Entrepreneurs: Your Friends Could Be Bad For Business

Could having friends be bad for business?

In the first installment of this two-part series, we explored social dynamics that could "turn friends into chains." In this second article, we focus on a more subtle and perhaps more harmful aspect of social connections: their blinding potential.

In social network research, the idea that social connections have a cognitive effect is an established fact: they are a prism through which one sees the world. It may be worth keeping in mind that prisms do not only reveal new aspects of the world, but that they can also distort perception. So think differently: Have no friends.

Researchers are far from being in agreement over the idea that social relationships have a positive affect on creativity. (For full list of research sources, see here.)

For instance, consider network structure. While many researchers have argued that being connected is great for creativity because it allows exposure to more information and perspectives, a growing number of studies note that many of the most original and disruptive ideas in industries as well as in science came from outsiders. The latter idea is old but still very relevant for entrepreneurs today: individuals who are too embedded inside a particular set of relationships (especially if they are homogenous) tend to find it harder to have original ideas.

New research from HBS Professor and MIT alumn Karim Lakhani finds that the best ideas in InnoCentive's competitions typically come from isolated individuals, especially women scientists.

What about collaboration? Again, no real consensus exists. A stream of research that is particularly developed among organization scholars has argued that collective work is more creative because it can involve individuals from different backgrounds and these divergent origins may inspire the collaborators and push them to make better decisions.

In contrast, a long-standing research stream in brainstorming (psychology) literature has repeatedly found that people working in groups are actually less creative than the same number of individuals working separately. Groups tend to be unproductive for several reasons: the flow of conversation is often chaotic, some people do not dare speak out of fear of being judged, and group members tend to focus on consensual ideas. Current research by one of this article's authors with MIT Sloan Professor Fiona Murray, finds that the cost of collaboration seems to outweigh the benefits.

Do you really know what is best for you?

Beyond the issue of following the consensus, connections can also blind an individual by leading him or her to be over-confident about the abilities of their friends.

Familiarity tends to produce a bias in people's evaluations of products and other people. For this reason, potential investors are likely to consider entrepreneurs that they have prior experience with to be more capable and more honest -- thereby increasing their willingness to invest in them.

A 2006 study by Sorenson and Waguespack of the feature film industry is particularly revealing. Firm distributors exhibit a strong tendency to allocate more resources to films produced by those with whom they have had prior interactions, "approving larger production budgets, marketing these films more heavily and scheduling them on more attractive release dates." On the surface, films by producers with a prior relationship to the distributors appear to outsell others. But in reality, once the resource allocation process is controlled, these films actually perform worse at the box office.

It is natural for one to perceive his best friends positively and to want to choose him as a business partner. After all, friendship brews not only familiarity, but also trust and emotional attachment. But such trust and confidence often create blind spots in one's vision and leads a person to search locally rather than globally for business partners and economic resources.

Studies have found that most entrepreneurial teams are composed of groups with strong personal ties, such as family members and workplace friends. These strong-tie teams often underperform weak-tie teams, particularly in sectors of technological innovation. This result is fairly understandable, since people with strong ties usually share the same work experience and social circles and consequently possess redundant information that is no good for "creative recombination." Further, the research finds that while entrepreneurs benefit from moderately strong relationships with bankers, they are disadvantaged when these ties are too strong because they stop considering external options.

In other words, when relations determine the choice of business partners, society as a whole, in addition to the actors selecting partners, suffer as they pass over more able parties. Beware of the blinding effect of social connections.

It has become a cliché to think of the business school student as a smartly-dressed young go-getter handing out his or her business card. The purpose of this article (and the previous one) is to highlight the potential (hidden) downsides of social connections in entrepreneurship. We believe that the "social capital" metaphor could, in fact, be deceiving, since social relationships cannot -- and should not -- be accumulated like money.

Let's be clear. We do not believe that entrepreneurs need to be loners, totally isolating themselves from the world in order to be successful. However, we do take issue with the excessive glorifications of social relationships and collaboration. With social connections, as with many other aspects of life, more is not necessarily better.

This post originally appeared on the MIT Entrepreneurship Review.