superb post Dharmesh - this should be printed and posted on all doors desks walkways etc of any startup...its so easy to get caught up in the "i got a big partner" routine..
In my previous company, I chased around "partnerships" for a year.
Partnerships don't work. It's like a relationship where you're dating someone just because they're cooler than you and can get you into parties. It's shallow and meaningless.
The only thing that works (especially for a startup) is "You pay me money. I provide you services."
Any other discussion is a waste of time.
That said, when a partner can add value that you can otherwise not add to existing customers, I'd encourage you to figure it out. But, don't go for one big partnership. Start a movement and make it possible for lots of partnerships to bloom and compete.
Well, English is not my mother tongue, but I'm pretty sure you want use "equal" here. "Equally" is, well, equally true, but it means something different than what you wanted to say.
Spot on as usual~ Great post!
I feel quite alone disagreeing with this post! It probably has something to do with cognitive friction and the fact that I am really close to that deal with the SBPC.
Let me tell you why I disagree. We have a network externality - our customers, by definition, are already customers of the SBPC.And our idea is really easy to copy. My plan is to enter into the agreement before we go to market (while the idea is still secret) and have the partnership with the SBPC to build up a rapid market presence that will be a barrier to entry for other entrepreneurs who like the idea.
What if the SBPC is just using me to find out if there is a market? Well, I simply don't think so. This company has about 5 other partnerships (I checked - they aren't easy, but they work). Also, the SBPC is growing in excess of 20% per year - I don't think they have the available resources to commit.
But I may just be kidding myself too.
Sam: You could indeed be in the small pool of people that call pull off a successful partnership. Raising the barrier to entry is a pretty good reason. However, one thing I'd be mindful of is that company you are thinking of partnering with probably knows this. If so, why you vs. someone else? How are they going to exploit their negotiation leverage?
Great post. I've been in discussions with SBPCs a number of times. Sometimes it came off well, mostly as a simple "payment for services", and often times the deal wasn't done.
Negotiating these contracts is hell. The other side will be extremely slow, demand all sorts of inequitable provisions, and you'll be exposed to their internal politics. One time, I'd finalized a contract to the letter and it was "in the mail". Three weeks later they came back - a "more senior lawyer" had looked it over and wanted additional changes. I was willing to bend a tiny bit, but they wanted a lot more, so I (politely) told them to go screw themselves. You don't want a partner who treats you like that, or is so unprofessional.
The key is to know what you want out of the partnership, negotiate based on that, and simply walk away if you can't get a deal you like. If your startup needs a partnership with a specific SBPC so much, you're in a pretty bad place. The other side will feel that, and screw you on the deal. You're much better off having your own avenues to market, or at the very least, having a wide range of SBPC you could potentially partner with.
Also - for a simple "payment for services" transaction, quote and SBPC double your usual price before you get started (unless the market won't bear it). The other side is unlikely to be cost sensitive, and you'll be glad of the extra revenue when you look back at how much time you spent negotiating terms.
Thanks for the responses. Gareth - you just took years off my life. The reality is that we are in the final throes of putting the deal together (3 months later) and I haven't heard from the SBPC for almost a week. It is as if they weren't there.
As the blood drained from my face reading your comment and thinking about the lack of communication from their side, like a knight in shining armour, the little envelope appeared in the bottom right corner. It was them. As it turns out, they weren't there...
I'm at the early stage of an interesting partnership. It's early, and things could go south, but it could be great for my business. Time will tell.
Instead of saying "Don't partner with bigger players," why not provide guidelines, like:
1. Don't risk your entire business on a partnership. Place smaller, considered bets.
2. Only partner if both sides have clear incentives. No business relationship works unless it is good for both parties.
3. Provide clear exit clauses that won't damage either partner.
4. Trust in both relationships and contracts. Relationships are important because you don't want things to have to be settled by attorneys. Contracts are important because they keep people honest, relationships can change, and the trustworthy person you're dealing with at the partner company may leave.
I agree with Dharmesh that partnerships/alliances with SBPCs are fraught with difficulties. I have seen this from the SBPC side many times over and have had a personal role in a number of these alliances. The small startup nearly always came out on the short end of the stick. (Even though I was trying to be very fair to them.)
