Today we're going to talk about partners. Who are your key partners and suppliers? We've already talked about value propositions, customer segments, distribution channels, customer relationships, and revenue streams. Now we're going to talk about our partners. What's interesting about partners is these are other companies who provide you resources. They might be partners, they might be suppliers, but they're needed to make your business model work, and these partners and suppliers might supply or give you resources, activities, and other things that are essential for your company to succeed. So what you need to understand is what type of relationships you need to have with them. Are these relationships going to be strategic alliances between noncompeting companies? Are they going to be joint ventures? Are they going to be coopetition? What are you going to do, and what are they going to do? So, in this lecture, we are going to explain the differences, the pitfalls, and the successes between each.
Let's just think about this. Which are the reasons that you would want to partner? Take a look at this list and choose all that apply.
So, what was interesting was number 1, shared economics. Well, that was right. You both have an economic reason to want a partner. But you know what? Number 2 is right as well, economies of scale. You partnering with a much larger company means you could take advantage of their supply chain or their volume discounts or the massive sales force they have. But you know, number 3 is right as well. Large companies, just by definition because they're larger, have more of everything than you do. Wouldn't it be great if you could get your hands on some of it somehow? And number 4. Access to customers. Well, we have 3 million customers, and today you have 3. That's a good idea too. Finally, access to their marketing or their brand. Wouldn't it be great to have the General Electric label or the Intel label or be a Facebook partner next to yours? And so the answer is: they all apply.
So what defines a partner? What's really interesting is that this has to be a 2-way street. One way we say that is shared economics. Not only do you have to get something out of the relationship, but so do they, and so you really need to understand what's in it for your partner. A classic start-up mistake is understanding why you need them but not being able to articulate why it is that they would need you. They should need you not only for success, but boy if they don't have you, they should understand that their business might fail. A partner might also take a form of co-development or co-invention, or you might share common customers. But, one of the things to remember is all the books about partnerships and all the literature you read tend to be about partnerships of companies the same size. But you are a tiny speck to most potential partners. Remember, you're a start-up, and that means they barely could see you, and so there are some special pitfalls, some special things to talk about throughout the rest of this presentation.
So let's see if we understand the types of partners and suppliers that are available and remember, none of these come with a memo that says they look exactly like these. Some of these might actually blur the lines, but let's take a look and see if we can understand who would fit under strategic alliances, joint ventures, traffic partners, coopetition, joint business development, and suppliers. Match the type of relationship with each of these partnership examples.
So, Intel Inside® was a great example of joint business development. They managed to exchange advertising dollars for a prominent position on the outside of computer manufacturer's boxes. What computer manufacturers got in exchange was gross margin that they never would have gotten in a low-margin business. Starbucks® and Pepsi™ to promote Frappuccino® was a great example of a strategic alliance. Apple and the record labels was another example of a great strategic alliance, but Apple and Foxconn is a great example of a supplier and might, at times, actually be a good example of a joint venture as well. Fashion week, well that's an example of coopetition. Normally, at other times of the year, these high-end clothing manufacturers compete with each other vociferously, but once a year they get together and cooperate in grading the industry. Standards groups are another example where competitors get together, put aside their differences, and work together towards a common goal of trying to come up with a set of mutually agreed standards. Kind of the ringer in here, that is the one that I didn't describe, but all you had to do was go on Google, is the most famous aircraft partnership ever made where 2 of the most unlikely partners, GE and a French aircraft manufacturer, came together to do a joint venture for the CFM-56 jet engine, which is one of the most popular turbofans in the world, so that was a great example of a joint venture and also had a bit of coopetition in it as well. Finally, for traffic partners. If you think about all the online scheduling sites, KAYAK, Expedia, Hipmunk, they're all traffic partners for the airline industry. In fact, that's how they make their money. While you're having a great time figuring out multiple airline schedules, every time you click through to by a ticket, they are getting paid by the airlines, and that's how they make their money. So, I hope these were good examples to help you understand the different types of relationships. As I said, sometimes they kind of blur between each other. Sometimes it might start with coopetition and turn into a strategic alliance and someday might actually be a joint venture, but the whole idea is that you're working together with others to help build your company.
What resources can partners bring? Well, obviously if they have something you need that you normally would have to develop and they would sell to you or license to you, that allows for you to get to market faster. Or, it might be a complementary product or service that you just couldn't afford to build or can't get around to for a while, and that allows you to offer a broader product offering. Or, yes you could do it, and you could probably do it in the same time, buy why do something that's their expertise with your money? It might just be easy to buy their product, integrate it in yours, and now all of a sudden you're no longer doing their invention but focusing on your core business. For start-ups, trying to understand what it is you want to focus on versus what is it you require in terms of activities and resources and suppliers is a real strategy. Partnerships are not kind of an add-on. They really allow you to capitalize on the unique customer knowledge or expertise of others. The final reason is, they might be channel partners or they might be partners overseas to new markets that you weren't planning to get to this year or even this decade and allows you to generate a source of income that would be unavailable to you for years.
