On Hiring Friends

Interesting report here by Jordan Weissmann:

Anyone care to speak up?

Everyone prefers going work with people they like. That’s just natural. But it’s also one of the reasons certain industries tend to get dominated by old boys’ clubs. Exhibit A: Wall Street.

Now, a new working paper out of Harvard University suggests there’s another downside to doing business with people based on whether you get along: Friends are bad for business.

The study explores the reasons venture capitalists team up on certain investments and what kinds of partnerships most often succeed or fail. It finds that VCs tended to collaborate with people who were a lot like themselves, based on traits such as race, past employers, and the college they went to. For instance, two investors who shared an alma mater were more than 20 percent more likely to work as a pair.

And that was too bad for them. Duos who shared a lot of personal characteristics were generally much less successful on their deals than teams that got together based on talent. For instance, if two members of the same ethnic minority collaborated, their likelihood of success fell 25 percent. Deals involving two investors who got their bachelor’s at the same school were 22 percent less successful.

In other words, picking a business partner because you both went to fabulous universities where you both studied advanced mathematics? Good idea. Picking a business partner just because you happened to go to share a frat at the U. Mich? Bad idea.

Why do buddy investors do so poorly? The researchers couldn’t find much evidence that they picked objectively worse companies to invest in, suggesting that they may have done an inferior job advising the startups they chose.

There a few reasons that might be the case. As the researchers note, groups that are alike tend to think alike. Or, more precisely, they force themselves to think alike. Rather than challenge each other and risk a confrontation, they strive for unanimity. As a result of this nasty propensity for groupthink, they may ignore the potential pitfalls of bad decisions or block out other viewpoints from outside the team.

In other words, a little diversity makes groups smarter. Even among hotshot venture capitalists.