Partnering Strategy Often Overlooked
Partnering strategy is a topic that is critical to the success of start-ups and other entrepreneurial ventures, energy and technology operations, and firms seeking to raise capital (be it equity or debt). Yet too often, a thoughtful evaluation of the wants and needs of the firm are overlooked in the haste of trying to accomplish something under deadlines. For purposes of this blog discussion, the use of the term “Partnering” is intended to relate to any form of combining of efforts and collaboration - irrespective of the formal structure. So that can include informal collaborations, more formal uniting of efforts, partnerships, joint venture, strategic alliances, etc.
In my experience as an advisor and financial executive, I hear these stories all the time from entrepreneurs. Here are three examples:
A brilliant explorer and his team seek funding from private equity to explore an area of the world with vast potential thanks to significant changes in the political landscape over the last 20 years. The team raises the most money ever raised by a start-up venture in the industry. Yet, three years later the team tosses the keys to the partnership to the private equity investors because the team cannot stand dealing with their new partners. Their reasons are understandable under the circumstances. So the team goes back out and starts all over again. The second time around the most important factor to the team’s success is no surprise: picking a partner who they like, one that understands the risks, a partner with a longer term investment horizon, and is known as the most above board firms in the business. Their bet pays off – but not without overcoming amazing serial business odds and a lot of hard work.
A successful corporate attorney leads a client into a meeting to finalize a partnership agreement that had been in the works for months. The other party feeling quite comfortable begins to tell his partners “tall tales from the oil patch” like how he screwed such and such – a former partner who did him wrong. The smart attorney (objectively recognizing there are 2 sides to every story) calls for a short break, grabs the client by the arm, and puts his reputation and invoice on the line – “walk away now…I got a bad feeling the same will happen to you in the end”. The client walks out. The attorney gets his invoice paid, he gets an unexpected bonus, and a client for life.
The oil price has dropped more than 50% over the last 12 months. There is a market share turf war you have no control over, the market is oversupplied, and the only place you can export your crude is now Mexico (well, that is if you have permission from Pemex). Meanwhile, your firm is leveraged, unhedged, missing debt service payments, avoiding angry investors and employees (current or former), and hearing rumors your bankers are in hot water following their bank stress tests and likely will increase the rate on your loans in October. This situation is very uncomfortable and you are going to test your partnership with your bankers and investors to the extreme limits as this scenario plays out. (If you are in this situation, HANG IN THERE – you will work through it. Hopefully you have control over professionals you hire to help you with restructuring or turnaround).
So how do you plan for successful partnerships? It is really quite simple. When you consider the exponential value of what could be at stake – the time invested is well worth the effort. Here are a couple of basic questions to get you started in your assessment:
Who are you partnering with? What is their reputation? Do you know others that have had partnerships with them before?
What are the motivating factors behind the partnerships proposal?
What are your expectations for the partnership and the anticipated benefits you are seeking?
Strategic, tactical, opportunistic, or a learning opportunity
Money, investment, sharing talent, other resources, sharing of risks, revenues and profit, collaboration, social investment, technology and/or research and development, industry market or brand credibility, relationships, access to networks markets or distribution channels, intellectual knowledge, capabilities and execution, etc.
What are your partners’ expectations and anticipated benefits from the partnership? From your firm specifically?
Is the growth potential and the perceived strategic value of the relationship for both parties reciprocal? What are they? How do you measure them?
What are the risks or negatives?
Are there any situations that might cause the partner to put his business (profits) ahead of the partnerships? If so, that is an area you really need to think about and talk to the other party about.
How will you operate?
What resources will you contribute? How will they be valued?
How do you want decisions made? Do you want to be part of that? Or are you ok with someone making unilateral decisions? What happens if you disagree – how will you resolve disagreements?
Under what conditions will you exit? How will that occur? Who gets what?
This is by no means a comprehensive list. Again, designed to get you started.
For many startups it is all about surviving and it is kind of hard to see past securing funding from whatever source – let alone thinking about some the questions above.This is exactly where you want to be having this conversation.Start with basics above and write down a couple of points.
In my experience, there are going to be times when a start-up just cannot answer all the questions, they might be unsure of what they think the answers are, or they just decide to take a leap of faith. I have taken a leap of faith on a couple of occasions and I have found it is better to just acknowledge that I don’t know the answer to all the questions during my decision process and just be sure the written agreement provides some risk mitigation options. For example, I communicated my concerns to my attorney. The end result was providing specific process steps included in the written communication, which defined the confidentiality agreement, and limited the term of the agreement. This leaves the partnership less stressed and gives us the opportunity to renew the agreement if both parties are happy with it.
The most successful long term partnerships I have seen (some international ones lasting multiple decades) are mostly equitable and provide mechanisms for changes in circumstances. Partners value the relationships, they work at maintaining their relationships, their relationships are very mature, and they care about the wellbeing of both firms and the partners they work with. They also recognize these partnerships will not last forever, they will not always agree (so pay close attention to the dispute resolution provisions), that circumstances will change over time, and they strive to them amicably.