News Wise: The Most Successful Startups Mix Friendships, Business

20 Sep 2021
AMJ researchers found that a dual team-formation strategy, melding hires based on personal relationships and those based on skill-seeking, results in superior venture performance.

Originally found at News Wise.   

Finding the right team is critical for a startup’s success and most aren’t taking the right approach, finds new Maryland Smith research. With the right strategy – a mix that has founders both liking each other due to shared values and experiences, and having the proper complementary skills and capabilities – startups can foster better team dynamics and have more success raising funds, being productive, and earning profits.

Professors Rajshree Agarwal, Gilad Chen and Brent Goldfarb at the University of Maryland’s Robert H. Smith School of Business collaborated on the research, supported by a National Science Foundation grant and published in the Academy of Management Journal. They worked with co-authors Moran Lazar and Miriam Erez of Israel’s Technion Institute of Technology, and Ella Miron-Spektor of INSEAD.

The research team, which Chen assembled using the approach the research prescribes, looked at how startup founders form teams and how their formation strategy affects the new venture. “Formation strategy is important for building strong transactive memory systems – the combined knowledge within the team of who knows what and how the team uses this shared knowledge to efficiently and effectively solve problems and make decisions,” Agarwal says.

“New venture teams are really the whole entity of an organization in its infancy,” Chen says. There are basically two ways co-founders find each other, say the researchers. The first is all about interpersonal bonds created through prior experiences – perhaps college friends, former colleagues, or family members. The second is by seeking out people who have the capabilities and competencies needed.

A hybrid formation strategy works best, Goldfarb says, but few startups – about 1 in 10 – actually use it. That’s likely because it is more difficult.

“To get the team with that perfect combination of having both the resources and the right mindset, and the right level of comfort that you share with each other, that’s hard to do,” Agarwal says. “Creating teams requires intentional thought and attention to these two things. It’s going to be hard, and it’s going to be rare, but if you do it, there are huge performance benefits.”

In one study, the researchers looked at new technology startups on the crowdfunding platform Kickstarter and coded whether co-founders selected each other based on interpersonal attraction, resource-seeking, or both.

“We were able to link these strategies to the amount of funding they actually raised,” says Chen. “A minority of those teams – about 10% to 15% – engaged in the hybrid team formation, but there was a huge dollar-value premium for those teams.”

Continue reading the original article at News Wise.

Read the original research in Academy of Management Journal.

Also read this AOM Insights summary citing this research.

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