The Invisble Hand of Partnerships
The Invisble Hand of Partnerships
By Sarah Gerdes, CEO, BMG
Pitching a group of strangers for money is hard enough when you have a strong business case. For many venture seekers, it becomes downright terrifying when making the case comes down to a single subject: partnerships.
According to a study BMG conducted last year of venture capitalists, the number one reason firms were not funded was a lack of partnership strategy. Specifically, young companies lacked the ability to articulate a relevant partner strategy cohesively held together by business justification and market situation.
This perception from the venture community was validated by their CEO counterparts when I spoke to an MIT Venture Forum attended by over 500 CEOs representing more than thirty industries. Fewer than ten percent felt confident in either their partnership story, or knowing what the venture community wants or expects to hear on the subject during an investment tour. To shed some light on the subject, I’ve recently talked with three venture capitalists that focus on early stage companies to understand the current views on the link between partnership understanding, awareness and their success in getting funding from the venture community.
Through the VC Looking Glass
For over two decades, Burke Craig Victor has specialized in funding early stage companies with less than ten people, typically placing several hundred thousand dollars. According to managing partner Andy Dale, all venture capitalists look at prospective investments through a “multifaceted partner looking glass” and want to walk away with three things from the first meeting: Do partnerships increase opportunity or decrease risk? Do they provide market and or company validation? Do they create the opportunity for market leadership?
How to companies provide this information today? Unfortunately, most of the time they don’t. A simple solution to this s to present the venture group with a single slide on the subject as opposed to an oration or a full presentation. “The one slider I like to see captures strategy, outcomes, revenue projections and risks, ideally in small print” said Dale, “most importantly the bullets and discussion show that the management team has clear understanding of how partnering can help them achieve their goals and objectives.”
This conveys that you have thought the partnership strategy out, thereby providing the venture community with a snapshot understanding of your ability to think strategically. Second, this provides a framework that can be evaluated quickly by the venture team.
Cross Functional Equals Strategic Impact
Identifying risk and return is one thing. Showing the impact to the business and the market as a whole is another. The best way to address this question is to show that the impact of a partnership is not isolated to one component of the business. Smart partnerships in early stage companies often affect the outcomes of two or more aspects of the business. For instance, a joint development partnership inclusive of more than just product development, but also distribution and sales, or marketing partnership inclusive of branding, inventory fulfillment and customer support.
The value of this approach cannot be overstated in an early stage firm. John Fitzpatrick of the firm Staenberg Venture Partners believes that cross-functional partnerships are one of the keys to success for early stage firms. Fitzpatrick suggests small companies focus on showing how a partnership accomplishes cross functionality by doing more than “riding the reputation” of a partner. “Partnerships allow a firm to build the company until such time as they have built reputation for themselves,” acknowledges Fitzpatrick, but outsourcing partnerships also allow the early stage firm to accomplish the activities of a larger firm “until they have the internal resources to take on the task”. For instance, Fitzpatrick points to whole selling a product for access and distribution through a larger sales team, or product bundling or co-marketing a product with a major brand to open distribution channels.
Some partnership claims create more skepticism than credibility. Both Dale and Fitzpatrick agree that marketing and sales partnerships have to be bullet-proof with details or run the risk of credibility loss. Prospective investment firms should keep in mind the following attitudes of the venture capital community and proactively address these concerns during their pitch:
1. Most often marketing partners are thought of as the answer to sales and they rarely are.
2. Marketing partners can give you access to customers but rarely will result in sales that's up to the entrepreneur and their team.
3. Many marketing partners are really better for service versus sales.
4. People always underestimate the cost of channel support in the end it is often more effective at least in the early stages to go direct yourself.
5. Successful early stage firms balance their partnership strategies and don't let partnering distract them from understanding their true customer and delivering them incredible value.
Experience a Requirement, not a Plus
If an entrepreneur is to provide a sound answer to the Dales last question regarding the impact of partnership on the market as a whole, the entrepreneur must have either context for the explanation or a great deal of experience. Not all first time CEO’s have much of either. That doesn’t necessarily prevent an investment. Instead it may just require a bit of proving by the entrepreneur to the venture group that experience can be gained on the fly.
Take Ann Winblad, managing partner of the Silicon Valley based firm Hummer Winblad, who requires an unproven entrepreneur to gain partner development experience by actually attaining some partnerships before she’ll sign on the firm. This tells her team if the management has the chutzpah to go out and deliver results prior to getting the funding; considering this exercise as a test for investment candidates.
