At a time when the economic climate remains uncertain and competition for new customers is fierce, businesses need to be smart about strategies for growth.
Anything that gives a company advantage over its competitors is welcome. One way for a growing business to accelerate further is to go into partnership with another, often larger, company. But what exactly does this involve? What are the potential pitfalls and how can businesses use partnership to their greatest advantage?
Why partner?
Partnership simply means a mutually beneficial arrangement between players in the same business ecosystem or space. For small companies, there are a number of different reasons why they might consider joining forces with another player in the same space. They can include things like:
1. Distribution and customer base
Getting your product or service in front of an established and captive customer base is one significant attraction that can potentially transform a business. It can also validate a young company’s solution in the market.
One of our portfolio companies, Wahanda, [Update: Now rebranded as Treatwell] an online health and beauty marketplace has recently partnered with lastminute.com to run the spa section of lastminute.com’s website. Partnering with an established player like lastminute.com gives Wahanda added credibility in the marketplace, while providing access to lastminute.com’s large customer base. From lastminute.com’s perspective, they get to leverage Wahanda’s best-in-class platform to power its business.
2. Product gaps
Identifying and leveraging complementary product capabilities can often create significant value. GoodData, another Fidelity Growth Partners Europe portfolio company, provides business intelligence in the cloud. Many other SaaS vendor are now extending their reporting capabilities with GoodData products as it is too difficult and non-core to do it in-house. In return, they get some of the revenue GoodData generates from its subscribers.
3. Developing your core business
Partnering with a larger business can be a great way to develop your core business while partners provide value-added services around the product. For example, many software businesses, and especially small ones with limited resources, develop a significant number of integration partners which can help deploy the software with clients, generate leads of potential customers, and often provide product feedback on an ongoing basis.
However, partnerships need to be mutually beneficial – so what’s in it for the big guy? There are a number of reasons. Often for example, large multinational organisations use partnerships to tap into the innovation and technical expertise of their smaller counterparts. Something that might take years to develop in-house can be done in weeks or months in an agile, fast-growing business. Such partnership might also educate large companies on large trends, and can often serve as a ìtry before you buy way to test how much value a small company adds to the larger business before they decide to acquire it.
What can investors do?
As investors, it’s our job to build good relationships with these major market players. If we know what pushes their buttons and understand what their needs are, we can suggest partnerships that are beneficial both to these larger firms and our portfolio companies.
When the time is right to go into partnership, we can also help our portfolio companies navigate the complicated negotiation process and understand the technical legalese used in contracts. Small companies can’t afford the teams of lawyers that their larger counterparts can. As investors, it is our job to advise our portfolio companies and ensure that the deal is right for them.
Is partnering right for you?
Partnering with another company is not something to take lightly and must be carefully considered before jumping in with both feet. Some things to consider include:
1. The terms
Are the terms of the agreement right for you? Any potential partner will want to make sure they are getting maximum benefit from undertaking what is potentially a risky deal. However, if the terms of the agreement are onerous, you should reconsider any deal. It has to be right for both parties.
2. Staying in charge of your destiny
Partnering with a larger firm can really help you scale your business. However, when going into a partnership it’s important that you maintain ultimate control over the direction of your business. This doesn’t mean refusing to pivot if the right opportunity arises, but it does mean knowing that you have the ability to make decisions based on what is right for you and your business, regardless of the needs of the partner.
3. Distractions
Large firms can be incredibly demanding of smaller partners. After time spent developing a particular product or solution, they may decide that they want to take a different tack or have different expectations from the project. If they want a custom-developed version of your product, it might takes months or even years before they are fully satisfied. This may ultimately distract you from developing and scaling your core business. Defining and resourcing key partnership requirements at the outset will help mitigate the risk of a partnership jeopardising overall company success.
Done right, partnering has the potential to accelerate a business. But it needs to be done at an appropriate time in the right way. Otherwise, instead of fuelling the business fire, the partnership might instead threaten to extinguish it.
The first two parts of Davor Hebel’s three-part look at building a high-growth business can be found here and here.
