Monday, March 7, 2011

Lesson #6: Structuring Strategic Partnerships for Your Startup

Posted By: George Deeb - 3/07/2011


& Comment

Overall, I am a huge fan of strategic partnerships, if they are structured correctly and both parties are incentivized to see the success of your business.  I built both of iExplore and MediaRecall with equity owning strategic partners:  National Geographic for iExplore and Getty Images for MediaRecall.  Today, we will: (1) define a strategic partnership; (2) highlight plusses and minuses of relationships like this; and (3) list critical items to consider when contracting these relationships.

First of all, what is a strategic partnership?  They come in multiple shapes and sizes.  Some are simply biz dev relationships with cross marketing.  Some are revenue share relationships.  Some are equity owning relationships.  To me, the deeper the better, to truly qualify as a strategic relationship.  So, don't be afraid to spread the equity to partners that can material change the upside of your business.

We structured a deal where National Geographic acquired 30% of iExplore, for cash and promotional support.  On the face of it, it sounds like a big number (as in my experience strategic equity owners are typically in the 5%-20% range depending on the level of support).  But, when you realize National Geographic is one of the most trusted brands in the world, with one of the highest-end demographic readerships to market high-end adventure travel, it was really a match made in heaven for a startup travel business.  And, iExplore clearly saw the benefit of that strategic relationship from a couple of perspectives: (i) their brand association provided a 25% increase in sales (vs. an unknown iExplore brand as a startup); and (ii) when times got tough around 9/11/01, having that National Geographic relationship made the venture capitalists more comfortable continuing to fund our business (e.g., if NG still likes the story, then so do we).  Without that relationship, I doubt we would have been able to stay in business given the 9/11/01 impact to the travel industry.

But, a strategic relationship is more than just giving equity to partners that can help you to materially scale up your business than you could on your own.  It is also, making sure that the strategic partner is contractually on the hook for the marketing support you need to implement that growth.  For example, in the National Geographic deal, there were tons of advantages for iExplore: (i) co-branding use of their logo; (ii) exclusive trip finder on their website; (iii) discounted rates to purchase advertising in their magazines; (iv) access to their 5MM customer direct mail list; and (v) access to other internal marketing partners, like their cable television and merchandising divisions.  Which at the time the deal was cut in August 2000, when iExplore was flush with cash, was a really terrific deal.

But, after 9/11/01, when iExplore found itself in a cash-tight position, we quickly learned that that deal was not properly structured for a downside scenario where we didn't have cash to spend.  Accessing NG's direct mail list required money to produce direct mailers.  Buying print ads in NG's magazines, even if at 50% off rate card, required money.  So, when you are structuring deals, make sure the promotional support will be there in good times and in bad.  Part of that means, making sure the day-to-day managers of the relationship have a vested interest in your success.  We structured our deal with the CEO and CFO of the National Geographic Society.  They were not the people in the trenches that were going to implement the marketing support--the editors and publishers at three magazines, a cable channel and website (who frankly are all busy people managing their various fiefdoms to care about building iExplore).

As for the advantages and disadvantages of strategic relationships, the plusses are: (i) they can help you grow your business faster and cheaper than you could on a stand alone basis, if structured properly; (ii) they get venture capitalists more excited about the upside of your business; and (iii) it makes other business partners more excited and comfortable with working with you.  The minuses are: (i) working with one partner (e.g., National Geographic), may make it difficult for you to work with competitive other partners (e.g., Discovery Channel), so be sure to pick the biggest, best partner to work with; and (ii) venture capitalists may think you have limited their exit options by working with one key partner, so make sure nothing in your deal requires you to sell your company to that partner or limits your exit options in any way.  It is fine to give the partner a right of first offer or a right to match offers with tight timelines, but nothing that guarantees they walk away with the business in all scenarios.

A few key considerations for any deal: (i) make sure the equity component is fair in comparison to the level of marketing support being provided (e.g, put a cash value on that support as a percent of your company valuation); (ii) make sure the marketing support is well documented so when it gets handed down from the biz dev department to the people in the trenches, they have to execute it with no wiggle room for interpretation; (iii) make sure the deal works in good times (cash rich) and in bad times (cash poor); (iv) make sure the strategic partner invests some amount of cash (even if minimal), so they have skin in the game to help protect their investment; (v) make sure the partnership has tight performance deadlines to implement your marketing support, as big companies can move very slowly without them; and (vi) make sure nothing impedes your marketability to venture capitalists or limits your potential exit options down the road, as discussed above.

Overall, as I mentioned above, I am a huge fan of strategic partnerships, and spreading equity to players that can materially change your destiny.  But, as always, the devil is in the details!!

For future posts, please follow me at:

Red Rocket is a featured contributor on entrepreneurship for many trusted business sites:

Copyright 2011- Red Rocket Partners, LLC