Back in the dotcom days, there was almost nothing as important as a good partnership and most start-ups spent a lot of time developing them. At a minimum, a partnership provided a press release opportunity and demonstrated legitimacy and tangible momentum in what was a very confused and crowded marketplace. Plus, they gave you something to pitch to Venture Capitalists since you likely didn’t have much in the way of revenue.
From my perspective, many of these partnerships were part of the house of cards that came tumbling down in mid-2000 as often the companies that started to fail had partnerships with each other but limited revenue. My company was no exception. We had executed 30 plus partnerships and though beneficial, not one of them helped me survive the post-dotcom crash nor provided game-changing results that people were talking about at the end of the day. As a result, I struggled with the idea of partnerships for a longtime thereafter. The question I kept circling back to was, for a small business or startup, are partnerships worth the time and hassle?
After executing more than 100 partnerships and strategic alliances in the past 15 years – some of which failed miserably – I’d say yes, partnerships are important to develop but only if executed in the right way. Here are five rules my team and I adhere to:
Rule 1: Keep it simple and have narrow objectives.
Even the most straight-forward of partnerships require attention to manage, so regardless of the size and importance of the partnership to your business, keep them simple. For me, partnerships that are low risk, small, manageable, and meet specific, narrow objectives – i.e. reinforcing your brand presence or reaching a targeted customer segment -have worked best. I’m a firm believer that you should enter into as many of these partnerships as possible, but make them easy to execute and low risk. As a start-up or a small company, you want to minimize the number of things you need to manage or follow up on. The last thing you want to be doing is fixing a marketing partner’s website on Christmas Eve (yes, I’ve been there).
For instance, I’ve had a lot of success in developing partnerships with associations, charities and publishers that are designed to build legitimacy and market presence for my web sites. We trade some website logo placements, put out a press release, share content and offer light promotion. They create momentum in the marketplace and can be a powerful talking point with investors and customers particularly as you’re growing. And they don’t take a lot of time and energy to manage.
Rule 2: Put dollars in the mix or identify a tangible metrics like new members or customer acquisition to which you can associate value.
When push comes to shove, while partners matter, it is only natural they fall lower on the totem pole – below investors, customers and employees. They are the last thing a company will worry about when sh*t hits the fan or sometimes, when things are going really well as they may not be needed. A great partnership should be designed to scale and operate independently, but often that’s not enough. To achieve this, make sure to set specific metrics that need to be met and turn your partner into a customer or alternatively, make yourself the customer of your partner.
As an example, we identified a company that had a customer segment we wanted to target as members of one of our websites. Instead of creating a joint marketing program based on trading services that would have been difficult to execute, we set up a partnership deal where the partner offered membership as a free benefit to their customers and in turn, we spent $500 per month on advertising and gave the partner promotion within our network.
Because we were spending dollars, we immediately became a customer for the partner and 1 year later, we had 15,000 new members for which we would have otherwise paid $15,000-20,000. The result was a partnership that ran smoothly, delivered results and didn’t need significant oversight to be successful. In most cases, I’ve found that even the smallest amount of dollar exchange changes the psychology of a partnership to that of a meaningful business relationship and leads to better execution as both parties are more invested.
Rule 3: Acknowledge that partnerships are really tough to make work; make sure expectations are aligned and plan for the worst.
Sometimes a partnership opportunity comes up where you want to swing for the fences and change your growth trajectory as a company. Maybe it’s entering a new market, creating a new product or feeling out a potential acquisition target. When you start talking joint venture or strategic alliance and you’re executing a deal that you’re hoping will have a big impact on your business, it’s time to be very careful. A good indicator that the partnership is more of a joint venture or strategic alliance is if you include the results in your financial projections.
I’ve found larger, more meaningful partnerships are incredibly difficult to execute, particularly for start-ups or smaller companies. In the best case scenario, meaningful partnerships take a lot of time and mindshare to manage. There’s a lot of risk betting on one company. With a partnership, you have twice the execution risk. Changes in personnel or corporate strategy, financial hardship, or even acquisitions are all realities that could derail even the best structured partnerships.
For instance, I’ve had an important partnership fall apart when the principal passed away and a competitor bought the business. Even with larger companies, which you assume are stable and with whom you’re working well, I’ve experienced change that comes from several levels above my contacts and rapidly derails the relationship.
Though objectives may change throughout the course of a partnership, the best way to combat this risk is to make sure expectations are closely aligned between both parties from the start. As a founder, I try to understand what the other side is trying to get out of the partnership and encourage my team to do the same. For instance if one party is interested in branding and you’re looking to generate revenue, you’ll have a greater risk of problems if you don’t know and acknowledge that upfront.
Rule 4: For large, critical partnerships, treat them as a business unit with a dedicated team and resources.
If you’re developing a major partnership, it’s critical to manage it as a business unit and build in multiple levels of accountability. I’ve had elegantly designed, complex partnerships that looked perfect on paper fail because there were too many shared responsibilities and no one had clear accountability if results were not met. After a partnership has been executed, it’s easy to lose track of goals and it’s only logical that both parties will spend more time on revenue streams of which they own 100% over those of which they own 50%.
To best align incentives, I’ve found the more you treat an important partnership as its own business unit, the more likely it will succeed. Give it a dedicated manager or project lead. Track it as a separate P&L. Limit shared responsibilities. Staff and invest accordingly. Make sure sales and revenue responsibilities are crystal clear and there negative consequences in place if they are not met. Even consider creating a stand-alone LLC owned jointly by both parties.
Rule 5: Plan for disengagement
See number 3. Partnerships end, so be sure that you’ve planned for the worst case. Make sure you can extract the value you’ve created. Give yourself an out. Always engage an attorney if the partnership is significant, a critical component of your strategy or a joint venture. I’ve found adding an option for disengagement by either party after six months is a good out and gives both parties enough time to test the relationship.
Perpetual partnerships sound good because they tie both parties together, but can often be problematic; if it’s not working, you’re forced to spend more time than a partnership might be worth. To avoid this, be sure to include minimum performance metrics for both parties which, if not met, allow for the option for disengagement. It’s important to have the difficult conversation about who owns the customer or the jointly created assets if the partnership doesn’t work out before the partnership gets executed. What happens if either party is acquired or goes out of business?
Overall, I’ve found that partnerships can be a double edged sword. If you can minimize risk and keep them small, I’ve found there is a lot of value, particularly in terms of legitimacy and market presence. When you’re considering larger, more complex deals, first ask if you can acquire the assets you’re seeking. I’d much rather own assets than partner or trade for them. That may not always be an option, so if you are determined that you really need the partnership, make sure to set up the program for success by ensuring clear accountability and dedicated resources. Be careful to not fall in love with your own deal. Plan for the downside, because there is a reasonable likelihood that a partnership won’t meet expectations. And make sure your company is protected if things don’t work out.
Curious if anyone has any other partnership best practices to share? Anyone have a different set of experiences with partnerships they’ve executed? Any good success stories?