Startups And The 900 Pound Gorilla: Why Strategic Partnerships Aren't

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Startups And The 900 Pound Gorilla: Why Strategic Partnerships Aren't

 


Given the strange title of this article, let me provide a little bit of background so you can figure out if this article might be of interest to you.  The “900 pound gorilla” is a term commonly used (at least here in the U.S.) to refer to the dominant leader, quite often a near-monopoly in any given market.  In my experience, startups, especially enterprise software startups or B2B startups are often born in the shadow of a gorilla.  Startup founders often spend some of their early time and energy forging “strategic partnerships” with a big player in the market.  This article posits that strategic partnerships between startups and market leaders are often not strategic (and sometimes, not even a partnership).  This is not to say that they’re not valuable, just that they rarely turn out to be what startup founders think they will.

In my experience, a fair number of startups get started in the shadow of a large, successful software company.  Usually, you’re building add-on products to some big, complicated system (like Siebel or SAP).  Often, you actually worked for the big company before or one of their competitors.  You know the domain.  You know their product.  And, most importantly, to some degree, you know the customers.  You are trying to leverage one of these things to get your startup kicked off.  This is not a bad thing.  Done correctly, such a relationship can give your fledgling startup above average odds of survival in the early years.

Here are some of my lessons learned when dealing with “strategic partnerships”.  [Note:  I can’t resist the temptation to keep putting “strategic partnerships” in double quotes in this article.]

Startup Tips For The Strategic Partnership
 
  1. Own The Customer:  This is likely the most important thing to strive for.  Sometime during the life of your strategic partnership, things are going to get contentious.  When that day comes your survival will be dependent on how close you were able to get to the customer.  If you are “leveraging” your partner by letting them deal directly with customer sales and support issues – so you can focus on what are good at – like product development and innovation, you’re likely going to be in trouble.  If you’re not good/efficient/passionate about supporting your product and talking to your customers, you need to get good at it.  Life is going to otherwise get really, really hard.

  1. Balance The Dependence:  A common symptom of the big partnership is that you (the startup) become dependent on the partner in terms of revenues and sales (i.e. you’re leaning on them to help move your product).  In the early days, this is completely fine (and expected).  They have the resources, the brand name, the credibility and the customers – you don’t.  Over time, your job is to reduce this dependence on a single partner for your sales.  You have to build your own foundation to be able to sell to customers directly.  If you remain dependent, bad things will almost invariably happen.  

  1. Get Great Counsel:  Too many startups treat the strategic partnership a little too informally.  You often forge the partnership over a meal with your old boss, or some mid-level manager type at the big company.  This is often due to lack of resources or contacts to get great business and legal advice.  It’s important to recognize that you are at a supreme disadvantage here – not just in terms of the fact that your potential partner is bigger than you, but because they likely have much more experience and a sophisticated way of thinking about this.  I cannot emphasize enough the importance of finding counsel (a lawyer, business advisor, etc.) to help you think through the terms of a possible deal.  

  1. Expect Irrationality:  Every startup I have ever talked to that has a “strategic partnership” with a 900 pound gorilla has complained at some point that their partner is acting irrationally.  At some point in the relationship, the partner does something that just doesn’t make sense.  The startup founder feels that she has addressed all the needs (financial, power, control, etc.) and the partner still acts with seeming irrationality.  This is a complicated issue, and all I can say is that even 900-pound gorillas are run by people, and people’s motivations are hard to understand.  It’s also important to remember the “agency” problem whereby the managers within these companies may not necessarily always act in the interest of their companies (as shocking as that may seem).  As the startup, you have to be prepared to deal with this seeming irrationality as best you can.  (And expect to be frustrated, when you try to reason your way through it).

  1. Diversify!  A strategic partnership with a big name company is a great way to get a startup launched.  It mitigates many of the risks that startups face in the early years (particularly with overcoming the credibility gap and acquiring customers).  However, it is easy to become complacent.  Ultimately, in such a relationship, the partner will be able to squeeze more and more out of the relationship unless you can diversify (in terms of other partners or other businesses).  If you grow too fast, the partner may also be threatened – as they have an existing revenue base to protect.  Tread carefully.  It is often painful, and seemingly bad business to retract away from your single, company-defining partnership.  In the short run, this almost always leads to depressed revenues, market confusion and lots of other bad things.  But it’s necessary.  The road to a single 900-pound gorilla partnership company is paved with revenues and profits, but has a dead-end.


Given the complexity of this issue, it’s hard to draw general abstractions – but I’ve done my best.  Most of the above tips come from either my direct experience or conversations with companies I know pretty well.  

Summary of My Point:  There is nothing wrong with launching your new startup with the help of a strategic partnership.  However, it is important to constantly monitor the relationship and have plans to “grow out of it” over time.  Otherwise, there will come a day where you are getting too big, too powerful or too irritating and the partner can (and will) manifest irrational behavior.  It’s easy to get stomped on by an irrational 900-pound gorilla when you’re a startup.  

