Benefits and Roadblocks of Corporate Partnering for Startups

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Fifteen years ago, the expansion model of a startup was fairly linear: The first three years were dedicated to building the business domestically. Year four generally saw European expansion. And by year five, the company was starting to explore the Asian markets.

The emergence of the Web as a viable commerce vehicle, though, brought about a paradigm shift in the startup world that obliterated that model—and forced entrepreneurs to change their plans. Rather than ignoring the global marketplace, today’s smart startups need to think with an international perspective from Day One—and work quickly to expand their footprint.

Of course, becoming part of the global network during a company’s formative days (when budgets are tight and research and development is crucial) isn’t easy, even with the advances and inroads the Web has introduced. At Allegis Capital, where I am managing director, many of our portfolio companies have found that the surest path to becoming an international company is by partnering with large, multinational corporations.

It’s a strategy that might sound curious at first. Big business works at a different speed and with different priorities than the startup world. But the backing of a large corporation can not only supplement a startup’s bottom line; it can also open doors that might otherwise remain firmly shut.

Beyond that, this sort of strategic partnership can provide market analysis that is impossible for startups to gather on their own, acting—essentially—as the ultimate focus group.

Navigating Hurdles

Naturally, there are some challenges that accompany these relationships. A successful pairing takes plenty of foresight and planning. You’ll need to not only find the company that best suits your startup’s philosophies, but also determine how best to take advantage of it (and navigate the hierarchy of that company) once the deal is finalized.

Allegis portfolio company Axcient has been particularly adept at learning to make things run smoothly with its strategic partner. After striking a non-equity partnership with Hewlett Packard in July of 2010, Axcient CEO Justin Moore quickly noticed the differences in how the two companies ran their operations. To ensure that his company saw the greatest possible benefits from the relationship, Moore developed four strategies to ensure things ran smoothly on a consistent basis.

These have not only helped Axcient grow, they’ve carved a path for other startups that might be unsure of how to get the most from a big business partner. Here are summaries of the techniques Moore has shared with us while growing his company:

Triangulate—Larger organizations tend to have an overlap in reporting. They also tend to have management shuffles with relative frequency. As such, there are often multiple people whose responsibilities for different areas of the business overlap.

Rather than maintaining a single point of contact, it’s important to develop several relationships in the organization, as this allows small business owners to have multiple allies to help accomplish a specific goal. When your company works with a single individual and that person leaves the company or their position, it’s a blow to momentum, which can be deadly.

Be Adamant—No matter how solid a startup’s partnership with a larger company may be, the people running that startup are going to have to occasionally break down walls. The best way to do this is with dogged persistence.

The ugly truth is: Partnering with a startup is not going to be the biggest priority for the big corporation, but it’s certainly the biggest priority of the entrepreneur. Therefore, it’s the startup’s duty to constantly drive the process and take on the onus and burden of extracting results. If the startup fails to do this, it’s quite possible the corporate partner may become distracted with other activities and the relationship will be unable to move forward and generate benefits for either side.

An example of persistence: when Axcient was getting equipment financing, it was proactive in reaching out and asking what, specifically, was necessary for approval. From there, it put together the required models, expectations reports, financing and equipment requirements and anticipated what the finance department wanted to see. Persistence paid off: the financing was completed.

Know Your Value—It’s easy to get overwhelmed by the reach (and numbers) of a big business partner, don’t underestimate the amount of value that you can bring to the table as an early-stage company. The partnership will work better when entrepreneurs recognize their company’s value in the arrangement.

If a startup’s service or product is unique enough to attract a corporate strategic partner, it’s because it gives that larger company something to differentiate itself from its competition. Be very clear about what that value is. Axcient, for example, lets HP differentiate itself from its competitor—arming HP with a Cloud-based solution.

Be Patient—Partnerships with big businesses are like kitchen renovations. However long you think it’s going to take to get something done, it ends up taking two to three times longer.