On the other hand, Dale insists that simply by having a process for partner development is going to address issues of logic and business practices. In other words, if you don’t have a track record of creating partnership, at least identify the process of how you intend to identify, create and manage the partnerships, again, in one slide. The venture firms aren’t interested in tactics; they are interest in thought process.
One method is to use a partner development process (Chapters 4-7 Navigating the Partnership Maze: McGraw-Hill 2002) Most partnerships follow a three phase approach which is logically broken into three phases: Business Case, Due Diligence and Definitive Agreement. Each phase has an interim milestone and a phase milestone making it the progression of the partnership clear to all the parties. When this process for creating a partnership is understood internally, it can then be articulated to the venture community as well as prospective partners curious about the partner development process. It is also the foundation upon which future interactions with the management and board can use to constantly refer back to the state and stage of the partner creation progress. This in turn establishes an understanding of the length of partnership creation, as well as the link between the partner and the return on investment.
Understand Your Limitations
Management teams who have worked at larger firms might have a deeper experience base with channel and technology development, marketing or international ventures. On the other hand, younger teams have less experience but a higher degree of passion, motivation and raw belief in a new product or service. A venture funding group weighs the passion with the skepticism or fear associated with a lack of not having creating a partnership. Fitzpatrick believes the younger CEO’s fear has to do with the details, not the idea of a partnership.
“Young your narrowly focused teams don’t know how to create partnerships, or even how if they should trust partnerships at all,” he said, explaining why so many venture presentations lack a partnership component. “It comes down to the little things like knowing the partnership methods, the language, and being comfortable with discussing and running a company that taps into virtual resources for supply, fulfillment and customer service.”
One of most common mistakes Fitzgerald has seen in early stage companies is an inability to answer the fundamental question of “why the company would want to create a partnership” with a potential portfolio firm. According to Fitzgerald, this single issue “is a show-stopper”. For a partnership to succeed and accomplish the original intentions, an entrepreneur must show it knows the win for both sides. Few companies can do more than articulate a one-sided “how we win” conversation. Those companies who do get funded go beyond this one-dimensional view.
Assess Your Partner Skills First
Having recently been given mini-workshops to the portfolio companies of three different venture capital firms, it’s clear that a vast chasm of understanding the partnership landscape exists both before funding and after funding. While all three firms have funded companies “light on partnership experience or strategy”, the need for secondary training and counsel has been imperative. No venture capitals wants the worst case partnership outcome, where, in the words of John Fitzgerald, “Lot’s of champagne stained partnership agreements started off with a bang and a press release only to end in a file cabinet due to misaligned goals.”
You can perform the standard venture capitalists’ test of partner understanding by completing the following check list. If you have in place these items, you are on your way to getting funded. If not, you have a bit of work to do before your next venture pitch.
1. A holistic, one page snapshot of your companies’ partner strategy
2. An understanding of the WHIIFM, or the What’s in it for me, approach to why a company will become your partner
3. An understanding of your partner’s business goals and day to day tactics for accomplishing these goals. For instance, once you create a partnership, does the partner have a means to manage or gauge its success?
4. Has your management team defined what a successful partnership means internally, across all functional groups and reached a consensus? If not, this will result in a fractured, nominally supported partner effort and discontinuity among the management team when resources are scarce.
5. Does the partnership(s) desired match the state and stage of your business? Modest, but highly impact partnerships are required for early stage companies, which don’t guarantee the best press release but do yield higher returns. Providing a graduated approach the partnerships is more credible than a one-size fits all partnership strategy.
Whether it’s holding a conference call with a prospective investor or giving a pitch to venture capital firm, the subject of partnerships will arise. The ability of an entrepreneur to deliver an articulate strategy and provide a context for how the partnership will be created is imperative to gaining funding. If this is done in light of the preconceived notions of the venture community, the chances for your company being funded will be much higher, while the risk of well soaked champagne-stained agreement taking up valuable file cabinet space dramatically lower.
*Originally Published in Capital Connection
The Invisble Hand of Partnerships - To learn more about this author, visit Sarah Gerdes's Website.
