Tuesday, November 14, 2006

Dancing with Giants

I have written about how I had a deal from Intuit (offer) and Infospace (revenue partnership deal) before I closed my first round of funding.

I had two advisors who had both sold their companys to large companies and adviced that it was a better strategy for a first-time entrepreneur to partner with some large player who could become a potential buyer, but I did not listen. Ok, I hadn't got started fully and wanted the taste of building the company, scaling team, building customer base ...
We later worked with large companies on strategic alliances - TIBCO, Palm, GE, New York Times ..

I want to write about two things here - Decisions points about going into such an alliance with a large player and more important the reality of what competencies need to be developed to make it happen.

I hear many entreprenuers talk about some big player "interested" in them. With Infospace, VCs loved us because we had the signed deal. So, interest needs to be built into a deal agreement for entreprenuers to really dream on it.

Decisions points of building strategic alliance with big companies:

We hear media stories of some large company buying some startup and its painted cool, mostly by the dollar value of the deal. ( I don't want to talk about the purchase path, which is a totally different dance).

1. A big name partner can become a buyer later down the road. This means you build relationship, understand the internal landscape and demonstrate clear value of your startup to the company.
2. A big name company can serve as validation to the VCs about the viability of your startup.
3. Its definitely helpful in building brand, getting media stories and in attracting future customers.
4. Its important to remember a big name company deal should make economic sense for your startup, only then it can scale into all your dreams.
5. A startup culture is so different from any large company department, so opposites attract easily, but they do not neccessarily operate in the same frequency. So its important to make sure your team stays excited about the value of your business and not get carried away into empty noises.

Competencies to build a large company partnership

Many founders think of this as a business development skill to be hired. Its a dance at multiple levels of the large firm to be played by same or different people in the startup.

One of my famous statements from my early Coola days are "We are big, we happen to be small right now". I cannot believe I actually said it but I believed it, so, it didn't seem hard then.

1. Its a very unique competency to build a large company partnership from a small company. The founders with their passion can do this best and can look for people who have done it before.
I had done partnership deals for clients from BBN and Harcourt, and believed I knew how this was done. But when you set out as a startup, all bets are on YOU! I was surprised that I had to prove that my startup will stay viable well past the deal and we were here to stay. Later I learnt that all that can be satisfied by some contract clauses, but the most important thing is to convince the people of the large company that your company was worth betting their career on.

In our case, people got excited about our technology and it helped to build irrational trust on us.

2. It takes time, so the important thing is to stay engaged.
A big company is several departments, so it takes time. But everytime, its a relationship game involving clear communication of what value we add.
Startups typically have people who want to get results and work their tail off for it. So, remember, it is better to test the waters with the first intro meeting. Gather information about the company, their language, culture, people and adapt your presentation to them with subsequent meetings. I remember many times where we went into meetings with a plan and walked out with no results, with the door almost closing on us. Just remember, you can negotiate and find a common ground only as long as you keep the negotitation process alive. So, it is better to pretend that you are not at the negotiation table, but exploring options and validating it with buy-ins from different stakeholders and keep the process alive till you really see a deal materializing.

3. Be prepared for the intimidation factor.
I took a friend entrepreneur to a large financial firm in Boston and he presented his tech idea and he came home and closed his shop. This is a real story.
Most large companies look at new technologies and usually say, we have something like that in the works in a different department. If their pain was real, it was possible they discussed some high level solutions that may sound like yours, but remember big companies need startups for the execution. If you go back to them after 6 months, it may still be in the same stage.
I also think, it will help not to go in with the attitude that you are small and they are big. If there is a real deal in the end, it means that both party have value to offer to each other.

4. Money speaks better than words.
Its common for a large company to say lets try it for free and you may walk out of a deal with some integration work but no real money. I see many entreprenuers float happily at the prospect of a big brand name partner and dream of future money. I have been one of them. If you give in, large companies will say, free for us, charge others using us as reference.
Remember, everything costs you money - your time, your team efforts, the delay of starting over with another partner. So, be polite but firm and bring in a paid deal.
You can agree to give the core product for free as a pilot for 3 months and charge a setup fee that will cover your costs, making it sound reasonable and fair. Your team will be excited at the real validation of their product and work.

5. Know when to pull back, but keep the engagement

I had a big company who said, you have something really cool here, so you are going to offer it for cheap for us and grow at our expense and later we'll be dependent on you. Its possible. All relationship power structure change over time. But make sure you communicate your intent to treat your customers as partners. Walk away from the deal as it could be a matter of some particular person, but keep the relationship alive. I walked away from one such deal who refused us a branded play but updated them and brought them into our folds after we had partners they respected.

6. Scaling of your company is morphed by the partners demands

Many of us do not foresee how the first big customer/partner changes our startup. You'll need more people to manage that account and may have to hire fast. Some in your team may start identifying their jobs with this partner and bring in biases towards them.

Once you sign the first large customer/partner, your startup is in very dynamic turf. It is better not to fight it but accept change and do the right thing for your company. Its possible that you may have to keep the person who worked on this deal dedicated to that account and it maybe good to scale revenues off that account. Or its possible you may want to pull the main person out to scale more of such accounts. You have to decide and take the change in attitude and demands that come with it.

Unfortunately for some founders, I find that their excitement of their startup goes down as they lack operational experience to scale the team around executing on a partner or scaling business development teams. This may be the right time for them to bring in some experienced person who brings this competency.

Just remember, the beauty of a startup environment is that its never static -- first the uncertainity of the concept validation, raising money, finding the right team, and this signing the first customer is more profound where you execute on your promise to your investors, team and the promise of your concept.

Remember, you chose to dance with giants, keep your pace to the big steps, as you are now on your path to become big.

1 comment:

Siva said...

It is nicely written and the thoughts are excellent. One has to definitely agree that when one wants to become big they should take big steps to keep pace with the giants.