So let's take a look at the types of partners. One of the most interesting concepts is strategic alliances. One of the concepts in start-ups that is important to remember is this idea of the whole product. It turns out there is no possible way on day 1 that your start-up could provide a mainstream customer with a complete solution; you just can't. You don't have enough time or money or resources to fill out every possible thing someone in a Fortune-1000 company is going to put on a checklist or an RFP for you to provide. So the idea is to use strategic alliances to complement your core product with other products or services. It could be training, could be installation, could be service, that is to surround your product with a cloud of other resources to address mainstream customers. For example, in 1996 Starbucks® partnered with Pepsi™ to bottle, distribute, and sell Frappuccino®, which gave them access to Pepsi's™ enormous distribution channel. Now, one word of caution. You understand that the phrase I used was to develop the whole product, to deliver a complete solution to mainstream customers. The mistake start-ups often make is thinking that they're selling to mainstream customers the day they first ship. It turns out that for most start-ups not in an existing market, you're not selling to mainstream customers, you're selling to crazy people just like you. It turns out that those people, which we called earlyvangelists, are more than happy to assemble the complete solution themselves, so all the bus-dev activities that start-ups scramble to get ready by first customer ship actually could be deferred in most ventures to actually after you got those first earlyvangelist customers because it's the earlyvangelists who will, once they build the product themselves, actually tell you what the complete feature set is. So, think about strategic alliances. Don't just checklist "I need a head of bus-dev and all these solutions on day 1." Think about what order they come in.
Now I would be remiss in talking about strategic alliances not to talk about the greatest strategic alliance ever made, and that was Steve Jobs at Apple when he built the iPod. Jobs understood that the iPod hardware was a wonderful device, but without software, iTunes, it was still just another piece of iron. But, even when they had the hardware and software ecosystem, they were still missing the content, the music, that would go on it. For 100 years, record labels had held that content so tightly, allowing no one else access, but there was a moment in time with Napster and the record labels feeling threatened that Jobs understood there was an opportunity to strike strategic alliances that no one else had been able to do. In fact, the rest is history. The iPod, the iPhone, the resurgence of Apple, music available to everybody and anybody in their pockets to billions of people was, in fact, a strategic alliance.
The next type of partnerships might be joint business development,
joint promotion of complimentary products.
One might be the dominant player. The best example of this in the computer industry was Intel.
Now, historically, chips ended up to be inside the computer that the consumer never saw at all,
and in fact, the only name on the outside of the box was the manufacturer,
but Intel in 1980s changed that game.
They said what if we pay PC manufacturers to put the phrase Intel Inside on the outside of the box,
and what used to be just this unknown piece of silicone inside the computer
actually became a valuable brand for joint business development, joint promotion by sharing advertising dollars and sales programs.
As I said earlier, one of the biggest mistakes startup make is confusing strategic alliances and joint partnerships for what you need on day 1. In an existing market, you actually might need these guys, but in a resegment and in certainly a new market, these are needed for early evangelist and so you need to think through. When do I need joint partnerships and when will I be hitting mainstream customers because remember most these partnerships tend to fail.
On face value, the next type of partnership is the most unlikely. It's when competitors get together in programs to do something jointly for their industry, for example, tradeshows, industry associations, etc. It turns out the automobile industry action group has 900 members of competitors who also to vie to sell the same products to the auto industry. Fashion week in New York, another example. All the fashion vendors, all the suppliers of high-end fashion get together, and actually work together to promote a joint view of the industry. So coopetition is another potential area for partners. Also, industry specs, technical committees, you'll see competitors who normally outside that building who do nothing better than run each other over with a car actually sitting and trying to define a joint technical specifications.
So, the last type of partners are actually key suppliers. There are two types of key suppliers. One which you actually outsource part of your company to a third party. It might be your accounting functions. It might be some of your sales. It might be something as simple as doctors looking at x-rays are now done by trained technicians in India. It might be part of your supply chain for sub-assemblies or you might outsource your entire manufacturing line, which we used to have here in the United States to a third-party company much like Apple does with Foxconn or your key suppliers might be traditional direct suppliers. They simply ship your components, raw materials, iron, and ore for you to make steel, etc. In the old days, we used to think of suppliers as not a partnership but just simply a cost to goods. Nowadays, we understand to get the most efficient use out of our resources, we really need a relationship that treats them like partners. We both need to be in this to win. We both need to understand that this is more than just a financial transaction. So, as your startup grows, start looking for partners where you are more than just a checklist and they're just more of a source of material and try to establish long and lasting relationships.
