The main goal of a startup is to grow and grab as big of a share from a market as possible.
This is the very nature of the whole endeavor and if it does not happen within a relatively short period of time (3-4-5 years), the activity will go south.
In business (as in life) nobody can survive and thrive by himself – for that, you will need partnerships.
But how to choose the right partner for your project? That is a hard question. If it was easy, the market would be saturated with great companies providing value to humanity. The hard truth is that finding the right “buddy” is almost as hard as finding the right idea. That is why investors are looking not only at the concept but at the team of the startup. Great ideas are nothing without great execution and this execution can be only brought by a group of smart and talented individuals.
You Have Your Core Team, What’s Next?
After you build your dream team and you start growing, you will need to partner with other organizations. Why is that? For the same reason why you need a team to develop your company – a partnering organization will complement your activities, services, and products. Partners can help you with marketing, logistics, financial and other strategies. You can try to do some of the things yourself, but that would only slow you down. In order to grow exponentially, you have to team up.
Strategic partnerships are the best shortcuts for fast growth, but you have to consider them wisely. They can either make you or break you. It is important to never chase such a partnership if you are pursuing money and money only. This kind of thinking will give advantages to one of the sides and will limit the other. In the end, It will not be very fruitful and the partnership would possibly collapse.
What you really need is a mutually beneficial collaboration even when things are not going very well for one of the partners. This support is critical as business and social survival mechanisms.
Organizations are very similar to biological organisms. They are born, they develop, they mature, and sooner or later die or transform. And just as biological organisms companies need to collaborate with each other if they want to increase their chances for survival.
Good partnership benefits all the participants – strategic partnership helps the young company by giving it access to a greater amount of working capital, human resources, faster-accumulated revenue, and generally accelerating the development of the enterprise. They benefit the established organization by complementing its existing offers.
Strategic Partnership Examples
If, for example, a large computer hardware enterprise decides to build a piece of gaming periphery, they may try to partner with video game developers who create projects for this type of hardware (virtual reality haptics, helmets, and so on). The bigger company may fund the startups with seed capital for the development, support, and marketing of the new products. In addition to helping the new venture, the hardware company will also benefit from the much wider adoption of its new creation.
Another example of strategic partnership could be given within the venture capital space. There are certain companies that can benefit enormously by partnering with startup investors (like StartupBrite). Those companies provide services to startups and connect them with relevant venture capital companies or angel investors.
The hardest part of building thе these types of relationships is like with any other – it requires building a rapport with your potential partners. This is a particularly challenging exercise due to the patience and long hours of negotiation required. The good thing about it is that it is well worth it and the collaboration with a wide network of vetted investors may prove extremely useful for the business development efforts of the startup.
What Are The Risks Associated With Strategic Partnerships?
There are always risks when a startup partner with large companies, and it is important to understand these risks before starting the process. What are those risks, and how does the startup founder know when it’s right to engage in such a relationship?
Here are few of the associated risks:
Although it may look like a mutually beneficial partnership, more often than not the larger company will try to get the most out of it. Such an unfavorable term could be a much lower price than was initially planned. The startup founder should be extremely careful with such terms and should back away if he/she senses such developments.
When discussing terms, the larger company will usually ask for some type of exclusivity. A young startup may block their ability to do business and work with another big corporation operating in a similar industry sector if they decide to grant that exclusivity and establish such a strategic partnership.
Dealing with unmet promises
After the deal is in place, both sides will expect immediate results. However, often this is not the case. Sometimes, the large company will fail to deliver up to the expectations of the startup, and sometimes the startup will not meet its initial targets. How to deal with that?
If the large corporation does not deliver, the founder should try to find out what leverages he/she can pull. In most cases, the small startup is left with no other choice but to cancel the contract and cut off the relationship. However, this is the most extreme solution and the smaller company’s CEO should only consider such a move when they see that his startup will suffer in the long term.
It is important always to keep in mind the size differences between the two organizations. Like in nature, the bigger fish will have the upper hand over the smaller one. This is how natural (and social) selection works. By being mindful of their potential partners, the startup founders can reduce the chances of being consumed by the corporate machine.
Legal Structures For Strategic Partnerships
A successful partnership can evolve into something much deeper than a simple exchange of favors or assets. It can evolve into a legal strategic alliance that can provide companies with additional resources, manpower, and even brand recognition. The most important types of legal alliances are:
- Joint Venture (JV)
The Joint venture results from the “marriage” of two (or more) “parent” companies. The percentage of ownership between the companies is up to negotiation, but the most common causes are either 50/50 or when or when one of the organizations has the majority of the shares (80/20).
- Equity alliance
It occurs when one organization purchases a certain percentage of equity in another.
- Non-equity alliance
This one is pretty close to the general description of a strategic partnership and it only differs from it by the stronger terms in the contract. The relationship is sealed by the legal document and if one of the sides fails to deliver, they can expect a legal punishment.
How Does a Strategic Agreement Look Like?
Once you have found a partner, you will have to prepare and sign some kind of proposal: Memorandum of Understanding, Joint Venture Agreement, and other types of legal documents which can range from fairly simple to incredibly complex. All of the details of the agreement depend on the scope of the deal. However, there are certain points that are included in all cases:
- The parties involved
- Services to be executed
- Terms (commission percentage, profit sharing percentage, payment channels and so on)
- Hierarchy structure
- Period during which the agreement is valid
- Signatures of authorized individuals
As we mentioned, it can become much more complex than what we already talked about here, but those are the contents that are to be seen in every strategic partnership document.
Everything should be cleared out and the signing parties must make sure that there are no details missing. This way they can avoid vigorous arguments in the future. Many organizations hire third-party auditors to check and overview the clauses. This is highly advisable since it lowers the chances of any type of mistake.
In Summary – Why Do you Need a Strategic Partnership
We started this post with a simple explanation of why startups need strategic partners in order to grow.
In general, if you can perform every business function within your company and bring the required profit to your shareholders, then you might not need to partner with any other organization (at least not in a strategic manner).
Keep in mind that there is always a way to reduce some expenses and improve the bottom line. For example, US semiconductor companies are huge organizations and can definitely afford to produce their chips on American territory. However, that is not the case. All of them have strategic partnerships with Asian manufacturers in place that allow them to cut their costs immensely and remain competitive. Our suggestion here would be the following: if there is an opportunity for your startup to improve its business process, there is a high chance that a certain partner can be of great help.
Make sure you reduce your risk in such a partnership – Lowering the risk that the startup holds is of great importance to any founder and building a strategic partnership can help with its mitigation. If for example, you find a partner that has already insured his company, the security that this insurance provides may also lower the risk to your business processes.
Remember that a business partnership is like any other human-to-human relationship. When you connect with a new person, you’re also instantly connected to that person’s network of peers.
Connections are how we move forward in life and they are the reason why we grow and develop. It’s often how organizations grow as well. If your startup is considering getting to the next growth stage, it worth making the effort to find partners that could support your growth.