Advice On Partnering With The Big and Powerful: Don't

By Dharmesh Shah on October 7, 2008

The topic of partnerships comes up relatively frequently in startup circles.  The common question entrepreneurs have about partnerships with Some Big Powerful Company (SBPC) can be reduced down to something like this: 

Q:  “My startup has the opportunity to explore a partnership with a Big, Powerful company.  What should I do?”

(Short) Answer:  Don’t.

Of course, there are exceptions, but on average, not knowing anything about you, your startup, the big company you are dealing with or the terms of the deal, I think this is good advice almost all of the the time. 

Let’s dig a bit deeper into some of the analyis that I’d put into making the decision.  One warning/disclaimer:  I’m not a lawyer and don’t play one on TV.  This is not legal advice.  If you’re signing a deal, make sure to get competent counsel.

Thoughts On Partnerships With Some Big Powerful Company

1.  Beware The Distraction:  Big companies have something you don’t.  Time.  They can commit one or more people to the ongoing task of “exploring partnership opportunities”.  You probably can’t.  You have a day job (and probably a night job too).  As such, the mere act of continued conversations with a big company to expore a partnership can be a major distraction for a startup.  Even if it leads to something (which it usually doesn’t), it takes a bunch of time and energy.  Beware this distraction risk.  You were warned.

2.  PR Glow Lasts A Day, Lock-In Lasts Longer:  One of the reasons big partnerships are so tempting for a startup is you envision the positive press.  It adds legitimacy.  It makes your startup feel more “real”.  You can almost feel the warmth and glow that comes along with signing a partnership with a big, powerful company.  But, this glow is short-lived.  On the other hand, even after the PR glow fades, the terms of your deal don’t.  There are a number of tricky deal terms that could be prolematic later.

3.  The True Cost of “Right of First Refusal”:  Let’s say Some Big, Powerful Company (SBPC) is interested in partnering with you.  One of the likely reasons is that you’re doing something innovative, and they “believe in innovation”.  Heck, they believe in it so much, the’re considering investing in you or buying you.  But, it’s a bit early for that.  So, as part of the partnership discussion, they ask for a seemingly innocuous deal term like “right of first refusal” on a sale.  Here’s how it works.  A few years down the road, you find some other company (SOC) that wants to buy you for $50 million.  Per the terms of your deal with SBPC, before you can sell to SOC, SBPC would have the right to look at the deal, and the option to buy you for $50 million.  Now, at first glance, this doesn’t seem like that bad of a thing.  What’s the downside?  Wouldn’t you want to bring SBPC into the negotiations and hopefully drive the price even higher?  Since they’re not getting a discount, and are willing to pay up, what’s the problem?  The problem is that when you have a “right of first refusal” with SBPC, folks like SOC are less willing to enter into discussions.  From a game theoretic perspective, SOC knows that regardless of what they do, SBPC is going to have the opportunity to evaluate the deal and take it away (exercise their right of first refusal).  So, SOC thinks “I can’t win this game…someone else has the advantage.  The deck is stacked against me.  I’m not going to play.”  This is a very specific example, and it’s a nuanced issue, but hopefully you get the idea.  When you provide special rights to someone, you’re reducing the incentive of someone else to get into the game. 

4.  What Do They Have To Lose?  What About You?  As you overcome your initial excitement about all the opportunities that a partnership with SBPC would bring, it’s extremeley important to try and think through the downside scenario.  What’s even more important is ensuring you have some way “out” in the event that things don’t work out the way everyone had hoped.  For example, let’s say you sign a distribution partnership with SBPC.  They volunteer to use their powerful sales resources to help sell what you have into their market.  It could be game-changing!  All they ask in return is that you exclusively work with them.  So, in this kind of situation, the question to ask yourself is:  “What if they don’t sell?”  Could be intentional, could be uninentional, but the result is the same.  Dollars are not coming in your door.  And, unless you planned for this contingency, you’re sort of “stuck” into an exclusive arrangement where you can’t change your strategy to something that will deliver sales.  One simple answer might be to trigger any lock-in provisions to actual sales results.  So, if things are panning out, great.  You hold up your end of the deal.  If not, your hands are untied and you can do what you need to do.

5.  How Are Incentives Likely To Change?  Lets say for a second that the partnership works out and delivers real value beyond your wildest dreams (that’s highly unlikely, but it’s fun to dream sometimes).  What then?  How do the incentives of the parties (particularly them) change?  If things are going swimmingly well, is SBPC going to be happy?  Or, are they going to thinK:  “Hey, we’re delivering all this value through the partnership, and we’ve got this big R&D team over here, wouldn’t it be in the best interests of our customers if we provide a scalable, integrated, enterprise solution?”  This is a long-winded of saying that after you’ve demonstrated that there’s a market for your startup’s offering, and they’ve demonstrated that they can sell it into their customer-base, they may decide that they’d be much better at serviing this market than you are.  So, even when things work out well (which once again, is rare), it creates its own set of challenges. 

6.  Have they succeeded with partnerships before?  Not all partnerships are created equal (or is that equally, I can never remember), and there are many different types of partnerships.  Technology partnerships.  Distribution partnerships.  Reseller partnerships.  All sorts of stuff.  When exploring a partnership with Some Big Powerful Company, one of the key things to figure out is if they’ve succeeded with prior partnerships they’ve done.  If they haven’t done these kinds of things before, and you’re one of the first, you’re in for some pain.  In theory, big companies see the value in injecting some innovation into their market through partnerships with startups.  In practice, they usually don’t.  It’s just hard to get them to move.  If SBPC has done partnerships before, how did they go?  Was there any value delivered to either side other than the press release and announcement? 

