Lesson: Channels & Partners with Steve Blank

Step #10 Investment: Should you take investment from a large company?

Now one of the greatest things that could happen to a startup is a large company says, "Hey I want to invest in you and I am really interested in doing something with you guys. We just don't want to be a supplier or joint venture. We want to put money into your company." I get all the time entrepreneurs going, "Yay. Look so and so is interested in investing in our company. What a great idea." It is a great idea but you really need to put on your green eye shades and black arm bands and roll up your sleeves and really think through here what's in it for you versus what's in it for them.

Obviously if you are a technology driven company, the first thing they want is access to your technology. Congratulations. But you know their objectives are not to make you a large company. Their objectives are to make them a larger company. So you need to understand what kind of deals do they want. "Oh we want most favorite nations clause," which means if you sign a deal with anybody else, we always want a better deal or my favorite is "Oh we want an exclusive for a year." Now all these things sound great from a large company's perspective, but the question to ask yourself is well, what do they do for me building my business?

I always turned to large companies and turn this around and I'd say, you want a one year exclusive or you want most favorite nations sounds like you actually want to buy us without actually spending the money because my goal is not to be a small subsidiary of your engineering department. My goal is to build a company your size and so we need to understand what's in it for both of us. I tend to try and understand first of all, who the sponsor is and what the motivation is. It needs to come from the business side, not just some technology people and you can't be dealing with junior biz dev people ultimately because their first answer for their first offer is always "One year exclusive and we need all these other things."

While that's great for them because they have their checklist, you need to be prepared to walk away but if you understand who the sponsor is, you can actually have an adult conversation saying, "Listen this doesn't work for me actually what you want me to do is to be selling to your competitors because that's the only way I could grow more resources to make you successful. I am happy to consider how you get an advantage but you can't decide I am you only supplier." So one of the ways I tend to deal with these is try to get sales deals, not investments. To me it's a lot better to get a $10 million order from a company than a $10 million ownership position that they take because now they are your boss as well or try to offer warrants that is essentially options on buying stocks based on sales success. Remember, while it might feel great to have name of big company next to yours for the first year, eventually this will be a lead weight unless it turns into revenue.

In summary, partnering strategies are great but understand you are not a peer of these large companies. All the books and literature that talks about partnerships very rarely address startup to large company partnerships. These are asymmetrical relationships. Don't confuse partners that you need early on to address earlyvangelists with the ones you might need a year or two for now to address mainstream customers. Remember, if you have been getting out of the building, you have actually found the early, passionate customer segments or people inside those segments that will buy your products even unfinished or unbuilt or buggy as it is. Understand what they need now and help them teach you what the mainstream will need later. Don't confuse big company partnering with startup strategy. Find the partners that give you an unfair advantage and just keep in mind and this really require a bit of cynicism, that you really don't matter to a large partner. They matter enormously to you, but I will keep a jaded eye out and understand what's in it for you to build your company so that one day you are bigger than them.

What are the other advantages about talking to partners? Keep in mind. This is almost like dating. While you are out there talking to them understanding what resources, what activities they could provide or what supply chain they could fulfill for you, also understand that some of them might be your potential acquirer someday. Even if the relationships don't work out or the deals don't work out, always be on your best behavior. Always in fact make them wish "Boy, this would be a great part of our company," because right now, you might not want to be acquired but someday, someone might want to come back when you are bigger with an offer that you just couldn't refuse and you get to buy the house and the car and the airplane at the south of France, and remember how great you were in those partnership discussions.

Partnerships can be strategic, they could be fun, they could be nerve-wrecking. Understand they are an integral part of your business model and business model canvas. Go out and talk to a ton of them and when you do, you will understand how to use them to makes your startup into a large company.