One reason is that the SBPC is only going to assign a lowly person to the venture. Think about it - if the SBPC thought your venture was important enough to devote a senior exec's attention, they would have just bought you in the first place. And don't be fooled by titles - SBPCs routinely hand out senior-sounding titles instead of raises.
That means you're dealing with someone who cannot make decisions on their own. They have to play the bureaucracy game. That means slow decisions and it means that even if your contact has good intentions, these will likely be watered down as the proposal flows through the mill.
Finally, I have found that SBPCs don't think very logically. The organization tends to get stuck in "group think" mode and just plows ahead. They may not even truly understand what you can bring to the table, or if they do, they may try to force you into delivering something else just because they need it.
BTW, don't take any of this as sour grapes. It's just the way I have seen deals go down. Facts of life, neither right nor wrong. I think Dharmesh's point is that dancing with elephants is a dangerous business -- don't get intoxicated by the fact that you have the elephant's attention!
Great post. Regarding volume triggers for distribution partnerships - putting these in place still doesn’t solve the distraction problem, and getting SBPC’s channel ramped up is ridiculously time-consuming and expensive (and usually ineffective). SBPC will always overvalue their channel – they say things like "we have x hundred feet on the street that will be able to sell your product," but the reality is that it's hard to get the attention of a sales organization that's already selling a bunch of other products...never mind the fact that the type of rep that succeeds at selling products/services for a startup has a very different set of skills than a good rep at SBPC. To succeed with their sales org requires lots of training, products need to have a high average selling price in order to get the reps' attention, they’ll need tons of field support, structuring sales incentives is often hard, etc...all of this has to be done just to get to a point where they MIGHT actually sell it.
Usually better to not even start the discussions.
Love the post, although don’t 100% agree that partnerships with big companies are always bad for startups.
However, the #3 comment is critical if you are thinking of raising venture capital. VCs won’t invest in a company that has signed a right of first refusal with a large player.
Also, Gareth’s point is spot on – be careful before you open the kimono.
As the local folks here used to say, 'if it deals with money, no such thing as fair partnership'. So it will all be a measure of risks vs opportunities that ultimately will determine the success of such an endeavor.
Partnership, there are no leaders in this city that would partner with a start-up, I have a start-up to build a cable tv network here in Boston,www.HollywoodInBoston.com
I would love for some boston business leaders to step forward and make this happen, It would create 3,000 new jobs. Atlanta has tnt tbs why not boston??
Big partners can really kill a company! Even if the partnership sounds good to both sides, from my experience just the procedure of implementing it under a big company bureaucracy is a nightmare! Not to mention if your company wants to make any changes along the way...
A friend of mine posted on his startup blog that they went after smaller\mid-size companies that supply to the big companies and they actually had a lot more success because of agility and each of them had more to offer the other
At Object Design, I can relate a bad and a good experience. Bad: Microsoft people came by, saying that they were interested in our product and might want to buy it or distribute it. We were excited and told them all about our technology. They left saying, hmm, interesting idea, maybe we'll build one. I would not mention this except that I know four, count 'em, four other startups who had exactly the same experience. This was back in 1990 or so and things may have changed.
The good experience was with IBM. Now, at this point we were not precisely a startup; we probably had about 100 people. But still pretty small. At the negotiations, we had two guys on our side of the table, and a dozen suits from IBM on the other side. Our side was our corporate counsel, a guy I hired as a software developer originally. (He was a great software developer, but got a repetitive stress problem, so fell back on his law degree.) The other was one of our senior sales reps.
We got a five-part contract, in which IBM would: (a) buy a lot of our stock, like a new VC round; (b) distribute our product under their labelling; (c) work with us technically (at that time, the IBM Almaden database researchers were the best in the world, and we really did end up working with them); (d) just plain give us lots of money, for five quarters, and (e) something else, I forget. This was an incredible success for us. They never ended up selling our product, which is probably just as well since it could have led to support issues. But we really cleaned up.
Obviously this is not a typical case!
Obviously the results can differ from deal to deal, but in a previous startup I had a very positive partnering experience. We put together a deal with (hmm, perhaps rather than naming the company I should simply say) a "Fortune 5" company, and as a result we were able to leverage the relationship to raise a badly needed round of money. Because the mgmt team at the startup had fallen off the turnip truck long before this paticular deal, we went into it with our eyes open and assumed that any revenue from the deal would be a bonus. The deal had the added advantage of tying up a major player in one of the markets we were going into.