That’s all I have for now.  It’s a complicated topic and one that (thankfully) I don’t have to deal a lot with right now in my current startup.  For those of you that made it this far, you might be tempted to write me an email describing your specific situation to get my thoughts.  Resist the temptation.  Although I’m a startup junkie, looking at individual startups and individual cases just doesn’t “scale”.  Leave a comment and tap the OnStartups community.  They’re much smarter folks anyways.

Also, if you’ve had experiences with partnerships with big, powerful companies (negative or positive), please share them.  I’m an entrepreneur, just like you, so I have a limited set of data points.  Share your wisdom, particularly if it was painful to acquire.

Topics: proust seo
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Entrepreneurs and...Hey, There's A Shiny New Thing!

By Dharmesh Shah on September 25, 2008

If you’re one of those rare entrepreneurs that has the discipline to stay reasonably focused on what you should be working on, feel free to skip the rest of this article with the comforting knowledge that you have my admiration and envy.

But, if you’re like most of us, you are probably plauged at one time or another by the “Shiny New Thing” (SNT) bug.  This particular syndrome is pretty easy to describe.  There you are, minding your own business (literally) and working on your startup.  Then all of a sudden, BAM!  Some shiny new thing comes along and tries to distract you.  You either get distracted, or you stay up nights wondering if you should have gotten distracted.  If you’re like me (my sympathies if you are), you have this experience quite frequently.  I think it harkens back to our childhood days when just about any shiny new thing would immediately grab our attention. [Hence the toy robot photo, blog image selection is not a core competency.]

There are various manifestations of this Shiny New Thing (SNT) phenomenon.  Here are a few:

1.  New technology/platform/language/framework:  This applies mostly to developers.  There you are coding away on your project, and this article comes up in Google Reader about this new paradigm-driven-framework.  BAM!  It’s so cool!  It could change everything!  It could make you 10X more productive!  So, you immediately start conjuring up ways to use that shiny new thing in whatever you happen to be working on at this point in time. 

2.  New market/customers/industry:  Your startup has a market, you probably even have some of the product developed.  You’re making sales, albeit things are going a little slower than you hoped.  Then, you read a blog article somewhere and BAM!  You think of this new market that you could go after.  And, brilliant technologist that you are, you’ve already developed your existing product such that with just a few small tweaks you could go after this new market pretty easily.  In fact, the beauty of it is that you don’t even have to give give up your existing market/customer/industry.  You can do this one too!  If one market is good, two has got to be better, right?  Right?

3.  New Feature/Application/Product:  Your existing product is cranking along.  The few customers/users you have seem to be happy.  You’re signing up more people.  You’re supporting your users.  You’re truckin’ along.  Then BAM!  You get this idea for a shiny, new feature or product to add to your arsenal.  You pause briefly to ponder whether the legal services industry really needs an ERP app for the iPhone.  But hey, you know this industry really well, and your best customer has a daughter who has an iPhone.  You’re just a little “ahead of the market”, right.  Right? 

3.  New Company:  There you are, cranking along.  And, you just kind of start getting bored.  Your idea was really cool and got you all fired up in the morning.  It was so shiny, new back then.  But alas, it’s just not that shiny any more.  The idea is sooo last month.  It’s really hard to be passionate about it now.  You’ve got to absolutely love what you’re doing, every day, right?  It’s a waste of time to stick to something that you’re just not excited about, isn’t it?  And then, BAM!  You come up with this new startup idea.  It’s bright!  It’s shiny!  Life is good again. 

So, you get the idea.  If you’re like most entrepreneurs, you’ve been hit by some variation of the above Shiny New Thing bug at some point.  Unfortunately, when you get hit with it, it’s rarely in the exaggerated, “Boy, that’s a supid thing to do, I would never do that” kind of way as the above examples illustrate.  The SNT bug is usually much more subtle and insidious than that.  It’s why it infects so many smart, rational entrepreneurs — and me. 

What makes this problem a problem is that it is rare that going after the  Shiny New Thing is going to increase your oddds of success (however you define it).  Most of the time, it’s a distraction.  The rest of the time, it’s usually a major distraction.  To really succeed and get things done, you’re going to need to stick to something and get the basic machinery “working” and plug away at it.  Good ideas take time.  Great ideas take even more time.  Don’t get me wrong, I’m not suggesting you be stubborn about your idea, business model, product, whatever.  Far from it.  I’m a big fan of the agile approach to startups.  But, there’s a difference between iterating on an existing thing and being distracted by a Shiny New Thing. 

So, here’s my advice to you the next time you see the Shiny New Thing bug buzzing around your head as you’re trying to get real work done.  Ask yourself the following 4 questions:

1.  Am I simply intrigued by the shininess and newness, or is there really a there, there? 

2.  What would I need to know and what minimal questions would I need answered to figure out whether this Shiny New Thing is worth my attention?

3.  How long will it reasonably take me to figure out what I need to know?  Can I even afford that investment?  How does it impact what I’m doing now? 

4.  Should I go ahead and….Hey wait!  As I was writing this, I just came across another topic for this blog as a result of something on Guy Kawasaki’s blog.  Must…try…to…resist…shiny…new…thing.  Oh no…it’s too…shinyyyyyyyy....[click]

Topics: strategy
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