In the web, over the last five or 10 years, we've kind of established a new type of partner and those are traffic partners In a traffic partner, we have long-term agreements with other companies that deliver predictable levels of customers to our website. How do we do that? Well, these are sometimes cross referral or swapping deals. We pay another company may be on a per-referral basis and our partners, our traffic partners, drive traffic using text links, on-site promotions and ads on their site and sometimes, we might even exchange email list and other data with these partners. So, if you're on the web, traffic partner is a virtual channel partner that simply doesn't exist in the physical world.
So this sounds great. Partner sound wonderful but what could go wrong with this?
Let's look at partnership risks.
Now everybody talks about all the great things they have in partnerships
and large companies partner all the time.
Let me start with the large company partnership risks.
One of the greatest partnership disasters probably ever.
Now, I am in the 21st Century probably including the 20th was when Boeing was building the 787,
the new jet airplane made out of carbon fiber and not only was it a unique technology advanced
but at the same time, they've decided to do something
that no other airline manufacture had ever were done.
What they decide to do was instead of Boeing now building all the parts,
they were going to outsource all the manufacturing risks to a series of partners,
spread around the world, and while Boeing's unions and machinists argued,
no they missed 50 years expertise on how to build these components.
Boeing because of other pressures, both financial and union
decided that it would be a much smarter strategic move to have people building
the center fuselage in Italy and the tail fin somewhere else,
and the stabilizers somewhere else, and the forward fuselage by another vendor
until all of a sudden, their supply chain was scattered around the world
and at least half these parts being made by people who've never made airplane components.
It will look great on paper. It was going to save them enormous manufacturing cost.
It turns out to be the worse business decision of the 21st Century,
because it was made by accountants and not by engineers.
It turns out their partners delayed the program by about three or four years,
because there was a tremendous amount of rework--
parts didn't fit, parts didn't work, and this wasn't your living room furniture.
These weren't devices that we're going to carry hundreds of people on the earth and there was no margin for error. It turns out Boeing actually had to go buy back a good number of these manufacturers and bring back their expertise and oversight, which they assume wouldn't be necessary. So, I just used this as an example not to bash Boeing, but to understand that even the smartest companies sometimes made partnership decisions that look good on a spreadsheet, but at the end of the day, partnerships are not driven by spreadsheets. They are drive by technical competence customer needs, and the ability to let her final finished quality product.
So let's think about risks in managing partners.
Well, the biggest one is what I call impedance mismatch,
and again I've been talking about this a couple of times in this lecture.
In a startup, you barely register on a large company's radar.
In fact, you're entire company's staff is probably less than the administrative staff
of the CEOs of some of these companies,
and the longest of the partners schedules become your longest item, and what does that mean?
I've seen many types, large companies say, well,
we'll make that decision when we get to our plan and meeting
and any less, but when is the plan and meeting?
Oh we have that quarterly.
Well quarterly 90 days to startup is like we make decisions in an hour and a half.
And so now all of a sudden, the longest of their meeting
and decision schedules becomes your longest item and if you're working like startups should
on an intense speed and tempo, they are now slowing you down.
The third thing is when you're using strategic alliances or joint ventures,
there is no clear ownership of the customer, and in fact, if there is any owner
at all the large companies will say, oh you know, we have a thousand people in the field.
Don't worry. We'll take care of this.
But when you typically never realizes, your product to those thousand people in the field,
might put a little asterisk on page 49 of their sells price list and again when you do joint ventures,
that will make you sure who owns the vision because products by committee
are probably the worse thing that could happen to a star-up and your objectives tend to differ.
You need to understand what happens in a large company when you become part of the partnership.
Were you there as a check list item that someone said, oh we need one of this in our catalog?
Were you there for someone to career to look with or you absolutely essential for their success?
Don't confuse big name company being interested in you with a potential liquidity event.
Most of these partnerships fail, and one that isn't intuitively obvious is that a great person
who you are dealing with in that large company--
the odds are in 15 months, they're no longer in that job.
Because if their career is heading in the right direction,
they're going to be promoted or moved to another job or another division or another location,
and therefore, the person who is passionate about your relationship is now gone.
So if there is no underlying rationale. If there's no real what's in it for them?
The turn in partners and strategies or personnel might put your company out of business and then never notice the difference. You were just a short-term play for whoever was in the job and if this was an important to their company though it might have been essential to yours, that deal is over even though you might have a contract. The other thing startups worry about is intellectual property issues typically not much of an issue in the United States, typically a very, very, very-- more very's inserted to your important issue in dealing with China. Intellectual property and the rule of laws or trait, and trademarks, and IP is not quite the same in the US as it is in China, Russia, India and other developing nations. You should make sure that you're not dealing with IP issues in these countries as you would in the US. Finally, these deals are difficult to unwind or end. This might've looked like a great idea when you were struggling startup. Eighteen months later, when you're revenues rolling in, you realized that you gave these large companies or these joint ventures or the strategic partners resources or assets or other things, you never would've done two years later, and so we really think through, what happens 2 years from now?
