Partnership Woes – Who do I Partner With? Small Player or Big Player?

The startup was in a tizzy.

One of its largest partners who sourced the startup’s products, bundled them with other offerings and sold them to customers had decided to make the products itself.

The partner was much larger than the startup, had more money and reach. About 10% of the startup’s revenues came from this large partner, albeit at a lower margin than if the startup sold products directly.
On the other hand, it did not have to incur additional sales and marketing costs. For the partner, the revenues from the startup were a tiny fraction of its current revenues but the market opportunity was large and fast growing. It was quite possible that the startup would be in direct competition with its partner before long. The startup was therefore understandably nervous – should it continue to supply the partner or should it stop supplying products? Should it aggressively cultivate other comparably large partners while continuing to do business with this partner?

Partnership Woes

Partnership Woes

All too often in business such situations arise. There’s nothing good or bad, right or wrong about these. It is just the way things happen. Startups are no exception. Many years ago, Ray Noorda the legendary founder of Novell had popularized the word “co-petition” implying that in business co-operation and competition could go hand in hand. Indeed, there are umpteen examples in automobiles, consumer goods and technology. But there are some fundamental points worth keeping in mind:

  • Co-opetition works among equals or comparable sized and capable companies. In cases where there’s a mismatch, the smaller company needs to have very unique and defensible capabilities – intellectual property or an exclusive license of some kind.
  • Where co-opetition works, the competing arms of the business are kept separate from the co-operating arms either through separate structures – legal or otherwise. Contracts are tightly negotiated.

This gives rise to an interesting dilemma.

Should a small company partner with another small company or with a much larger company? The question to ask is what is this partnership with another small company really worth? Remember, two poor people don’t equal one rich guy! On the other hand, partnerships with a large number of small companies, each of which does small business but in the aggregate have an appreciable turnover, could be fruitful. But forging and maintaining these relationships is very tough since each small company is itself struggling with its own issues of growth, finances and people. No doubt, partnering with a much larger company takes a lot of time and effort but once done, can be a source of profitable revenues for the smaller company.
Again as in all partnerships, this too takes an enormous amount of nurturing to flower. Being dependent on just one large partner for business is fraught with its own risks as the loss of this partner can seriously damage the prospects of the startup. So it is prudent to have at least 2 large partners (ideally who compete with each other in the market) so they keep each other in check even if the startup cannot. This is of course, easier said than done (is there anything that’s done easier than saying it?!) but is a critical approach to pursue for a startup. Sometimes, a larger partner might want exclusivity, in which case depending on the situation and negotiation capabilities and leverage at the startup’s end, it is worth considering limits to the exclusivity – geography, time, products, non-competing channels etc.

As with most things in life, one doesn’t get anything without “asking” (to oneself or to another or both) for it. It is therefore important that startups consider asking themselves at all stages what it is they really want from the partnership. Is it just a stepping stone to many more partnerships? It is just an opportunistic measure to enter a market and secure some quick revenues? Is it a partnership that needs to be nurtured for the long term value and impact? The answer of course depends. Depends on the unique situation for each startup.

So what should the startup do?

________________________________________________________________________

[Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay at jumpstartup.net. The views expressed here are his own. The article first appeared in FE and is reproduced with author’s permission.]

Image credit:ramana charming [flickr]