Should my startup partner with a larger company?

During the early stages of a startup’s life, larger companies sometimes show interest in a strategic partnership.

These partnerships can be a game changer, so it’s worth making time to consider whether a partnership would really add value to your business at its current stage of development.

To form a successful strategic partnership with a larger company, you need to:

• recognise the possibility of a strategic partnership;
• carefully consider the benefits of a potential partnership; and
• assess the risks of the partnership; applying forethought on potential scenarios and developing balanced contracts for potential outcomes.

Recognising the possibility of a strategic partnership

A strategic partner could be anyone, but they’re most likely will already have a presence in your industry and may also be a potential customer, supplier or even a competitor. It’s important to recognise some of the signs of a partnership opportunity.

Indications that a company may be open to partnership:

• “catch-up” meetings, especially those without a known agenda, where you may talk about the market, your positioning or competitors;
• discussions about distribution, such as them introducing potential customers to your business or helping you distribute your products or services,
• discussions about collaboration, such as bundling or even integrating each other’s products;
• speculation about a joint venture or investment in your early stage business; or
• allusions or declared interest to acquire your business.

Carefully consider the benefits of a potential partnership

A strategic partnership can help to you to grow your startup, providing anything from funding, a reputational boost, distribution access, or subject matter expertise, through to an exit mechanism.

A partnership may:

• inject money into the business which allows you to keep operating and deliver on your growth goals
• provide a reputational boost (via PR, marketing and brand association) which assists you reach a wider audience and bigger clients
• allow you to leverage another organisation’s resources and greater reach to helps you achieve your sales goals faster
• provide access to knowledge, know how or technology that enables you to enhance your understanding and product capabilities
• provide an exit mechanism for shareholders or business owners

Assess the risks of the partnership; applying forethought on potential scenarios and developing balanced contracts for potential outcomes

1. Don’t assume a strategic partner is going to solve all your problems and make your company successful. No one cares about your business as much as you do and to think someone else has the same goals and incentives to make it a success is naive. If you don’t retain a direct sales and marketing capability how can you keep learning from customers feedback what the market needs and thinks about your product?
2. Don’t hope the strategic partner will deliver outside of what has been written down and agreed. Most of the statements and promises made will turn out to be without substance and designed to induce you to move forward.
3. If the potential partner hasn't committed fully committed to the relationship (i.e. during the courtship or negotiation stage) don’t assume the relationship will be consummated and issues resolved as you hope. Often companies will be dealing with multiple potential partners at once and their strategy or focus can change relatively quickly. A larger party might find that the position they negotiated isn't the one their management or board want to execute so they may come back to renegotiate issues you felt had already been agreed. It makes sense to also have other options.
4. Align incentives – make sure that your success is their success and vice versa. If they can achieve their strategic goals without you achieving the goals you entered into relationship it will be unbalanced. Try to avoid being positioned so that you are a relatively inexpensive option for their strategy.
5. Set very clear short and medium term goals so you can track when the relationship is diverging from expectations and correct early. It is important to monitor the relationship closely in the early days so you have a chance to get it back on track. As time passes, stakeholders can change, priorities shift, and your joint initiative starts to look hard and less achievable.
6. Don’t let the strategic partner benefit before you get benefit. For example, where you are providing discounts based on what they say they will sell consider some kind of tiered discount that increases as their volume of sales increases. If you are giving an investment stake in your company based on the performance of the partner, then consider making their performance a condition precedent on investment or have a claw back mechanism should they under deliver.
7. Avoid exclusivity where possible and in particular one way exclusivity – it’s a mental crutch for the strategic partner to “bank” putative future gains now and do nothing knowing that you can’t engage with one of their competitors. Sometimes exclusivity can work in your favour where time is critical, the potential rewards are large, or when you’re seeking to shut out a particular competitor. 
8. Limit ‘most-favoured nation’ type pricing and be careful that if you set a discount or pricing regime with one partner it may become your de facto general pricing. Granting a large margin can become a drag on your cost of sales now, and as you grow.
9. Be careful about the strategic partner using information you provide in one context to their benefit in another aspect of the relationship – e.g. if they know you have high margins from the distribution discussion they can leverage that to negotiate a lower buy price as a customer.
10. By choosing one strategic partner you are often ruling out others – they won’t want to be seen as helping a competitor. Similarly, taking money from one may create political reasons why others won’t fund in the future or deliberately seek to weaken your business to hurt their competitor.
11. If you are dependent on raising capital to grow, consider how the deal will be perceived both when it is announced, and when a potential funder goes into due diligence and reads the terms of the partnership agreement. Will it be a deal breaker?

Like any relationship the best are built over time and on a foundation of mutual trust. You are likely to need to work together closely for an extended period of time so make sure that the other party has the same values and alignment to achieve your goals. Entering into a new relationship can be exciting and rewarding but can also take up considerable resources and time and don't always play out as anticipated.

I’ve completed many strategic investments, as a corporate operator and investor, and as a mentor and adviser to startups. I help startups to navigate acquisition deals, corporate distribution deals and corporate investment proposals.

If you’re interested in learning more, reach out to me.

Photo by Chris Liverani on Unsplash