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The Invisible Hand of Partnerships and Acquiring Venture Money
By Sarah Gerdes, CEO, BMG
Pitching a group of strangers for money is hard enough when you have a strong business case. For many venture seekers, it becomes downright terrifying when making the case comes down to a single subject: partnerships.
According to a study BMG conducted last year of venture capitalists, the number one reason firms were not funded was a lack of partnership strategy. Specifically, young companies lacked the ability to articulate a relevant partner strategy cohesively held together by business justification and market situation.
This perception from the venture community was validated by their CEO counterparts when I spoke to an MIT Venture Forum attended by over 500 CEOs representing more than thirty industries. Fewer than ten percent felt confident in either their partnership story, or knowing what the venture community wants or expects to hear on the subject during an investment tour. To shed some light on the subject, I’ve recently talked with three venture capitalists that focus on early stage companies to understand the current views on the link between partnership understanding, awareness and their success in getting funding from the venture community.
Through the VC Looking Glass
For over two decades, Burke Craig Victor has specialized in funding early stage companies with less than ten people, typically placing several hundred thousand dollars. According to managing partner Andy Dale, all venture capitalists look at prospective investments through a “multifaceted partner looking glass” and want to walk away with three things from the first meeting: Do partnerships increase opportunity or decrease risk? Do they provide market and or company validation? Do they create the opportunity for market leadership?
How to companies provide this information today? Unfortunately, most of the time they don’t. A simple solution to this s to present the venture group with a single slide on the subject as opposed to an oration or a full presentation. “The one slider I like to see captures strategy, outcomes, revenue projections and risks, ideally in small print” said Dale, “most importantly the bullets and discussion show that the management team has clear understanding of how partnering can help them achieve their goals and objectives.”
This conveys that you have thought the partnership strategy out, thereby providing the venture community with a snapshot understanding of your ability to think strategically. Second, this provides a framework that can be evaluated quickly by the venture team.
Cross Functional Equals Strategic Impact
Identifying risk and return is one thing. Showing the impact to the business and the market as a whole is another. The best way to address this question is to show that the impact of a partnership is not isolated to one component of the business. Smart partnerships in early stage companies often affect the outcomes of two or more aspects of the business. For instance, a joint development partnership inclusive of more than just product development, but also distribution and sales, or marketing partnership inclusive of branding, inventory fulfillment and customer support.
The value of this approach cannot be overstated in an early stage firm. John Fitzpatrick of the firm Staenberg Venture Partners believes that cross-functional partnerships are one of the keys to success for early stage firms. Fitzpatrick suggests small companies focus on showing how a partnership accomplishes cross functionality by doing more than “riding the reputation” of a partner. “Partnerships allow a firm to build the company until such time as they have built reputation for themselves,” acknowledges Fitzpatrick, but outsourcing partnerships also allow the early stage firm to accomplish the activities of a larger firm “until they have the internal resources to take on the task”. For instance, Fitzpatrick points to whole selling a product for access and distribution through a larger sales team, or product bundling or co-marketing a product with a major brand to open distribution channels.
Some partnership claims create more skepticism than credibility. Both Dale and Fitzpatrick agree that marketing and sales partnerships have to be bullet-proof with details or run the risk of credibility loss. Prospective investment firms should keep in mind the following attitudes of the venture capital community and proactively address these concerns during their pitch:
1. Most often marketing partners are thought of as the answer to sales and they rarely are.
2. Marketing partners can give you access to customers but rarely will result in sales that's up to the entrepreneur and their team.
3. Many marketing partners are really better for service versus sales.
4. People always underestimate the cost of channel support in the end it is often more effective at least in the early stages to go direct yourself.
5. Successful early stage firms balance their partnership strategies and don't let partnering distract them from understanding their true customer and delivering them incredible value.
Experience a Requirement, not a Plus
If an entrepreneur is to provide a sound answer to the Dales last question regarding the impact of partnership on the market as a whole, the entrepreneur must have either context for the explanation or a great deal of experience. Not all first time CEO’s have much of either. That doesn’t necessarily prevent an investment. Instead it may just require a bit of proving by the entrepreneur to the venture group that experience can be gained on the fly.
Take Ann Winblad, managing partner of the Silicon Valley based firm Hummer Winblad, who requires an unproven entrepreneur to gain partner development experience by actually attaining some partnerships before she’ll sign on the firm. This tells her team if the management has the chutzpah to go out and deliver results prior to getting the funding; considering this exercise as a test for investment candidates.