IMHO - deals with much larger companies can work but you have to be realistic about what you're going to get out of the relationship.
The last couple of posts point out that perhaps a large company's greatest value to a startup can be things like funding, technology collaboration and mentorship.
In an earlier post I said that I had not seen very many big/little alliances that worked. I was referring to operational/product-line alliances (which I should have made more clear).
But many large companies -- particularly high-tech companies -- have capital investment arms that understand startups and are well equipped to work with them to mutual advantage.
For example, Intel has a group called Intel Capital
. This organization is staffed with knowledgeable dealmakers who have experience in venture capital and M&A transactions. Their charter is to use Intel's money to take equity positions in small non-public companies whose work is symbiotic with Intel's commercial interests. Intel Capital mentors these companies and introduces them to appropriate people in the Intel product organization. Most tellingly, Intel Capital is expected to make a profit from its investments. This means they want the startup to grow and become more valuable. Everyone's goals are therefore aligned instead of it being an adversarial relationship as with most product deals.
Not all of these investment deals end up successful, but I would bet that on average they are more successful than the typical simple product deal.
Something funny happened to the link in my previous post. The link should point towww.intel.com/capital/,
but somehow the blog engine has prepended the address of the blog itself so the link doesn't work right. Dharmesh??
...and in the last post I just typed in the Intel Capital URL without the "a" tag, but the blog engine turned it into a hyperlink anyhow (but included the comma, so again the link doesn't work).
To get to the Intel Capitel web site, use the URL:
www -dot- intel -dot- com -slash- capital -slash-
I have a strong positive experiences with partnerships with SBPCs. If you can handle all the difficult issues in negotiating, billing, contracting etc., such a partnership is a deal for us. The key aspecs is this: if we would supply a demands of this SBPC in particular areas, they wouldnt even bother to start serving these demands by themselves - which would be a real competetion for us.
I also liked the opinion of Jon Dahl with the guidelines, he hit the nail.
Got to agree with you on this. After 5 starups and counting, I have yet to see David and Goliath truly work. Lots of PR value, no value-creating substance. Also a completely disconnect in terms of the companies' size, culture, time orientation, etc.
Learning to work with external companies is a key need for startups, but it's got to based on an exchange of value (the "I give you something, you pay me" model) rather than the more nebulous "partnership."
Partnerships could work in theory, but we all know in practice it's far messier.
[Wow, this topic has legs! Nearly two weeks and still running.] Watch out for big company politics
A number of contributors have said it's important to keep your eyes open in a David/Goliath alliance. One key part of this is to know your way around big company politics. Why? So you can understand your counterpart's status in his/her company.
Here are a few examples of big-company political pitfalls that can sink you:
- Several internal groups may be competing for the same goal. Example: Both the high-end product line and low-end product line may be developing competing products for the mid-range. If one of these groups is ahead in the race, you may be recruited by the other group to supply a quick (and temporary) placeholder product. Lots of work under tight deadlines, with little payback.
- Many large companies have renegade players who act as gadflies to the rest of the organization. They are typically outspoken, trash-talk their peers, and propose your product as a devil's-advocate alternative to internal development. Unfortunately for you, a renegade's proposal is rarely chosen over the established internal development group.
- Your champion's organization may have goals that are not directly aligned with the corporate priorities. For example, a well-meaning group may be trying to expand a company's business into new market segments or technologies. That group's budget is likely to get squashed like a bug (and you with it) when the non-priority activity comes to light.
- There are many, many competing activities in a large organization. Big-company marketing teams understand that they cannot dilute their impact by promoting all of these activities. Only the most strategic will get meaningful PR. The rest may be forbidden (by policy) from even getting a BusinessWire pro forma
press release with the big company's name on it. Your champion may not be politically strong enough to win this battle for you.
Good insight. Of course every company has to deal with one of the larger companies at some point in time. I would think that it is important to ramp up on the basics of the art of negotiating -- rather than have a general guideline of walking away from an opportunity. Several large companies (especially those with good corporate governance) do listen and ammend agreements to meet the requirements of even their smallest vendors and partners. So I think it is important to consider partnerships with larger companies (or smaller ones) but ensure it is a partnership between equals.
