Better Together? How to Evaluate Company Partnerships

The world is filled with great partnerships and terrible ones.  For every Ben & Jerry or Ernie & Bert there is also an Ishmael & Moby Dick or a Batman & The Joker.  In business, great partnerships can be the path to great success.  Failed partnerships can be the path to ruin. Getting this right can be like winning the lottery.  Getting this wrong can feel like you have joined hands and taken the express train to the 7^th circle of Hell.

A friend of mine – a first time CEO of a young startup – called me the other day to ask how she could best evaluate potential partner companies.  It is a great question, and one that is often fraught with complexity. Partnering can be a great strategy to fill in product aspects that you don’t want to build yourself and to create potentially new and efficient distribution channels that augment your own revenue growth.  But you have to get it right.

On the product side, the partnership must, at a bare minimum, actually add something you need and not cause you to spend more time, money or hassle than you would have if you had just sucked it up and built it yourself.

On the distribution side, the partnership must, at a bare minimum, add more revenue to your P&L than you would have been able to get for the same time/investment/effort all on your own.

But there is more to it than that, especially since you can’t know if you have achieved one of the two above scenarios except in retrospect.  In other words, there’s a lot of hoping and praying involved in initiating new partnerships.  When they go badly, there is a lot of cursing and regret.  Hindsight, as they say, is 20-20.

Here is the advice I gave my friend about how her startup can evaluate companies as potentially good partners.  Hopefully it’s helpful to some of you and I’m sure others have good advice to add.  My MVP (Minimally Viable Partner) list is as follows:

• Emphasize the Obvious – Check out the obvious stuff first: how are their reviews? Service stats? Do their employees seem to like it there or is there a revolving door at the organization? Are they funded by smart people and led by smarter people? Are they solvent?
• Culture Clubbing – Is there a good culture fit? This can only be determined by spending time together and talking about your individual and shared strategy.  By “culture” I mean is there a shared sense of purpose and value creation? Is there a shared sense of urgency?  Do the teams work at the same clock speed or is one a tortoise and one a hare?
• Your Success is My Success – Is there agreement between the parties on what constitutes partnership success in clearly measurable terms? Do these things match?  If one partner is there to build a faster revenue ramp and the other is there because they like the logo affiliation, that is not necessarily the path to Nirvana.  Both parties need to be revenue motivated if revenue is the measurable outcome.
• Mind the Age Difference – Are the companies’ stage of development complementary or a mismatch – If both companies are baby startups trying to get their products into the market, it is not likely that this will be a good partnership. Here’s why I say that:  someone in the mix is going to have product challenges – maybe both – and need to focus on the core product.  This means they can’t focus on your product, creating a mismatch in stage of interest.  However, if one company is humming along and the sales team needs more product in their bag and the other company is a startup looking to jumpstart sales before a sales team is in place, that could be a match made in heaven.  If one company is massive and the other is a pre-revenue startup, the partnership is going to be a stage-fraught challenge, as the two companies will have very different clock speeds, compliance requirements, timelines for success, etc.  It’s important to know and to consider how a company’s current stage can affect partnership outcome.
• In Sickness and in Health – A corollary to this last one is company stability. If a baby startup is living fundraising to fundraising with a shot of bridge financing in between, it is tough to know that they will be a long-term stable partner, assuming that’s the goal.  If you build a key part of your company around such an entity and they teeter on the edge of bankruptcy regularly, that is going to cause a lot of heartburn.  When two such companies try to partner, it can be a particularly tough mix as the parties seesaw back and forth between stable and death’s door.  For these reasons, massive companies do not like to rely on early stage startups who may lack reliability (aka, have weak balance sheets) when it comes to partnering for important competencies.  It’s important that everyone think about where they are in the cycle of growth as they consider whether they are good, stable partners and whether they are willing to take a chance that when one company wakes up the next morning, the other one will still be there.
• Show Them the Money – If you don’t align the incentives of the parties, and especially the financial incentives, the partnership is doomed. Yes, that is very definitive.  It is also very true.  And this needs to be thought of in terms of both company and in terms of the key groups within each company that needs to be successful for the measurable goals to be met.  If it’s a distribution partnership, for instance, revenue must be produced for each partner company, but it will only be produced if the salespeople are properly compensated to make that happen. This means that the company coming with its product needs to participate in paying (or funding) commissions/other compensation for the sales team of the distribution partner; it also means that the company who owns the sales people needs to build in goals and targets related to the partner’s product sales.  If the salespeople don’t believe they will make more money from selling the new partner’s product that someone stuck in their bag, they won’t.  Salespeople are smart and almost always default to selling what’s easy to sell.  If the new product takes a little extra effort, you need to make it a requirement and worth their while.
• You Better, You Bet – For product partnerships, the one who will integrate the other’s product needs to be sure that product will actually serve their customers’ needs. Spend some time on it. Due diligence this question.  Understand who the real and perceived customers and competitors are and why/how this partnership product is better.  Just because you think this solution is awesome doesn’t mean everyone does, especially if service is poor.
• Who’s On First? – For distribution/sales partnerships, make sure that the calling point of the sales team is the same or overlapping with the calling point for your product. If you love a cardiology company because they call on cardiologists and your product makes heart care better, great.  But if your product really needs to be green-lighted by the CFO or CTO and not the clinical team, you may be considering the wrong distribution partner.  Don’t skip this step.
• Do You Feel Like I Do? – Both partners need to be committed to adequately resource the partnership. Just like a marriage, you can’t stick two companies together and expect them to magically get along forever (or for a week) without fulfilling each other’s’ needs and having good two-way communications.    In other words, you need to “complete each other” in the Jerry Maguire sense of the phrase, not just have a short-term interlude based on hitting it off at a bar.  Both parties need to bring product/people/money/strategy/activity to the game, or the game will be a short one.  Each party needs to create a single accountable owner and then those two people must be glued to each other to ensure everything is working – they need to communicate early and often and have partnership success as part of their job descriptions.  Knowing whether your target partner is willing to commit real resources tells you something about how committed they are to their side of the marriage.
• Somebody Told Me – Lastly, at least for me, is to check on how the target partner treats their other partners. If you make a few calls to other companies with which the prospective partner works or has worked with and you hear nothing by sunshine, may that also shine upon you.  If all you hear is complaints, run.

Anyone else out there feel free to add your two cents on this topic.  In a world with ever-increasing coopetition, I hope it helps!