Tell me if you have seen this scenario. You are in a small, scrappy startup that is grinding each and every day to eke out growth. Then comes across the big enterprise company that likes what your startup is doing and suggests you should work together.
You’ve hit the jackpot! Here is a real company with a big sales force, healthy marketing budget, and eager to help you. They have the resources to fuel your growth and finally allow you to be seen as a credible company with massive upside potential.
Then reality hits. The partner wants concessions. The margins on the pitch deck mysteriously shrink. The legal wrangling is long and complicated. Your champion changes jobs. When a deal is finally inked, the enthusiasm that started the discussions ebbs as the roll-out is slower than expected.
There is an elaborate game that gets played. You go through all the same hoops to negotiate a deal as you would with a straight up sale. You navigate the organization to create visibility for your solution. You attend tons of meeting, do lots of internal selling, host plenty of dog-and-pony shows, and create all sorts of presentations and documents and processes to convince folks of the value of your product.
A year later, sales are anemic at best, while expenses are through the roof to support your “partner”. The heavy lifting promised by the partner gets shifted to you. And the deals your partner is working on are completely inappropriate for your solution, causing massive customer support issues. It slowly dawns you that the partnership could be the death of your company. The problem is that you were never their priority.
Despite the risks, there are situations when partnering can be beneficial. Certain business models rely upon partnerships such as API & tools vendors. Startups targeting highly regulated industries are prime candidates for partners. Take the insurance or beverage industries where markets are built around independent distribution networks. Partnering can also be sensible when your startup has no inherent barriers to entry or can be easily copied, so quickly building a wide market presence is essential.
How then should you evaluate entering into a partnership with entities that are much bigger than your startup? Here are ten thoughts to consider that will help you understand the risks and benefits before getting in too deep:
- Values – 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. Remember, you are guilty by association if you get hooked up with a company whose reputation is compromised.
- Synergy – Partnering should advance your vision and business objectives, and vice versa. I have seen some bizarre linkups that I only assume were done on “seems like a good idea” terms. I am all for experimentation, but such arrangements never pan out to the degree that it compensates for the effort put in. Make sure all parties have the same objectives going in and clearly understand the “why” behind joining forces.
- Motivation – Is it obvious why a big company wants to partner up with you? Some corporate business development middle manager may be excited, but is that enthusiasm shared elsewhere? What strategic initiative or corporate incentives are driving their desire for dialogue? You have no idea what they may even mean by “partnership”, which could range from links to each other’s websites to a potential buyout.
- Ease of Business – If it is exceedingly difficult to get a partnership deal signed, imagine what it will be like closing deals together. You need to know how their bureaucracy works. Who has signing authority, where are the roadblocks, what deals are problematic, how many signatures are required for approval, do deals need credit, contracts and legal review, what terms are problematic, is executive sponsorship required, do they have fast track approvals? These are lots of questions, but if you do not know the answers, you will certainly be taken for a ride. Therefore reach out to other partners to provide color on the challenges they faced in creating and executing a partnership.
- Transparency – Having 100% transparency is a stretch, but you should have a sense whether the people you are working with are trustworthy. You need a partner that is open with their motivations and helps to navigate the bureaucratic maze. You gauge trust 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 milestones, and whether surprises arise on a regular basis. If you are seeing red flags, do not get lulled into thinking it will get better, because it never does.
- Fairness – You are in a vulnerable position when partnering with a larger company because they yield 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 and terms that impact to your business outside of the scope of the partnership such as the right to sell your startup or ownership of IP. Even if the deal involves an equity stake, make sure any rights that are provided are time-boxed so that it does not impact your freedom to determine the future of your company.
- Relationship – For the partnership to work, the relationship between people needs to work. Because employees are transient in big companies, you need to build those relationships by going deep and broad. The success of managing the partnership depends on building a coalition of people across partner company. Therefore, avoid gatekeepers that prevent you from establishing relationships with key contacts. Gatekeepers create a single point of failure in the partnership and obscure the political dynamics behind the scenes needed to keep the partnership alive.
- Scope – Sometimes a partner will want freebies, meaning they want something extra that is outside the scope of the partnership. You may think it worthwhile to maintain a good relationship because it is hard to account for every single issue that might come up when you first ink the deal. However, freebies add up. Make sure you have a defined process for managing these issues and do not be afraid to bring up the fact that each request has a cost. Good partners 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. Therefore, have firm tiers of success criteria and timeframe in place to ensure you are fairly compensated for the value of the partnership and have the option to dissolve the agreement if results are not achieved.
- Mitigation – Startups have few resources to push back against a much better capitalized corporation when problem arise. The best defense is to never put yourself in a situation where the life and death of your business is contingent on the relationship with a single partner. This is especially critical if you are building on someone else’s platform, which can change direction and terms on a whim. Make sure you have a plan B in place to give yourself a fighting chance should the partnership dissolve.
If there is one point to take away from these points however, it is the need to ask the tough questions, even when it may be uncomfortable. Getting clarity and precision is exactly what is needed though as a single mistake or assumption can undercut your negotiating position, creating problems downstream.
Partnerships can be an enormous opportunity to drive growth, but be wary when the balance of power is not in your favor. Partnering with companies similar in size may be a more fruitful strategy as you are more integral to your partner’s success. However, if the opportunity presents itself to partner with a large, well-known corporation, take the opportunity to fully evaluate the partnership potential to your startup’s success using the above considerations to help frame your decision making process.
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