One of the greatest things that could happen to a startup is a large company says, "Hey! I want to invest in you, and I'm really interested in doing something with you guys." "We just don't want to be a supplier or a joint venture; "we want to put money into your company." And I get all the time entrepreneurs who are going, "Yay! Look!" "So-and-so is really interested in investing in our company. What a great idea!" It is a great idea, but you really need to put on your green eyeshades and black armbands and roll up your sleeves and really think through here what's in it for you versus what's in it for them. Obviously, if you're a technology-driven company, the first thing they want is access to your technology. Congratulations. But you know, their objectives are not to make you a large company. Their objective is to make them a larger company. So you need to understand what kind of deals do they want. "Oh, we want most favored nations clause, "which means if you sign a deal with anybody else, we always want a better deal." Or my favorite is, "We want an exclusive for a year." Now, all these things sound great from the large company's perspective, but the question to ask yourself is, "What do they do for me building my business?" And I always turn to large companies and turn this around and I'd say, "You want a 1-year exclusive or you want most favored nations." "It sounds like you actually want to buy us without actually spending the money, "because my goal is not to be a small subsidiary of your engineering department, "my goal is to build a company your size." "And so we need to understand what's in it for both of us." And so I tend to try to understand, first of all, who's the sponsor and what's the motivation? And it needs to come from the business side, not just some technology people, and you can't be dealing with junior biz dev people ultimately because their first offers are always, "One-year exclusives, and we need all these other things." And while that's great for them because they have their checklist, you need to be prepared to walk away. But if you understand who the sponsor is, you could actually have an adult conversation, saying, "Listen. This doesn't work for me." "Actually, what you want me to do is to be selling to your competitors "because that's the only way I could grow more resources to make you successful." "I'm happy to consider how you get an advantage, "but you can't decide I'm your only supplier." So one of the ways I tend to deal with these is try to get sales deals, not investments. That is, to me it's a lot better to get a $10 million order from a company than a $10 million ownership position that they take because now they're your boss as well. Or try to offer warrants--that is, essentially options on buying stock-- based on sales success. Remember, while it might feel great to have name of big company next to yours for the first year, eventually this will be a lead weight unless it turns into revenue.
In summary, partnering strategies are great. But understand you're not a peer of these large companies. And all the books and literature that talks about partnerships very rarely addresses startup to large company partnerships. These are asymmetrical relationships. And so don't confuse partners that you need early on to address earlyvangelists with the ones that you might need a year or 2 from now to address mainstream customers. So remember, if you've been getting out of the building, you actually found the early passionate customer segments or people inside those segments that will buy your product even unfinished or unbuilt or buggy as it is. Understand what they need now and help them teach you what the mainstream will need later. And so don't confuse big company partnering with startup strategy. Find the partners that give you an unfair advantage. And just keep in mind--and this really requires a bit of cynicism-- that you really don't matter to a large partner. They matter enormously to you, but I would keep a jaded eye out and understand what's in it for you to build your company so that one day you're bigger than them. One of the other advantages about talking to partners to keep in mind is this is almost like dating. While you're out there talking to them, understanding what resources, what activities they could provide or what supply chain they could fulfill for you, also understand that some of them might be your potential acquirer someday. And so even if the relationships don't work out or the deals don't work out, always be on your best behavior. Always in fact make them wish, "Boy, this would be a great part of our company," because right now you might not want to be acquired, but someday someone might want to come back when you're bigger with an offer that you just couldn't refuse, and you get to buy the house and the car and the airplane at the south of France, and remember how great you were in those partnership discussions. So partnerships can be strategic, they could be fun, they could be nerve-racking. Understand they're an integral part of your business model and business model canvas. Go out and talk to a ton of them. And when you do, you'll understand how to use them to make your startup into a large company.
Now that we covered partners, some optional reading for next week, and defining the Startup Owner's Manual pages 169-175 and pages 180-188. One of the interesting things about partners is most startup say, "Ah, we'll worry about them later." It turns out having a partnership strategy might allow you to shortcut some of the difficult things that startups don't have or resources they don't have on day one. On the other hand, doing a partnership strategy too early sometimes incumber startups with relationship they discover when they talk to customers they really didn't need. In either case it means you should be talking to partners often now but trying to understand where the customers actually care whether you have them now versus later, and to do that you need to get out of the building and start talking to both customers and partners to figuring out what partners will you need, why do you need them, and what are the risks, why will they partner with you, what's the cost of the partnership, and again, my favorite-- draw a diagram of the partner relationships with any dollar flows that are implicit inside of them. Take a look at the link below for some examples of partnerships that other students have done and use the optional LaunchPad Central software and post your customer discovery narratives and make sure you update your business model canvas.