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The Trends

• "time to market" strategy makes partnering more important than cash
• technology or distribution partners key to financing prospects
  • VCs want to see key reference OEM customer
  • must limit partner dominance; pursue multiple layers of distribution
  • access to partners way to screen financial investors
• "smoke and mirrors"; technology partners verify new products/markets
• large partners seeking to lock-out competitors
  • buying critical technologies, content, customers
  • wary of lock-up of your technology and markets
  • battling the Microsoft alliance? (Sun, Oracle)
  • alliances with Microsoft (3Com; Real Networks)
• "the tail wagging the dog"…smaller partners often key to critical markets
  • almost always get a hearing
• death of the "invented here" approach
  • dynamic markets/technologies and new competitors work against internal development
  • larger public competitors judged by quality of their strategic relationships
• proliferation of corporate investment funds; strategic business development
  • invest in related add-on technologies
  • also invest in market growth (Intel and EDAC)

How Partnerships are Perceived…
By Investors...Love/Hate Relationship

• they love verification; they hate dominance
• corporate investors best in early rounds
• limit to 10% by pooling rules; 20% with reporting consolidation
• better valuation?…not necessarily; financial return also important
• mix it up; get in financial investors ASAP…
• OK with corporate investors; problematic with financial investors
• be concerned about market and technology independence
• be concerned about liquidity alternatives; reach understanding up front
  

By Other Critical Partners...Depends

• partner dominance locks out other competitors
• assume must give exclusivity; get non-compete in return
• go with complimentary or non-competitive partners
• usually functionally distinct, ie. content, distributionand technology partners
• put a time-line on the relationship
• …assume things go wrong
• develop own internal capabilities

The Roadmap...How to Do It...
Step One: Establish the Reason for the Partnership…

• distribution, funds, market credibility, joint product development
• what your partners need - where the opportunities are..

Step Two: Know yourself…

• define your business; take broad approach; foresee competitive threats; prioritize related businesses
• formulate a strategic vision; competitive analysis
• consider implementation; resources needed, timing and prioritizing objectives, i.e. what is the "roll-out" plan?

Step Three: Profile your Partner…

• identify partners who have what you need
• consider their needs, how to approach
• develop the pitch, NDAs
• sources of info…investors, Advisory board, investment banks, Big 6…and research (public sources);
• personal contacts the best…you know the market better than anyone

Step Four: Just Do It…

• unlike in financings, intros not necessary (but can’t hurt)
• everyone reads email…just get in the door
• objective really is to get an audience…put effort on slide presentation
• you’d be amazed…people want to talk...

Step Five: Whats it Worth?

• don’t ask  - assume parity and no cash
• reality is your partner will pay something … emphasize utilization of existing channels, brand presence, technology…at no margin cost
• for joint product development….let them pay
• for investment, be more aggressive on valuation than with financial investors . . . but assume VC models
• for acquisition, consider (a) make-buy analysis, (b) market multiples, (c) recent industry deals and valuations
• as the licensee…make downstream payments or payment in-kind
• as the licensor…front-end fees, add incremental fees, minimum payments for exclusivity

Step Six: Structure of Relationship

• Contract =
  • clear definition of responsibilities
  • can scale up commitment over time
  • carve up markets and technology rights to reserve other opportunities
  • avoids problems with investors; other partners
  • anticipate future developments; provide exit
• Investment =
  • ideal if less than 10%; not more than 20%
  • usually comes with technology ties
  • OK if acquisition strategy
  • might be key to getting in other financial investors
  • try to balance
• J Venture =
  • complex legal structure and costs
  • usually better larger partners; going after new opportunity that neither controls
  • active involvement by each partner - not passive
  • questions about technology ownership, distribution of  proceeds, consensus management
  • big question on how to get value out; exit
  • sometimes works, i.e., Central Wireless Partnership

Other Issues

• Brand Presence
  • co-branding is critical; need attribution
  • easier in a "resale" of services vs. OEM relationship
  • get partner commitment on promotion - budget etc.
  • pull exclusive or all rights if not marketing the technology
• Niche Play vs. Aggregation
  • stay focused on your value-add; you don’t want to compete with your partners
  • OK to aggregate in your market space… to be the dominant competitor there
    
• Putting the Party Together...
  • think about how all partners will work together, and agendas
  • have a back-up for each critical partner that doesn’t work out
• Decision-making, and Management of the Relationship
  • always go to the decision-maker = owner of the program
  • as a startup, put your highest ranking person on the relationship
  • constantly monitor problems, progress and new opportunities
• IPO vs. Acquisition
  • everything has a price
  • don’t encourage an acquisition; but don’t dismiss it
  • early acquisition may leave money on the table…yet with with too much risk, it may be the best move
  • if you have a legitimate shot at an IPO…say it until you sell out…thiswill drive up value (HotMail example)