For entrepreneurs, this can be maddening, but this is where a little perspective is essential. Big business is inherently slow. Their list of priorities is absurdly long. They think in financial terms that are inconceivable for small, early stage companies—with revenues in the billions. If startup owners are able to keep that in mind, it will help save their sanity—not to mention the partnership.

Picking Partners

Finding the perfect strategic partner isn’t an easy task. While it might be tempting to quickly embrace a business with deep pockets or one that operates in a closely aligned industry, that’s not always the right move.

It is, in fact, sometimes the least likely candidate that proves to be the best choice. Just as opposites attract in the dating world, so too can companies that (on the surface, at least) seem to have very little in common. Eric Olden, CEO of Allegis Capital portfolio company Symplified, discovered this first-hand five years ago.

Symplified, a cloud services company, today counts Quest Software, a traditional software company, as a strategic partner—something that might confuse some business observers, given how radically different the two firms approach the computer industry

It’s a partnership that even Olden was skeptical about when he was first approached by Quest in 2007. But something about that initial conversation felt right, so he began to do his homework on the company. Quest, he learned, encouraged startup partners to maintain their entrepreneurial spirit, rather than trying to make them conform to its big business style. That extended to acquisitions, too—and many of the employees of startups it had purchased had opted to stay with Quest (including two people Olden knew personally).

Ultimately, the promise of continued autonomy and the ability to utilize the resources of a multi-national corporation overcame any worries about the two companies’ different focuses—and the partnership has been a fruitful one.

Many entrepreneurs might not have been open to working with a big business that takes such a different approach to their industry. But the blinders that come with that sort of narrow focus can prevent startups from realizing their potential.

Similarly, startup owners often forget to consider overseas multinationals in their search for a strategic partner. Identifying an ideal international company might be more difficult than finding one domestically, but that extra effort could unearth some additional rewards. Specifically having a powerful corporate ally in another country can help a startup quickly gain an international presence at a much lower cost.

Depending on the nature of the relationships, it’s entirely possible for a promising startup to sign several strategic partnerships. This is, in fact, a good step toward fast-track expansion, because tales of organic startup growth although they make for a good story, it’s a rare feat for a startup to become a large company without a partnership.

Symplified has several such partnerships with major corporations, including Amazon Web Services, which have helped it expand much faster than it would have been able to otherwise. One of the keys to successfully forming these relationships has been careful targeting of potential partners.

Timing is Everything

As important as it is to pick the right partners, it’s just as crucial to pick them at the right time. That’s doubly true of partners who are interested in establishing an equity relationship with the startup. Doug Donzelli, CEO of Allegis Capital portfolio company Apprion, emphasizes that while the lure of additional capital is always strong, it’s important not to sign an equity deal too early.

Instead, startups should wait until they have a solid product—and have gained some market acceptance. This not only strengthens their bargaining position in the terms of the deal, but it also helps them better focus on which partners will be best suited to help them grow.

Apprion, which delivers wireless application networks and services for the process manufacturing industry, has equity relationships with both Chevron (a deal that was struck at the end of 2007) and Motorola Solutions (which came on board in the first half of 2008). Both companies fit well with Apprion’s focus—giving Apprion access to a leading customer in the market as well as one of the major vendors.

The Ultimate Focus Group

The power of names like Chevron and Motorola opens plenty of doors, but the benefits of the partnerships run much deeper. Both companies have shared a tremendous amount of marketing experience with Apprion, which has also benefited from Motorola Solutions’ technical expertise. And Chevron comments on new and existing products and what needs to change.

Utilized correctly, multinational corporation partners not only open doors for startups into wider communities, they also double as the most valuable focus group an entrepreneur could ever hope for—offering critical insight.

And just as a big business partner can open doors, it can also help close deals. After all, there is no better reference for potential customers than a company boasting a high-ranking slot in the Fortune 500.

The Non-Strategic Route

Not every company is interested in being an active partner with a startup. Some prefer a more passive role. And while active partners are preferable for startups looking to leverage the strengths of those companies, they’re not necessarily essential.

