This week the Sprout companies, mentors and guests will be discussing Go To Market strategies. While this is a wide ranging topic that covers a number of different business topics, if there is one thing the Sprout team would like startups to think about it, it is this...
'Find clever ways to use partnerships to get your business generating revenue'
We often see startups who's business model vision will include design, development, manufacturing, distribution, marketing plus many other model attributes. Our advice to startups is identify what the core of your value is, and find partners who can fill in the gaps to get you started.
Partnerships are often over looked because startup founders or founding teams get worried about IP, or control, or being 'locked in'. All these risks can be mitigated through good negotiation and thinking through the parameters where a founder WOULD be happy to enter a partnership.
The best way to understand this concept is with an example:
Startup A is developing a product that a large channel partner/distributor has said they would distribute if Startup A could solve some key technical problems in the product. There are multiple ways to solve this particular problem for Startup A. The pathway Startup A is currently investing in is to 'design and develop' a product that the channel partner would want. The problem is that developing this product in the way the startup is choosing has significant technical risk and requires significant investment. In this current scenario, the business model of the startup is to design, develop and potentially manufacture. The significant risk of developing the product means the company could look at an alternative business model which could look like the following:
Startup A identifies an existing company (let's call it existing company B (ECB) that either a) operates in a different geography or b) has similar technology but markets it to a different market. Startup A approaches ECB with an offer to enter an exploration of how their technology or product might be customised to fit within the opportunity Startup A has before it. Once the agreement to explore has been made, Startup A scopes the required work to complete the product specs required for their specific opportunity. These specs are then costed and if identified to be significantly less than the original plan where Startup A 'designs and develops', Startup A enters into a negotiation for rights to utilise ECBs product to get Startup A started and making revenue as fast as possible. Startup A might put terms like the following down for ECB to review:
- Exclusive rights to ECBs technology or product for the geography that Startup A is focused on
- These rights would have a fixed period e.g. three years
- Rights to create add-on or improvements to ECBs technology or product
- ECB will be offered first right of refusal to license the improvements from Startup A and the right will be open for 30 days once ECB has been notified of the improvement
- Agreement that if ECB utilises first right of refusal on the improvements, Startup A will get paid a license fee or royalty per dollar or per unit
- If agreement is made, Startup A then outsources the development of the improvements required for it to fit the product requirements of the channel partner/distributor. At that point, Startup A's core competency is as a marketing company or if it chooses to manufacture the improved product it will be a marketing and manufacturing business.
Two very different business models that ultimately achieve the same end goal to supply the channel partner with a product to meet a market demand. However the difference in startup cost could be significant. In some cases the 'design and development' pathway might require 4-5 times the investment of just acting as the marketing company.
Something to think about for startups out there.
James has worked with multi-nationals and successful technical start-ups. He uses his contacts and experience in market development and market entry strategy to help BCC’s clients. He’s has a nose for good ideas and people who can drive them.
To contact James phone 06 353 3100 or email firstname.lastname@example.org.