On the other hand, Dale insists that simply by having a process for partner development is going to address issues of logic and business practices. In other words, if you don’t have a track record of creating partnership, at least identify the process of how you intend to identify, create and manage the partnerships, again, in one slide. The venture firms aren’t interested in tactics; they are interest in thought process.
One method is to use a partner development process (Chapters 4-7 Navigating the Partnership Maze: McGraw-Hill 2002) Most partnerships follow a three phase approach which is logically broken into three phases: Business Case, Due Diligence and Definitive Agreement. Each phase has an interim milestone and a phase milestone making it the progression of the partnership clear to all the parties. When this process for creating a partnership is understood internally, it can then be articulated to the venture community as well as prospective partners curious about the partner development process. It is also the foundation upon which future interactions with the management and board can use to constantly refer back to the state and stage of the partner creation progress. This in turn establishes an understanding of the length of partnership creation, as well as the link between the partner and the return on investment.
Understand Your Limitations
Management teams who have worked at larger firms might have a deeper experience base with channel and technology development, marketing or international ventures. On the other hand, younger teams have less experience but a higher degree of passion, motivation and raw belief in a new product or service. A venture funding group weighs the passion with the skepticism or fear associated with a lack of not having creating a partnership. Fitzpatrick believes the younger CEO’s fear has to do with the details, not the idea of a partnership.
“Young your narrowly focused teams don’t know how to create partnerships, or even how if they should trust partnerships at all,” he said, explaining why so many venture presentations lack a partnership component. “It comes down to the little things like knowing the partnership methods, the language, and being comfortable with discussing and running a company that taps into virtual resources for supply, fulfillment and customer service.”
One of most common mistakes Fitzgerald has seen in early stage companies is an inability to answer the fundamental question of “why the company would want to create a partnership” with a potential portfolio firm. According to Fitzgerald, this single issue “is a show-stopper”. For a partnership to succeed and accomplish the original intentions, an entrepreneur must show it knows the win for both sides. Few companies can do more than articulate a one-sided “how we win” conversation. Those companies who do get funded go beyond this one-dimensional view.
Assess Your Partner Skills First
Having recently been given mini-workshops to the portfolio companies of three different venture capital firms, it’s clear that a vast chasm of understanding the partnership landscape exists both before funding and after funding. While all three firms have funded companies “light on partnership experience or strategy”, the need for secondary training and counsel has been imperative. No venture capitals wants the worst case partnership outcome, where, in the words of John Fitzgerald, “Lot’s of champagne stained partnership agreements started off with a bang and a press release only to end in a file cabinet due to misaligned goals.”
You can perform the standard venture capitalists’ test of partner understanding by completing the following check list. If you have in place these items, you are on your way to getting funded. If not, you have a bit of work to do before your next venture pitch.
1. A holistic, one page snapshot of your companies’ partner strategy
2. An understanding of the WHIIFM, or the What’s in it for me, approach to why a company will become your partner
3. An understanding of your partner’s business goals and day to day tactics for accomplishing these goals. For instance, once you create a partnership, does the partner have a means to manage or gauge its success?
4. Has your management team defined what a successful partnership means internally, across all functional groups and reached a consensus? If not, this will result in a fractured, nominally supported partner effort and discontinuity among the management team when resources are scarce.
5. Does the partnership(s) desired match the state and stage of your business? Modest, but highly impact partnerships are required for early stage companies, which don’t guarantee the best press release but do yield higher returns. Providing a graduated approach the partnerships is more credible than a one-size fits all partnership strategy.
Whether it’s holding a conference call with a prospective investor or giving a pitch to venture capital firm, the subject of partnerships will arise. The ability of an entrepreneur to deliver an articulate strategy and provide a context for how the partnership will be created is imperative to gaining funding. If this is done in light of the preconceived notions of the venture community, the chances for your company being funded will be much higher, while the risk of well soaked champagne-stained agreement taking up valuable file cabinet space dramatically lower.
*Originally Published in Capital Connection
The Invisble Hand of Partnerships - To learn more about this author, visit Sarah Gerdes's Website.
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 Sarah Gerdes (Visit Sarah's Website) Sarah Gerdes is recognized as one of the leading partnership experts by Fortune, Inc. Magazine has represented governments, F50 firms and small businesses in forty-five industries. Learn her secrets to jump-starting revenue here.
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