Allegis portfolio company IMVU, for example, has long had a retail relationship with Best Buy, and even obtained an investment from its green field fund, but it’s never discussed a true strategic partnership with the retailer, which mainly offers the startup insight on trends in technology and retailing. Despite the lack of the formal partnership, IMVU is benefiting greatly from the relationship.

No Free Lunch

Strategic partnerships aren’t a panacea or a free lunch. They are, in fact, a lot of work. Building momentum and ensuring follow-through from both parties takes dedicated resources.

The partnerships, by their very nature, aren’t even symmetrical. Startups are focused on a smaller product set and don’t have resources that compare to those of their partner. But the returns are similarly uneven—and largely work in the startup’s favor.

Successfully managing and tending to the partnership is an ongoing task. Startups that can handle the challenges, however, will see their growth accelerate while their capital requirements shrink. And the barriers to entry that have kept so many early-stage companies out of the global marketplace can quickly collapse, giving a startup its best chance to not only succeed, but prosper.

Bob Ackerman Jr. Ackerman is the founder and a managing director of Allegis Capital, an early-stage Silicon Valley venture capital firm that invests heavily in cybersecurity. Follow @allegiscapital

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  • http://web.mit.edu/tlo/ Chris Noble

    This is a good and timely article. I license MIT’s IP in the Energy space, and there has traditionally been a big divide between the VC-backed spinouts on one hand and big-company sponsored-research licenses on the other. We do lots of both, and are working hard to bring them together for mutual benefit. Partnering between startups and big companies can be a win-win, but it also requires VC investors who are supportive. Sounds like you are Bob! Good work.

  • http://www.allegiscapital.com Bob Ackerman

    Thanks for your comments Chris. When I started Allegis Capital 15 years ago, one of my goals was to build an entrepreneur-centric firm, based upon my own experiences as a start-up executive. The success of my first company had nothing to do with venture investors – “we don’t invest in many software companies – the assets all have legs and go home at night” was a common theme from venture investors. In fact, the success of the company – which had operations in the US, Europe and Asia, lay in three strategic corporate relationships – AT&T, Apple and Motorola.

    These relationships are not easy – there is a significant impedance mismatch between the culture of a corporation and a start-up. At the same, when the interests are aligned, the leverage is compelling. In my experience, the VC – Corporation – Start-up embrace is about active management of risk and generating better returns. Having worked with more than 35 corporations as active limited partners and dozens more in partnerships with our portfolio companies, I can tell you first hand – the value this there. But you have to work for it.

  • http://www.tomhalle.com Tom Halle

    Bob – spot on. Strategic alliances, particularly of the “David-Goliath” variety, are a powerful alternative to cash that allow a startup to accelerate product development, market intelligence & penetration, press & analyst visibility, competitive shutout, revenue ramp, and other objectives that would otherwise be out of reach.

    These alliances are of particular interest to the Goliaths in the life sciences, information & communications, finance & insurance, clean/green tech, and emerging consumer product segments as these companies seek to test new product/market adjacencies and reduce technology or market uncertainty without committing large R&D budgets.

    I believe there is also an emerging understanding – among both Davids and Goliaths – that forming a strategic alliance is in fact the first in a series of potential steps that may ultimately lead to acquisition. The savvy Goliath, rather than diving in with an acquisition while uncertainties remain high, will partner first, then incubate, then invest – learning along the way – and, once the product/market potential has been proven and the partner portfolio has been winnowed down to those with the best traction and fit, and those with the best cultural, strategic, and operational alignment – then acquire.

  • Bob Ackerman

    I could not agree more Tom. In fact, in structuring their corporate venture activities, corporations would be better served if they structured their programs to align: 1) deployment of capital, with 2) tolerance for risk, and 3) and ability to deliver and derived strategic value in a partnership. I sometimes describe this as the “rent” – “lease” – “own” model of strategic partnering. Frankly, it is often better for the corporate in terms of driving sustainable value and tends to do “Less” harm to the young strategic partner.

    Bob