Posted by Dharmesh Shah on Wed, Jun 28, 2006

COMMENTS

DId you ever read "Startup" by Jerry Kaplan? His company, GO, tangled with some really hefty gorillas (Microsoft, IBM, HP, State Farm) and got screwed by just about every one of them. It was painful to read at times. Legal contracts got discarded, verbal promises were rescinded, etc. The book certainly illustrates the dangers of creating a company that is dependent on one or two huge customers in order to stay afloat.

posted on Wednesday, June 28, 2006 at 11:39 AM by Jesse Smith


I've been through this (in key roles, so I should add, "that I know of") twice, once with Redmond and once with Tasman Drive.

Here are the things I learned:

- You can "affiliate" yourself with a 900lb gorilla though basic partner programs or product interop without exerting the effort to close a "strategic partnership".

- The effort involved in securing a strategic partnership, and the likelihood of success, can be comparable to closing 2 major customers.

- Even if you close it, the outcome is most likely going to be less meaningful than having even one customer.

- I saw one strategic partnership really drive sales. The dynamic was, the 900lb gorilla "annointed" our company, which was in an incredibly competitive space where 5-6 startups had traction and were building a market.

- Strategic partnerships can break strategy; management teams get acquisition on the brain, every decision (on your side and the gorilla's side) is seen through that prism.

- A very formal strategic partnership (say, a strategic round) can hurt your exit if it's seen as effectively giving first refusal to the partner. Yeah, you shouldn't think about exit, but if you're in an OEM discussion, the thought of exit is unavoidable; it is hard to close an OEM with a small company when acquisition in the future is off the table.

- The tightest relationships I've seen on the ground (sample size: 2, so grain of salt) were with regional account managers (who benefit both from pull-through sales and by facilitating anything with their customers, which deepens their relationship with them). And speaking as a product manager: I'd aim at Product Managers in my target partners if I was shooting for decision maker.

My take: not worth going after. Huge customer wins are infinitely more valuable. Think of partnership as something bought, not sold. If you rock, it's going to happen anyways.

Obvious caveat: what do I know?

posted on Wednesday, June 28, 2006 at 12:29 PM by Thomas Ptacek


Dharmesh says, "The road to a single 900-pound gorilla partnership company is paved with revenues and profits, but has a dead-end."

Amen! The operative word here is "dead-end". Sooner or later, it will end in an ugly way for the little guy not for the 900 pounder. I also concur completely with Thomas' insights.

After catching the "strategic partnership" wave twice and ending up stranded on the beach with a broken surf board both times, I would never go near a partnership with a major again regardless of the promised conditions or rewards. My philosophy is: avoid competing with them directly: stay off of their radar as long as possible; do not become dependent on them or their business.

I see Google as a case study in the corrupting influence of success and power. They have come to embody the moral transformation that occurs when companies become monopolistic behemoths.Their motto was "Do no evil". They were the anti-MS. Now look at them. They cooperate with the Chinese government in suppressing dissent; they seem to have a suspiciously disingenuous but profitable policy with regard to click fraud; they seem to be transforming into the enemy before our eyes. They started benevolently; they are now huge and have "professional" managers. Does their recent behavior indicate that they are likely to respect an agreement with a little guy?

It's much tougher and initially precarious financially to go it independently, but what you earn, though it be a pittance, is yours and no one can take it away from you.

posted on Wednesday, June 28, 2006 at 1:58 PM by


I think your approach and foundation often leads to early success. One suggestion I make frequently to my clients presenting for investment is whenever possible when you have that first client, bring them to the presentation.

It's in both of your best interests that you survive and it's a great way to minimize investor skepticism (whether or not that skepticism is myopic).

In my experience working with start-ups, interestingly it gets a bit tricky when you do land that first partnership because the skill set required of the CEO usually changes noticeably. (most certainly after customer 3 or 4)

Being able to keep a dynamic AND focused approach is key. (And yes, that is a somewhat confusing statement that you often hear from a consultant like me!!)

posted on Wednesday, June 28, 2006 at 2:59 PM by Tim Taylor


Thanks for this article and valuable comments from readers. This is exactly what I have planned to start my new venture. I am planning to use company's brand name and products (Which I developed :) to start with. Eventually, replace company’s products with in-house developed products. Do you have any more suggestions on this approach?

posted on Wednesday, June 28, 2006 at 6:13 PM by Rinku



Has the 800-pound gorilla gone the way of the rest of America and put on 100 pounds ?

posted on Thursday, June 29, 2006 at 1:55 PM by Ernest


Ernest, that was hilarious.

posted on Friday, June 30, 2006 at 12:36 PM by Doug Cummings


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