Last week I participated in the “Blue Run Ventures Vancouver Founders Summit” with the amazing BRV team and portfolio CEO’s.  I participated in a panel titled “Scaling Through Partnerships” – the panel tried to explore when and how do partnerships (Business Development type) actually help early stage start-ups with scale.  Below I tried to summarize my main points.

Big caveat here – my perspective is on early stage consumer products, the dynamics of other markets may be very different.

Why Partner?

In my experience, early stage consumer companies go through a similar cycle – they have an idea, raise some money, launch a product, iterate a bit and then discover that distribution is very very hard.  The small cohort of users using the app seem to like it, which signals product market fit, but the numbers are not growing.  This usually coincides with a challenging fundraising horizon due to lack of growth.  The obvious solution most jump to is usually partnerships.  If we could only get large company X to offer our app to its customers, and a fraction use it, we will blow our numbers out of the water.  The trigger for this is usually an interesting inbound interest from said company or warm introduction, followed up by super exciting meeting at the corporate headquarters and very exciting discussions.

So what’s the problem?

  1. Usually the need for partnering is masking a bigger problem.  Did you really achieve product-market fit?  You need to grow your numbers to raise your next round, this does not mean that you have actually developed the right product.
  2. Do you really know who you are?  Early stage companies have very little assets or legacy and thus can do anything.  When a large company comes along with the promise of massive distribution, they usually have a different business model they are pushing on you.  The need for growth will derail your company.  You will quickly find yourself going down a rabbit hole which was not built for your users but for your partner’s needs.
  3. Mismatch of incentives/time horizons – as an early stage start-up, everything you do is life or death (or you shouldn’t be doing it).  You desperately want to do the deal to solve your growth problem and raise your round, but your corporate partner has very different timelines and incentives:
    1. You want to launch (need growth), she wants to close a deal (she is a BD person)
    2. You want to launch tomorrow, she wants to launch on next years budget before her big promotion
    3. For you this is life of death, for her it’s a hobby
    4. The deal is usually front loaded with you developing something and only then, they will launch it.  Chances are by the time you finish developing they would have re-orged twice, the team you worked with has left and you would literally not know who to call.
  4. The cost of the project will be MUCH higher than you can imagine – in terms of time wasted, dollars spent, flights and travel, lack of investment in your core product and total distraction from your quest.  It will always seem manageable in the beginning but never ends this way
  5. Even if the project launches, it will probably not deliver anything close to what you imagine.  Odds are you would never launch but even if you did, calculate the cost per acquisition, fully loaded, and 9 times out of 10 it would have been a mistake.

At Waze we spent the first 2.5 years not being sure who we were.  Were we a data provider (maps) or a consumer service?  This ambiguity led to many different types of partnerships – trying to sell map data all over the world, working with GPS hardware developers to build a paid product, working with carriers to get pre-installed on their phones or promoted through their channels etc etc.  Non of these partnerships delivered or came anywhere near delivering what we thought.

The number one problem was our lack of clarity on purpose – who were we?  After our B round, we made the decision that we would be a consumer company full stop.  This meant all our efforts went on making our consumers happy.  Advertising was a future issue since we needed to build audience.  This clarity empowered us to say no to every partnership proposal that came along, regardless of the brand, size of company or $ value offered.  We actually did not implement a $5M project because we realized that it does not serve our users interest.  This clarity led to focus and success of our product

What kind of partnerships do work?

To make anything work you must first have a product people love and use.  The paradox is that the stronger your product is, the easier it is to do deals on favorable terms, but the less you need the partnership.  This is the core of the reason why early stage companies should ignore partnerships for a long time.  If your product is not successful, not partnership can save it.  If it is successful, the longer you wait the easier partnerships will get.

At Waze our most successful partnership began with Carmageddon – in July 2011 the 405 freeway in LA was being shut down for renovation.  The Mayor of LA named it “Carmageddon” due to the fear of what was to come.  As a consumer focused company in the traffic space, we thought this would be a great way to get our name out in LA.  We planned a social media campaign along these lines.  Very quickly we were contacted by ABC7 in LA and within 24H we had a partnership where we would be embedded in their studio, reporting about the traffic issues while they would be promoting Waze as the way to get around Carmageddon.  It was mind blowing for us, a small, unknown start-up, that we could be on live TV and promoted by ABC7, including 15 second “promos” throughout the week leading up to it, full news sections and round the clock reporting during the event.  You can flip through a video recap of the event here.  We got tremendous distribution from this partnership as only TV can deliver.  Later we expanded this into the “Waze broadcast Program” and today have hundreds of TV and Radio stations around the world who use Waze to report traffic – giving us distribution and them great data/content.  BTW – if you are a broadcaster, visit us here to join program ;-)

Why did it work?

  1. Accelerating organic trends – by that point we had a great product and LA was our top, and fastest growing, US metro.  We were really ready for the exposure and it helped accelerate what was already an organic trend.  This is a general trend throughout our partnership strategy – we are always looking to accelerate organic trends through partnerships, PR, paid media etc but not create the trend if its not there.
  2. We leveraged this to get great exposure on all TV stations/media at the time.  You can get an idea of the coverage here creating a force multiplier through PR.
  3. We knew who we were and had the necessary clarity to say no to ABC7’s offer that we develop a full fledged traffic solution.  We were focused on distribution and brand and so would rather have a real partnership – free to both parties and built on value for both, then become a vendor of TV stations building a traffic solution.  Had we done this partnership earlier in the company’s life, when we were not sure who we were, we could have easily become a supplier of traffic data and broadcast tools rather than what we are today.

What kind of non-organic efforts should an early stage start-ups engage in?

  1. In mobile, you must know the editor of your apps category in the app store/play store.  These people decide on featuring and the relationship there is critical.
  2. PR – this is the most cost effective way to to promote yourself, assuming you have a great product and interesting story
  3. Only engage in partnerships to promote organic trends, not to develop new ideas/markets/opportunities since this is a strong signal you do not really have clarity on who you are or product/market fit.

What non-distribution value can partnerships bring?

  1. When fundraising, partnerships or soon-to-be-signed partnerships can help VC’s get comfortable with your product/strategy – it is external validation.  It is a signal that they are not the only crazy people believing you.
  2. Don’t forget that your (VC) partner needs to update his team every Monday on what’s going on with you.  Your cycles are not weekly or monthly.  By being able to talk about interest from a big brand you make your partner a “hero” in his firm, even though they know rationally that this won’t change your product.  Even VC’s are human and not rational actors.  Never underestimate the importance of your investors being excited about you.
  3. Partnerships are the best way to start an acquisition path with a large company.  It allows the team to get to know you and to brainstorm on how you could work together to achieve common goals.
  4. Most large corporations these days have corporate VC’s, wish they had corporate VC’s or have a CorpDev person dying to make investments and feel like his cool friends at VC’s.  Money from corporations can be less valuation focused and be critical for your fundraising.