Wednesday, August 24, 2011

Lesson #80: Pitfalls to Avoid When "Reeling in the Whale"

Posted By: George Deeb - 8/24/2011


& Comment

Every B2B startup wants to close the $1MM contract with the Fortune 500 company, and every B2C startup wants to cut the big strategic partnership with the bohemoth media marketing partner in their industry.  It can be a very exciting time for a startup, with lots of "high fives" slapping and an earned right to celebrate after months (or years) of "reeling in the whale".  The immediate instinct is to focus on the huge revenue upside relationship, and how you are finally "on your way".  But, in today's lesson, we are going to learn that these "whales" can easily kill your business, just as easily as they can accelerate them.  So, we are going to highlight a few common pitfalls to avoid, through a couple real life examples.

Let's start with MediaRecall, the B2B digital video services and technology business I ran.  We were in discussions with NBC on digitizing their entire news archive for the last decades, with hundreds of thousands of hours of content that needed to be serviced.  It would be a $25MM contract over five years that would "change our world".  Especially since the largest contract we had ever closed prior to that was $500K.  We were all jazzed up about this project, for what it could do to stabilize our revenues as a startup and cover our overhead costs for the foreseeable future.

But, once the revenue potential "euphoria" wore off, the impact of a contract that large was actually quite sobering: (i) our technology infrastructure would need to be materially improved and expanded to support all the additional volume; (ii) we would need to build a second services facility onsite in New York, with rare equipment specifically needed for that one project only; (iii) the work would require a lot of energy around fragile old film reels, when video tapes are a lot easier to work with without risk of damaging the core content (which we were indemnifying against damages); (iv) our human resources efforts would need to accelerate to hire and train all the additional staff overnight; (v) we would need to move to a material larger home office to staff the new team, materially increasing our going-forward overhead; (vi) this contract would most certainly be all-time-consuming, for at least the first year, putting at risk our efforts with other clients, slowing our new client pipeline and putting all our eggs in one basket; and (vii) if one thing goes wrong with this high profile project, that news could spread through this very tight-knit industry and basically "black list" our company.  A lot was riding on the success of this project, and it required religious focus to not drop the ball on any of these potential pitfalls.

Let's move on to the second example: iExplore's strategic relationship powering B2C travel booking services in partnership with National Geographic (please re-read Lesson #6 for the details).  At face value, it was a marriage made in heaven, the biggest brand in "dream creation" partnering with the new startup for "dream fulfillment" in the adventure travel space.  The power of National Geographic's 80MM household reach in cable TV, 6MM magazine subscribers and 5MM unique visitor website was almost intoxicating to think about as a startup trying looking for low hanging fruit to scale up our business.  At face value, this reach was most definitely worth giving National Geographic a 30% stake in our business, combined with being directly associated with their 112 year old trusted brand name.

Then reality settled in with unexpected pitfalls along the way: (i) the people we executed the partnership with handed us off to an execution team, comprised of about 50 individuals in various departments that had no real vested interest to help iExplore succeed (pulling teeth to get anything done); (ii) the contract was not written with enough clarity, leaving it up for debate what was really intended in certain areas; (iii) the contract was written with the assumption that iExplore would be flush with cash throughout the five year period, and could afford buying 50% discounted ad space in the magazines and direct mail (which wasn't the case after 9/11/01, taking this marketing support off the table--BOOM!, there goes 6MM magazine subcribers); (iv) the cable TV division could never find a way to promote us cost effectively (BOOM!, there goes 80MM households); (v) although we found permanent placement on their website, we were buried deep on their site with links that were hard to find (BOOM!, there goes 5MM uniques, in exchange for 50K uniques); and (vi) it made cutting a strategic deal with Discovery Channel (one of my goals), much more difficult, as they are arch enemies with National Geographic.  Did I already mention we gave up 30% of the company for this relationship??  Lessons for next time: the devil is in the details!!

So, as you can see, "whales" can be great for revenues, but they can put a lot of strain on the business in other ways.  Some you can expect, and some you can't.  So, make sure you think through all of the potential pitfalls well in advance of signing the contract, and make sure you get any expected support in writing (and in excrutiating detail, so there is no ambiguity on what you are expecting).

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