When/How Often Do Startups Join Together?

I asked this on my blog, but then realized this would be a good forum for discussions so am asking here as well:

How Often Do Startups Join Together? In talking to and mentoring dozens of startups I’ve noticed that many of them are in similar spaces; working on the same general problem, yet not quite competitors. Almost complimentary.

This raised a question for me: In the history of the modern startup universe, how common is it for really early stage (say 2-5 people with only friends & family funding) ventures combine with others?

I ask because it seems to be a good idea on the surface. For example, I know of several companies trying to address developer pain in building cloud based mobile apps. Each is tackling a different part of the overall pain that developers feel. Neither has the time, nor resources, to do anything but focus on their core idea. They each struggle to finding and sell to customers; likely talking to the SAME customers. They also do the same with potential sources of funding.

Wouldn’t it be better if they somehow joined forces?

Beyond ego (which can be a huge deal), what would be the barriers to them joining forces?

Discuss please. I have some hair-brained ideas about actually making this happen and I’d like to gather more experience from others.

There are a wide range of barriers to joining forces in early stage startups, the ones that spring to mind are:

• Motivation. Part of being in a startup is the drive to make your own thing, more than ego, its seeing your idea fly and making it. As you get larger (put groups together) the number of leaders, number of people following those leaders changes the dynamics and the drive is lost.
• Shared goals. They are all playing in roughly the same space but don't complete these would either have to merge into a monster product OR have several products under a company OR drop a few in favour of one ... which is fine as long as its min.
• Investment dilution. If you have 4 people in a team then you have 25% each, if you put 3 or 4 of thes teams together you have 6% ... not quite so interesting, fine if you sell for $100M but what if you only sell for $2-5M? that would limit your chance of selling because everyone would vote to hold on.
• Eggs in a single basket. Its more than just the idea/technology there is market, branding, people and lots of other stuff. If you slam them all together ... you get 1 shot at it all right, rather than 4 shots of which 1 or 2 may work.
• Which idea do you pick, which technology stack, whos skillset. Mine obviously, I'm a better developer than him ... why is he giving me directions? because the team is now too big?
• More mouths to feed. You have 16 people all wanting to get paid so the first pay cheque has to be split into tiny amounts.

There is as you say, merit in the idea of joining forces, but what structure could work?

• Collective sales. Having an independant company (run by you for example) that represents all the underlying companies and can walk into a client with a far better hope of addressing their individual set of problems.
• Collective Admin. Outsourcing the running of the books etc
• Shared space. Allowing them to feed off each other will provide a lot of benefits, if you provide the space and create the chance for them to collaborate and draw from each other ... then you will most likely get much further.

Basically, let them each have their own way and make or break on their own ... but remove all the common problems away from them so they can focus on their unique aspects.

The personalities of a startup usually don't work well when you attempt to merge them into a single company, both sides still want to be in charge. One option is a direct acquisition where it's clear who the dominate company is.

However, in the startup space, I believe the best option is to have a joint venture, keeping the companies separate, but allow them to work together for a specific goal. By keeping things legally separate, each side is still in charge of their domain. And if either party doesn't uphold their end of the deal, or of the technologies don't mesh well, they can go their separate ways. If you go this way, I'd be very clear about the termination process, non-compete terms, non-disclosure, and make sure each side can't hire the others employees without explicit permission, in a carefully reviewed contract.

Rather than actually merging your companies, you might consider coworking, which can offer many of the benefits that you talk about without some of the disadvantages others have mentioned.