How to Form Strategic Partnerships Without Getting Crushed

Defining a Strategic Partnership

There are a lot of different kinds of partnerships out there, ranging from go-to-market partnerships with resellers, to collaborations with global SIs (system integrators) or inbound technologies. But not all of these are strategic.

For Mark, a strategic partnership is a business relationship that has the potential to add significant transformative value to your company. From a start-up company perspective, this almost always means that your strategic partner will be a market leader, or, what Mark refers to as an elephant.

“When you’re partnering with an elephant, there are a significant number of strategic marketing benefits that arise as a result of being able to leverage the larger company’s brand, including increased market awareness and improved customer credibility.” — Mark Sochan

In any partnership, there is reciprocity, and both sides make the choice to enter due to the potential individual benefits that may result from the relationship.

As Ben aptly says, “A successful partnership is built around a core-value exchange. Each company, on both sides of the equation, needs to be deriving value. That value doesn’t need to be equal, but both parties have to feel like they’re achieving the value that they set out to achieve.”

So what does an industry titan get out of partnering with an early-stage startup? Well, strategic partnerships only exist because these small companies are able to provide something an in-house team can’t.

As Mark says, “In the other direction, the big company is usually looking for some sort of innovation spark. They’re looking for tricks and tools that are going to help them compete more effectively with their big competitors, the other elephants that are in the market.”

As a small company, it’s easy to get excited when a large company takes an interest in you. But that interest comes with risk, and entering into strategic partnerships is a precarious pursuit. It’s easy to get trampled.

Ben puts it bluntly: “I think oftentimes, startups make the mistake of thinking about a partnership only in terms of how great it could be, and fail to think about the downside.”

Great isn’t easy, even for a founder doing everything right. There are a lot of factors that come into play when managing a partnership of this magnitude, and countless hurdles to overcome. Here, Mark and Ben dive into some of the most common and challenging hurdles strategic partners need to overcome throughout their alliance.

The Elephant in the Room: Pacing

When approaching strategic partnerships, it is important to take a step back and appreciate the disparity between the two companies at hand, most notably in relation to their size. Inherently, the “elephant” is going to be a lot larger than the startup. As Mark notably points out, “Because of the difference in the size of the companies, there’s going to be a real difference in the speed with which things happen and how decisions get made.” That is to say, although there may be a real need to spark the partnership early, other factors might prevent this from happening at the desired speed.

Following this same train of thought, Ben reminds founders, “Big corporations tend to move slowly. This is often a result of having numerous stakeholders, sometimes with conflicting objectives, and navigating that can be a big part of the challenge in getting to the finish line with a partnership agreement.”

It’s important to note that a large company does not operate the same way as a nimble startup. Large corporations have systems and processes in place that make it more complicated to execute in a timely manner.

Mark was able to extrapolate on this notion and provide some examples of what might hold these companies up when it comes to execution: “When you’re partnering with an elephant in the industry, there are going to be teams of people. I’ve been in meetings where there are over a dozen people involved on the other side, and you just feel like you’re kind of getting bogged down in corporate bureaucracy. But that’s a reality.”

In fact, according to McKinsey, most large corporations now have at least 30 alliances (many have more than 100) that they are managing in congruence with the current partnership at hand.

The startup CEOs who successfully navigate strategic partnerships understand these differences going into the relationship. As Ben says, “These CEOs have the quality of thoughtfulness. They tend to be aggressive, but also respectful and perhaps most importantly, they have a visceral understanding of the dynamics of the partnership. Working with big corporations, you really have to know who to go to, how to position the ask and when to pull those levers.”

Mark adds that the successful CEOs he sees are holders of a big vision — they have a tangible idea for innovation and are able to come up with solutions that big companies want and covet.

More than anything, he says that the CEOs “are very aware of the value that they bring to the table and also aware of what pain points are driving the big company.”

Working Towards The Deal

It’s easy to get carried away with excitement in the initial stages of forming a strategic partnership, especially when a tech giant everybody knows has demonstrated interest in your startup.

As strategic discussions continue and the initial terms of the partnership begin to take shape, excitement builds. But often, the closer the establishment of a partnership seems, the more precarious each individual term and decision feels.

As Mark points out, “in just about every big deal I’ve been involved in, it gets to a low point in the negotiations where there’s some real strain and potential ugliness.”

As any good business person knows, it’s not a ‘won’ deal until there are signatures on paper. Until then, it’s common for there to be stages where both sides are threatening to walk away from the table. This can be aggravated by the leverage big companies are able to exercise in these negotiations, sometimes putting forward onerous or seemingly excessive terms, especially in the areas of liability and indemnification.

One way to counter being pushed around by the large company is to understand the urgency that’s driving the other side and apply leverage there.

Mark Sochan breaks it down:

“Usually, there’s some event that is driving the larger company, and an urgency to get the deal done. So I see the smart negotiators really leverage those pain points. Typically, those pain points are around a deadline for a conference where they want to make a big marketing splash, or it might be the pressure of launching a new product within a specific timeframe, and deadlines around that. I’ve also seen real pressures around losses in the larger company’s customer base.”

