How To Incentivize a Strategic Partner
Startups often face a conundrum when trying to align incentives to land a strategic partner. Here’s how to solve this issue.
Every startup faces a strategic partner conundrum.
It begins with the realisation that growth usually always requires partnering with existing brands.
The idea of collaborating with a brand to turbocharge the distribution of a product or service is very exciting. In fact, you may have already identified the brands, who to contact and at a very high level, what’s in it for them. This thinking might have also found its way into your pitch deck.
The real question is, once you’ve impressed them with your hustle and value proposition, will they help you achieve your distribution dreams?
There is one reason why the answer is NO for many startups.
It comes down to incentive alignment.
The conundrum, therefore, isn’t whether you should partner, it’s how.
Look beyond the brand
It’s easy to forget how much goes on behind the scenes to make big brands work. There is competitive pressure, internal priorities and politics and a long line of other companies wanting to partner with them.
Unsuspecting founders look at big brands’ reach and strength and quickly forget that these companies are complex and often moving in pursuit of a strategy that cannot be well understood from the outside.
Approach any strategic partner with these 6 facts in mind
1. They have all the power
Don’t kid yourself that at this early stage you have more control than you actually have.
It’s important to remember, however, that this is the most vulnerable your venture will ever be and the momentum you are creating by forging these partnerships will increase your influence and leverage over time.
This requires patience, a counter-intuitive behaviour for most founders. In the context of valuing time as your most valuable asset, position your value-adding product or service confidently but avoid posturing. It will cost you time and potentially a partnership.
2. Their objectives matter more than yours
You should be clear on what your venture needs from the partnership but remember that if your partner’s success increases because of you, your venture’s value increases and the future will be brighter.
Fight hard to understand the motivations the sit behind each of your future partner’s objectives and then determine how to align your objectives. There’s usually a trade-off where not all of your needs will be met but that might be better than not having a strategic partner at all.
3. Partnerships don’t start with binding contracts
Partnerships are built on mutual intent. It takes understanding through multiple conversations to establish intent and the desire to work together.
Avoid starting with a contract. Instead, work up a plain-English statement of intent which can be iterated as the relationship evolves. Expect this to turn into a legal document at some point but for now, feel free to use this template.
4. Once a deal is done, expect to work much harder than you expected
An agreement doesn’t automatically pave the way for smooth partnership sailing. The people asked to support partnership efforts still have day jobs, priorities and politics to negotiate.
Be ready to play a significant leadership role in driving clear communication and decision making across a new team who lack the context afforded to the people who signed off on the deal.
The bottom line is that it will be up to your venture to get things done.
5. There are allies within your strategic partner
Find them, as quickly as possible and develop relationships based on you delivering on the 51% rule. These people enable progress and are your backchannel. They are essential to your success.
6. Partnerships nearly always take longer than expected to bear fruit.
Unexpected issues and opportunities appear in partnerships all the time. This usually affects the time it takes for both parties to create the value they initially expected to enjoy.
As a rough guide, I usually expect to work on a partnership for 2–3x longer than I originally expected.
Navigating to strategic partnership
Armed with the 6 realities of forging a strategic partnership, you can now start moving towards the critical milestone of closing the deal.
After shortlisting brands which are likely to be able to support your distribution objectives, the next step is to determine what’s in it for them.
Incentives fall broadly into three main categories. Your job is to determine which of these incentives will make people inside your partner’s business happier and more successful. The next step is to organise how your product or service fits with the incentive.
1. Financial Incentives
These incentives involve payment in return for access to your partner’s assets. These payments may be at a discount (due to the partnership) and can range from revenue share to commission-based arrangements.
Although these incentives look straightforward on paper, your venture’s capacity to generate enough meaningful revenue to share in the early days will be low so don’t expect a partner to think this will be sufficient.
Other important financial incentives include tailored pricing to manage perceived cannibalisation risks (if you plan to distribute a partner’s assets in one of their existing markets) and equity in your venture if certain extraordinary milestones are achieved.
2. Relevance Incentives
Never underestimate how hard brands need to work to maintain relevance in their chosen markets. A relevance incentive helps an existing brand to deliver a fresh message to market while simultaneously promoting your product or service.
3. Exclusivity Incentives
Exclusivity is a powerful incentive. It helps a partner in one of three ways. First, it helps to extend the first-mover advantage of the partner once the exclusivity period is over. Second, exclusivity can be extended in the event the partner wants to maintain monopoly access to a startup. And third, exclusivity helps protect the partner’s interests in the early stages where intellectual property is being created between the companies involved.
Be as practical as possible
These short-term incentives can co-exist in a deal with a strategic partner. Using one or a mix of incentives allows both parties to road-test the relationship and determine how much value exists. If this audition works out, the future may include a more lucrative partnership or result in the partner taking an equity stake in the startup.
I’ve used a host of tactics over the years to negotiate strategic partnerships and it’s important to remember that each incentive is (usually) accompanied by a tradeoff.
So if you’re mulling your first strategic partnerships, start with the ‘run before you walk’ approach, be wary of strategic partnership dynamics and work as quickly as possible to generate value.
And one final thing, always listen to your gut.
Notwithstanding what we’ve covered, if your spider senses tingle as you move through the steps to form a partnership, listen to them. A counter-productive partnership can a time and momentum sinkhole.