OnStartups

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

Posted by Dharmesh Shah on June 28, 2006 14 Comments


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.