Why Startups Must Take Advantage of Strategic Partnerships
Over the years, successful start-ups have taken advantage of opportunities to overcome challenges that may arise on various operational fronts through the benefits of strategic partnerships.
– By Kaizer, Cicero & Co
Starting up a new business venture is oftentimes a thrilling and exciting thought. The to-be entrepreneur is full of energy and eager expectation about a vision he or she is set to birth into reality. However, it is far easier to conceptualize the achievement of this great vision, than it is to successfully meet all the demands it poses and scale through the numerous hitches a new business might encounter on its way to lasting success.
In actual sense, running and sustaining a successful business venture in today’s global marketplace is far from a walk in the park. According toForbes Entrepreneurs, 90% of start-ups in the US will eventually fold up. The United Nations Industrial Development Organisation’s Investment and Technology Promotion Office (UNIDO ITPO) puts the figure at 80% for Nigeria.
For the entrepreneur in this unfortunate position, the dream and hopes of leading a lasting legacy by means of a successful business venture quickly crumbles, and are likely to remain abandoned until the next promising idea or opportunity to try again.
Sometimes, start-ups may sail through the first and even second years of existence only to find that the demands of maintaining profitability in a fluid market or highly volatile economy are just not able to see the business through its third, fourth or fifth year. A publication by the US Small Business Administration said that only 20% of start-ups will go past five years. The numbers are also similar in Nigeria. A study by Stanbic Bank in 2013 showed that 80% of SMEs (including Techpreneurs) in Nigeria fail within the first five years.
There are several reasons a business might fail in any given sector, economy, place or time. In the global south and in countries such as Nigeria, some of the most common reasons can be traced to lack of adequate funding and access to working capital, poor planning, mismanagement of funds, economic and political instability, epileptic power supply (common in Nigeria), issue of double taxation, unfavourable government policies, other operational issues etc.
It may also take years for new businesses to build a strong enough customer base, gain stakeholder confidence and build brands capable of competing favourably in the marketplace. However, a key but commonly overlooked factor capable of sustaining a start-up through turbulent early years is its engagement in strategic partnerships.
Through these strategic partnerships, start-ups team up with larger or same sized organisations who share common goals, have similar target markets, or whose operations complement the business’ objectives. Strategic partnerships with larger and well-established businesses, market influencers, industry associations and other stakeholders can go a long way to help sustain the growth attained in the early years of a business.
Uber, for example, scaled through the difficult early years by engaging in strategic partnerships with companies like Toyota, Starwood Hotels, Yellow Pages, Google, etc. Strategic partnerships are all about synchronizing services to meet the needs of a shared target market.
A pharmaceutical company once faced a dilemma; the business experienced a sales distribution challenge that hindered the company from getting lifesaving medicines across to remote villages in Zambia plagued with diarrhoea. The company came up with an ingenious solution – they thought of the only product that would most likely be found anywhere in the world – Coca-Cola (thanks to its robust network of suppliers).
The pharmaceutical company stacked Oral Hydration Solutions in crates of Coca-Cola through which they were able to get the required drugs to the villages.
Sometimes, strategic partnerships, even with potential competitors, can help a start-up discover how to differentiate its products or service offerings through specializations that other companies in the same industry may lack. In the early years of a start-up business, strategic partnerships can go a long way in helping scale through hurdles, increase their bottom line and minimise risks.
Strategic partnerships can help level the playing ground for small start-ups and give them the competitive edge to compete with larger organizations. Strategic partnerships can help start-ups share marketing, product development, sales and distribution and other functions. Small businesses can also enter strategic partnerships with suppliers, banks, vendors etc. to make product and service delivery more efficient.
Here are some basic factors to consider when selecting strategic partners:
It is important to note that partnerships are not always easy and that sometimes they do not work out. Nonetheless, it is important to address three important issues namely: Leverage, Scalability and Incremental Revenue to both entities.
A potential partner should have a market presence beneficial to your start-up. They must also possess a product or service that you can leverage from.
Lastly, the resulting product or service should be capable of being offered to customers repeatedly across a sales process, thereby creating an opportunity to increase revenue.
Other factors to consider include:
Technical Prerequisites: If your product or service is one that when sold or delivered may lead to the use or implementation of another product or service, you may want to consider getting into a strategic partnership with the company that produces the other product or renders the other service.
Does your company have a solution that might help a larger corporation differentiate its product or service? You may want to partner with the larger corporation. Remember that the larger a firm is the slower it is for the firm to apply innovation and change. You may want to enter into a strategic partnership with that larger firm to help them bring some innovation to the product or service that they render.
This kind of strategic partnership can help you reduce direct marketing costs and it can also help you gain credibility and visibility in the market.
There should be a defined mutual vision for success for the parties involved in the partnership and how all parties involved can leverage the other’s strengths and competence.
Never go into any partnership without having a contractual agreement or documentation that details the responsibilities, the risks, rewards, rules of engagement and other components that may affect the partnership as it rolls out.
Regular communication at the executive level and open disclosure of issues as they arise in the partnership are very important to both parties. Customers need to be confident that both parties are committed to the partnership.
When seeking strategic partnerships, especially with bigger organisations remember to focus on the value that you bring to the partnership if it happens. Also, remember that what may be of great value for you as a start-upmight not necessarily be of that much value or essence to a bigger organisation.
For instance, a company like Dangote cement will not be motivated by a partnership that will generate additional NGN100M of revenue in a year even though that might be so much more than your company will generate yearly. However, a strategic partnership that will help Dangote cement increase efficiency in service delivery or distribution over a certain period of time may provide more motivation for the company.
In summary, before embarking on that meeting to introduce your company and present your value proposition, remember to pin down those metrics that your potential partner cares about.
Kaizer, Cicero & Co is a private company that provides business advisory services, consulting services, financial advisory services, tax advisory services and related services to public and private clients spanning multiple industries, delivering the insights they need to address their most complex business challenges.