Strategic partners

Strategic partners can be, and often are, essential assets for a start-up company. A strategic partner provides access to missing capabilities, parts of the value chain or market segments, and can provide a shield during hard times. Typically for a techno-starter, strategic partners are larger firms that supply capital and specific capabilities in return for licensing rights or a share in the company. The advantages of a strategic alliance include:

  • • Each partner brings in complementary capabilities.
  • • It expands the reach of both parties.
  • • Both parties become more robust because their resources are extended and diversified.

As with most long-term relations, it is not easy or straightforward to find the right partner and the right partnership arrangements. The partnership must be mutually beneficial in order to be sustainable. Therefore, the process for selecting strategic partners should be developed and executed carefully. The process usually goes through various discrete steps:

  • • A feasibility study to identify the major issues and ensure that the strategic objectives of the partners are aligned and can remain so in the long term.
  • • An assessment of the potential partner in respect of its strengths and weaknesses and whether the two companies would fit in the way they operate and their positioning in the market. Company culture, vision, and management style should not be sources of conflict or friction.
  • • Negotiations should not only cover the contractual obligations of both parties on the deliverables but also include agreement on how the partnership will operate, and under which conditions and how the partnership can be terminated.

Thoughts about termination should be an integral part of the negotiations because only 50% of the partnerships are considered a success and 10% fail.

Usually one or more of the strategic partners are much larger than the start-up company and this can be both an opportunity and a threat. An alliance with a big-name strategic partner can give the company a boost and much increased potential. For instance, Spotify, a music-subscription service provider, partnered with Facebook and found that the alliance boosted revenues because Spotify users that linked their account to their Facebook account were three times more likely to become paying customers than those that did not. A successful partnership with a big player is a major competitive advantage; it allows a small company to compete with the big ones. But if the big partner does not live up to the spirit or letter of the agreement, there may be little that the start-up can do.

Another element to consider is whether the key objective for the company is long-term independence or a friendly takeover. If independence is the objective, then giving shares to the partner may not be the best start of the partnership, in particular, if the partner wants a say in the way the company is run, for instance, with a member on the board.

Thus, it is important to take time and make sure that the partner has been chosen wisely. The right partner can do the company a lot of good; the wrong partner can be long-term trouble and can do severe damage to the company. An example of the danger of the wrong strategic partner is given by the story of Acorn that needed a strategic partner in order to survive.1

 
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