Well said; Of course, one can't and shouldn't automatically avoid such partnerships.
However, one of the points that I think has been clearly made in this discussion is that it can never be a 'partnership between equals' when a small company partners with an SBPC.
Carl's remarks are spot on. Even companies with the best intentions are led by their bottom line, and your partnership with them is not likely to be a major part of their revenue plans. If it was, when they did their build-buy-partner analysis of your proposal, they should have offered to buy you out. If they didn't offer, then you're certainly not part of their core strategy, and you can't reasonably expect much loyalty to your plans (beyond the letter of any agreement you have in place).
In any such partnership, even with the most responsible, benevolent SBPC, you'd better have a bomb-proof plan B that acknowledges the inherently imbalanced nature of the relationship.
Very very nice post and too useful. i would like more read like this in future.
http://www.oxyshopping.com India online shopping search engine
Please join us for an evening to discuss ideas on driving down costs in a changing economy at the W Hotel - Chicago on November 13, 2008.
Complimentary drinks and hors d’oeuvres. Free entry with RSVP.
Another danger is a more subtle form of lock-in.
ROFR is obvious, but sometimes partnerships include clauses where if they bring you business you owe them e.g. 10%. The enticement is that you get 10% of deals you bring them, so for an early startup this might look like a useful way to get some extra revenue.
The fallacy is that when you "bring them" a client they almost always claim they were already talking to that company (since at SOME point in the past they probably put A LEAD from SOMEWHERE in that company in their CRM).
This would be benign, except for that reverse-hook. When you go to sell your company, now there's this contract where some random company could argue for 10% of your revenue from a large deal. It's not quite the deal-breaker of a ROFR, since the latter comes up in the LOI stage whereas the former won't appear until due diligence, but it's still a booger.
And companies are hard enough to sell without extra boogers!
Great post, thanks.
Hi Guys, thanx for all the insight. However, what do you do if you have a great product that will be taken over and copied by a large corp. if you don't parner one and go it alone? Any suggestions? Thanx, Ian
Also watch out for the hidden agenda. The day after we accepted a $1M investment and other inducements from "friendly giant", we discovered that we were going to be used as a wedge to help "friendly giant" get a deal with "unfriendly tornado mode company".
If "friendly giant" had revealed that strategy up front, I could have told them of the huge risks in targeting that particular deal. To their credit they almost pulled it off anyway (which would have left me rich as a side effect), but sadly the deal floundered at the last possible minute. I was out of the picture soon thereafter which saved me the pain of watching the company I co-founded crash into the wall during the height of the tech wreck. Still it was a fun 9 year ride and a valuable lesson learned.
Sometimes the lack of information about the partnerships of big players is the problem.
this is why books like
http://www.synomic.com/index.php/partnerbook.html for SAP or http://www.amazon.com/s/ref=nb_ss__1_16?url=search-alias%3Daps&field-keywords=partnering+with+microsoft&x=0&y=0&sprefix=partnering+with+
for Microsoft help you find, evaluate and execute on the partnerships.
Great post. This is something that we have been toying with the idea of expanding thru a partnership to offer better services to our customers... not so much to reach a broader market. But that would be a great side effect. Last, I don't think we would go after a provider like Rent.com which is managed by Ebay. I think we would go after a smaller guy like Rentals.com.
This topic is quite something... Loved the post, loved even more the comments.
I think tech people hate selling and are always trying to find a way to get rid of it. That's why we fool ourselves with partnering SBPCs. There is no substitute for money. If you like my technology, if I am great: Show me the money! That's the only way to create commitment.
I've lost so many hours trying to make partnerships work that I kind of gave up (at least to myself). Your post made me feel ok with that. I thought I was the only one who could not make it work.
In 6 years we had only one succesful partnership. The company is like 5 to 10 times bigger than us (not 1000x) and the deal is "we sell and put our litle secret magic technology there, they put their quality IT with a price only scale can give."
There is money involved, we pay! And it is ok, because we don't need to incurr in fixed costs to do something we are not so good at. Moreover, these guys are great, they have more experience and are open to share with us. Despite being really really nice guys, I am sure they wouldn't have such patience didn't we worth it.