mr. Domergue came to feel he was “always putting the brakes on what they wanted to do, and was a third wheel in general. It became uncomfortable.”

The schisms deepened, and the trio came to a decision to part ways, a decision that also ended the friendship with their erstwhile third partner. “We are not really close at all any more,” Mr. Walcker says with some regret.

By contrast, Mr. Pham and Mr. Walcker’s friendship has grown even stronger. Mr. Pham was Mr. Walcker’s best man at his wedding this past summer.

Failures of friend-founded businesses often come down to just a few issues, says Michelle McBane, director of the Investment Accelerator Fund at Toronto’s MaRS Discovery District innovation hub. As with Naak, one of the biggest is competing visions for the business’s future.

Equally important are a lack of honesty and transparency and a lack of diversity among the founders. Since friends usually come from similar social, economic and educational backgrounds, they often have homogeneous skill sets and approaches to problem solving.

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Today, Naak is thriving; its products are in more than 600 stores nationwide.

Christinne Muschi/Christinne Muschi/The Globe and

“Your customers are likely to be diverse,” says Ms. McBane, “and you need to build a diverse culture if you’re going to anticipate different obstacles, come up with different solutions, and serve your customers well.”

There’s plenty of data to back up the notion that birds of a feather flocking together is not good for business.

A working paper titled The Cost of Friendship produced by Harvard Business School researchers in 2012 examined more than 3,500 venture capitalists over more than 30 years. It found that for VCs who invested together in new companies, the odds of achieving an initial public offering (IPO) were 22 per cent lower if investors had attended the same university, and 18 per cent lower if they previously worked at the same company. Also, investors of the same ethnicity were 25 per cent less likely to achieve an IPO than mixed-ethnicity investors.

A similar lesson can be found in Harvard professor Noam Wasserman’s book The Founder’s Dilemmas. “Teams in which co-founders have similar backgrounds tend to lack some necessary skills, to have more conflict over roles … and to have a comparably limited range of useful contacts,” he wrote.

Dr. Wasserman also warned that friends can be cavalier about work responsibilities, on the assumption that they will be cut more slack because they are friends. In turn, friends find it much harder to address problems in the interests of maintaining social relations.

“Accountability can be hard,” says Mackie Hilborn, chief executive officer of Toronto-based EnergyGeeks Corp., which helps homeowners install solar energy systems in their homes. It was founded in 2016 by brothers Mackie and Ian Hilborn, with longtime friends Marcus Joo and Chris Stern.

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“If someone is a friend of yours, they may feel like they have job security regardless of performance," Mr. Hilborn says. "If someone is too close to the boss, there can be a ‘he’s my buddy, it’ll all be good’ attitude.”

Mr. Hilborn says this hasn’t been a big issue at EnergyGeeks, but he has seen it elsewhere. He thinks one reason for his company’s success is diverse skill sets – all four founders have differing backgrounds and clearly defined roles. In his case, the personal relationships have made it easier to define those roles: “If you’ve known someone for years, you just can’t hide strengths and weaknesses.”

In any case, clear roles and a well-defined hierarchy are necessary, says Victoria Lennox, CEO of Startup Canada, a not-for-profit that assists entrepreneurs nationwide.

“I don’t believe in co-CEOs,” she says. “It often doesn’t turn out well. There has to be accountability and a decision-maker, and the founders have to know that hierarchy exists, even if they’re social equals.”

Michelle McBane is director of the Investment Accelerator Fund at Toronto’s MaRS Discovery District innovation hub.

Jeff Beardall

Ms. McBane suggests entrepreneurs hire a small-business lawyer who can help draft a founders' agreement to set responsibilities and a process for settling disputes. “It can also be very useful to carve out a certain time each week to have smaller conversations, so things don’t fester and blow up,” she says.

Today, Naak is thriving; its products are in more than 600 stores nationwide. But it had an existential crisis last October, when a storage problem resulted in part of their inventory becoming worthless. It could have wiped out the business.

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The episode inspired serious introspection. “When you face such a challenging situation,” says Mr. Walcker, “you start to question everything: the operations, your business partner, and your own choices as a founder.”

The pair dove deep into the difficulties. “We had a ‘tell me what I’m doing wrong that I should do better’ kind of conversation,” he says. “We had to learn from what we experienced, and be honest with one another, without ego. It was very hard.”

But their friendship, he believes, is what made such an intimate and bluntly honest conversation possible: “It gave us direction, and strengthened the company and the relationship.”

Tips for starting a business with a friend

Founding with a friend? Answer these questions first.

Is your vision aligned? “You need to be on the same page,” says Naak’s Minh-Anh Pham. Naak’s founding trio become a duo not because of personal confrontation, but different ideas of what the company should become. “When you partner with a friend in business it’s like you are getting married,” says Mr. Pham, “and it could be for a very long time. You have to want the same things out of it.”

Does your team have diverse skill sets? With friends, “you can get into situations with too much ‘groupthink,’” says Michelle McBane at MaRS. If the founding friends have overly similar backgrounds – let’s say two engineers with similar work and educational histories – it’s advisable to introduce advisors, or a third partner to the mix. Or even reconsider whether this is the right founding team in the first place.

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Are you ready for difficult conversations? “It’s tough to look your friend or brother in the eye and say, ‘What the heck, pull your weight,’” says EnergyGeeks CEO Mackie Hilborn. “More challenging than if it were just an employee.” Naak pulled through a difficult period in part due to the founders’ total transparency and willingness to have hard discussions and leave their egos at the door. That, says Ms. McBane, is vital. “You need to dedicate time to having hard conversations,” she says. Even if that risks offending one another.

Are you prepared for the friendship to change? “You need to know going in that it will change the relationship,” says Mr. Hilborn. “Not necessarily for the worse or the better, but it will be different. You’re now interacting with that friend all the time, every day. Workplace disagreements can become power struggles, you can push each other’s buttons. Having a friendship can strengthen the working relationship, but you can also annoy one another, and that bleeds from friendship to business, and vice versa.”

Are you prepared to lose the friendship? “The biggest thing to appreciate is if you do jump in with a friend, you could lose that friend,” says Startup Canada CEO Victoria Lennox. Mr. Hilborn says that EnergyGeeks has been fortunate enough to avoid any serious bad feeling, in part due to the company’s success. “But if we weren’t,” he says, “it might leave a lasting scar on the relationship, because you both put so much time and effort in. It would weigh on you.”

Do you have other friends? “You still need some folks in your life outside of business,” says Ms. McBane. “You can’t have all your eggs in one basket, socially or professionally.”

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