Recently, I discussed my thoughts on partnerships between startups and big corporations. Essentially, I am not in favor of such arrangements, as I believe they distract from the mission of a startup in quickly scaling the business model. Many startup founders are of the opinion that partnerships are the way to quickly scale, but as I mentioned, most partnering relationships either never materialize after much effort or create negative value. Rather than pursuing a partnership, startups are much better off selling their solution to big companies and bringing much needed cash in-house.
There are always exceptions though, and there are times when partnering can be beneficial. In fact, certain business models rely upon partnerships to remain in business, such as startups that are based around APIs for their data, tools or infrastructure. Startups that are entering heavily entrenched and highly regulated industries are also prime candidates for partnering. Consider, for example, the insurance industry or beverage industry where the market dynamics are centered around established and independent distribution networks. But even outside of those situations, partnering can be a sensible approach when your startup has no inherent barriers to entry, can easily be copied or it needs to quickly build a wide network/market presence.
So, what should one consider when entering into a partnership with entities that are much bigger than his or her startup? Here are some thoughts to consider:
- Values. While getting the deal might be of paramount importance, one should not neglect the broader implications of getting married to another firm. You need to consider if your partner is an organization that you want your startup associated with long-term. That is important because it is a reflection of the values you espouse as a company, which impacts everything from hiring to sales to leadership. This is no different than corporate sponsors dropping an athlete after said athlete gets caught in a tawdry scandal. The organization does not want to be guilty by association or to take on a reputational risk.
- Synergy. Admittedly, this is a tired business-speak term, but it is most apt in this instance. You want to enter into a partnership that makes sense in that it furthers your vision and business objectives. Likewise, it should make sense for a company to partner with you to address some need that is not currently being fulfilled with their own solutions. I have personally seen some bizarre linkups that I only assume were done on a lark to simply see what happens. I am all for experimentation, but such arrangements never pan out to the degree that it compensates for the effort put in. Make sure that everyone is on the same page when having partnership discussions and that all parties can directly value from the collaboration.
- Motivation. It is obvious why you would want to partner with a big company, but what exactly is in it for them? Some corporate business development flunky or middle manager will butter you up, but you have no idea whether or not their enthusiasm is shared elsewhere, what is driving their desire for dialogue and whether behind the scenes is a strategic initiative or corporate incentives to drive particular goals. You have no idea what they may even mean by “partnership,” which could mean something as innocuous as links to each other’s websites or something as significant as a potential buyout.
- Ease of Business. The number one killer of these partnerships is the hoops required to jump through to close business. It is never “easy” to get a deal signed with a big company, and that does not even account for the ongoing activities after the deal is signed. However, there are circles of hell that are much worse than others. You should understand how the bureaucracy works, the processes for getting things accomplished and what it takes to keep things moving along once started. Who has signing authority, where are the roadblocks, what deals tend to be problematic, how many signatures are required to get approval, do contracts need both contracts and legal review, what terms are problematic, is executive approval required, are there fast-track approval processes? Yes, there are lots of questions, but if you don’t know the process, you will certainly be taken by surprise. If you are having difficulty determining how a potential partner operates, look at their other partners and reach out to firms similar to yourself to shed some light on how the company is as a partner and learn about some of the challenges that were faced in creating the partnership.
- Transparency. Of course there is never going to be 100% transparency, but you should have a sense of the people you are working with in order to develop and manage a partnership. In many ways, this ties into the last two points, as you want to have partners that are open with their motivations for a deal and ones that actively support the partnership by helping to manage the bureaucratic maze. You can get that sense by how open they are in discussions, how responsive they are to issues, how forthright or evasive they are in answering questions, how timely they are in meeting deadlines and milestones and whether or not there are surprises and unexpected issues that arise on a regular basis. If you are regularly seeing red flags, do not get lulled into thinking it will get better. It never does.
- Fairness. Let’s be upfront. The idea of “equal footing” is just feasible when startups partner with large firms. The reality is that you are in a vulnerable position and the company has much of the power. However, there is no reason to unilaterally accept terms and conditions that are onerous or potentially destructive to your business. Push back on exclusivity arrangements or terms that have any impact on your business that fall outside of the parameters of the specific deal, such as your right to sell your startup or ownership of IP. Even if the deal is of a strategic nature involving an equity stake, make sure any rights that are provided are timeboxed so that it does not impact your freedom to determine the future of your startup.
- Relationship. The only way a partnership can work is if the relationship between the people work. The way you build those relationships is by going deep and broad, which is why many of these types of partnerships are so difficult to manage. People come and go, either because they leave the company or are reassigned. Therefore, the job of managing the partnership involves building a coalition with multiple people across the company and in each department. Avoid situations where gatekeepers prevent you from establishing relationships with key individuals, which create a single point of failure in the partnership and obscure the dynamics and processes behind the scenes to keep the partnership moving forward
- Scope. Oftentimes, a partner will want some freebies, meaning they will want you to provide something extra that is outside the scope of the contract or partnering agreement. Sometimes, this is worthwhile in order to maintain a good relationship. It is hard to fully comprehend every single issue that might come up ahead of time, much like a software project. However, there comes a point where the freebies add up and start to cost you. Make sure you have a defined process for recording and managing these issues and do not be afraid to bring up the fact that the out-of-contract requests are adding up. A good partner will understand and allow for amendments to the contract over time as the partnership evolves.
- Success. You cannot measure success without first establishing goals and measuring towards those goals. And if you cannot measure success, you cannot incentivize further success. That is something that should be hammered out early on when discussing a partnership, as it also establishes the value that your startup brings to the company. The other thing to consider is, what to do if you do meet and exceed the initial objectives of the partnership, which could cause the big company to lord it over the startup. Therefore, consider adding tiers of success criteria and putting timeframes in place around these criteria to ensure you are poised for a long-term and valuable relationship.
- Mitigation. There are all sorts of problems that can arise with partnerships, some of which I highlighted in my last post. The challenge however, is that you as a startup have few resources or available recourse against a bigger and much better capitalized corporation. The best defense is to never put yourself in a corner to begin with and to avail yourself of every option in the event something dire happens. And never put yourself in a position where the life and death of your startup is contingent on the relationship with a single partner. This is particularly critical if you are building a startup on someone else’s platform — a platform that can change direction and terms on a whim. Have a plan B in place to give yourself a fighting chance should the partnership dissolve.
It bears mentioning that partnerships can be an enormous opportunity to drive startup growth. Partnering with other companies that are smaller in size may be a more worthwhile strategy, as you are more visible and integral to your partner’s success. However, if the opportunity presents itself to partner with a large company or well-known brand, take the opportunity to fully evaluate the partnership’s potential to your startup’s success using the above considerations to help better frame your decision-making process.
This article was originally published on Strong Opinions, a blog by Birch Ventures for the NYC tech startup community.
Image credit: CC by _mixer_