Ben concurs: “The best way to create that optimal structure is to understand what’s important to both sides, thinking about the key components of that core value exchange.”

Knowing the value you bring to the table and understanding the value exchange in both directions is fundamental to keeping both parties talking through the nitty gritty details. Having an experienced and reputable contract lawyer can also have a significant impact on the outcome of these negotiations.

Dependency Clauses: Don’t put all your eggs in one basket

When discussing terms, large companies will occasionally ask for exclusivity. This is a red flag, and it is imperative for the CEO to consider the implications of accepting such terms before doing so. A young company may hinder their ability to conduct business or engage in a partnership with another large corporation operating in a similar industry if they decide to “put all their eggs in one basket” and move forward with a particular strategic partnership.

As Ben puts it, “Generally speaking, when you have a material dependency on another company, whether it be a strategic partner or another business, it’s never a good idea.”

In other words, it is important to have a mutual understanding of the extent of exclusivity surrounding a partnership before entering into a binding agreement.

“As a ground rule, it’s good to think about it this way: if this partnership went away tomorrow, would you still be in business? Would your business be materially affected?” — Ben Luntz

Investors take a portfolio approach for a reason — it diversifies their risk and potential for reward, ensuring they are never relying too heavily on any one investment’s success. This is the same approach that one should take in pursuing strategic partners.

Mark puts it like this:

“At the end of the day, the right number of strategic partnerships is any number except for one. You always want to be at the table, having a discussion with a potential partner. You’re going to learn stuff, and through that discussion and those learnings you might figure out the best way to forge a strategic partnership, or you might decide that incentives are not aligned and walk away from the partnership. But at least you’re at the table, and the big guys know who you are, and you have a better insight into what the leaders in the industry are doing, and therefore what the market is doing.”

The Contract is Just the Beginning

A signed contract is only the beginning. It’s a milestone that signifies the start of the work itself. Mark says he sees it all the time: “Founders who think that once the deal is signed, and champagne bottles popped, that revenue checks will just start flowing in automatically.” That’s just not the case. There’s a lot of heavy lifting that has to get done to make a partnership start producing.

Usually, the onus to get the project moving falls upon the startup. As the nimbler of the two companies, with the ability to rapidly onboard new projects, it is their responsibility to ensure deliverables are met on a timely schedule. As Ben says, “Managing the relationship is just as important as negotiating it and setting it up.”

When it comes to best practices for how to do that, Ben says it comes down to communication, planning, and managing expectations. He adds, “Make sure that you’re on the same page in terms of the plan, dates, and key deliverables. If you’re not, it’s important to raise a red flag and re-calibrate accordingly.”

Dealing With Unmet Expectations

Once the terms are in place and the partnership is underway, the expectation is that both parties will begin to deliver their value to one another. However, this does not always go according to plan. Sometimes, the corporation fails to deliver on its promises, and sometimes the startup doesn’t live up to the expectations of the corporation.

If the large company isn’t delivering, the startup CEO needs to understand what levers they can pull. These shortcomings can arise from a myriad of different situations. Ben highlights a situation in which a large corporation failed to deliver below:

“We had invested in a hardware company in our first fund. That hardware company was incubated by a large commercial manufacturer, a multi-billion dollar global company and one of the largest commercial manufacturers on the planet. So you’d think that there’d be a line set, given that this CM had incubated — and had an equity stake in — the company. But, when it came time to produce the product, they were only delivering about a third of what they were contracted to deliver. The company approached the “elephant” multiple times, and the answer was essentially, ‘sorry.’

Yes, they were in breach of contract. Yes, the startup had every right to go after them for that. But in reality, what were they going to do? Sue this multi-billion dollar global company? They didn’t have the time, energy, or resources to do that. So, in that particular case, they had to pull the plug.

So, as a startup founder or CEO, you need to understand what levers you can pull if the situation begins to deteriorate. Do you have leverage as a small company? Sometimes, the only leverage you have is the ability to remove yourself from the partnership.”

Ben goes on to say that there are a few important lessons to be learned from this story: First, just because you have a contract doesn’t mean that it is set in stone. Second, it is necessary to monitor and manage these relationships incredibly proactively. In the event that things go awry, you need to be able to quickly switch gears in an effort to get ahead of any residual effect the situation may have on your business.

Again, if there is too much of a dependency on the corporation you are partnered with, your startup business will suffer in this scenario.

In Summary

Strategic partnerships come with inherent risk, and at the end of the day, there are things you can control and things you can’t. For big companies, strategic priorities shift and change regularly. Reorganizations occur and sometimes whole products get axed. These are risk factors outside of a startup founder’s control. There is little that can be done to mediate them.

If you let stress and fear around what could go wrong take time away from the things you can do today, you radically reduce the potential for partnership success. All strategic partnerships are formed with the underlying hope that they will perform the way they were envisioned. This requires work and commitment from both parties. As CEO of your company, you have a responsibility to ensure your side of the bargain gets carried out.

As Mark aptly states, “At the end of the day all you can do is closely manage the relationship, keep your ear to the ground, and deliver on your end of the bargain.”