This article was first published on LinkedIn on 4 February 2020
There is a saying that while competition makes better products, partnerships make better companies. Picking up on this theme, we explored how partnering with other companies can enable start-ups to achieve things they couldn’t achieve on their own, as well as the pitfalls that can scupper efforts to create successful partnerships.
Here are the key takeaways from our discussion:
1) Partnerships can be a catalyst for growth
Partnerships can be transformative for start-ups, turbo-charging their growth and boosting their market access. A good partnership can give a start-up credibility in its sector and enable it to get its innovation to market quicker (e.g. a fintech partnering with a bank can avoid numerous regulatory hurdles by using the bank’s licence to roll out new products). Partnerships also offer the lowest cost of entry to new markets, by allowing them to leverage their partner’s extensive customer base and rapidly onboard new clients.
In an ideal scenario partnerships can exploit synergies between the start-up and its partner, benefitting both parties. One example we discussed was an African payment app start-up that has partnered with a retail chain: the latter sells customers the phones that use the app, while the former provides the app that enables customers to finance the purchase of the phone. This gets to the very essence of how partnerships can deliver results impossible to achieve by each party on its own.
2) There are many pitfalls to partnerships
The reality is that partnerships are fraught with risks and the roundtable shared stories of failed or stillborn partnerships they had experienced. Their key advice for start-ups was:
a) Don’t enter into partnerships too early or you risk losing control of your IP, your company values and your way of working.
b) Don’t rely on future partnerships for your financial stability: it can take one year to close a partnership deal and if you are relying on the increased revenue to stay afloat, you will probably run out of cash before the partnership gets off the ground.
c) Don’t talk to the wrong person. You might find someone working for a potential partner who is enthusiastic about your idea, but if they are not the budget holder or the decision maker they are unlikely to deliver a partnership agreement. They may even be pulling in the opposite direction from the rest of their colleagues, which could lead you into dead water.
d) Be honest with your partners about what you can achieve. David can’t force Goliath to modernise, and too often big companies throw their problems at start-ups and expect them to wave a magic wand and sort them out. Be careful about what you commit to deliver and fight back against mission creep.
Ultimately, mental attitude and lack of openness to new ideas are the biggest barriers to companies exploring partnerships with start-ups, especially large and siloed corporations.
3) Disputes over who owns the customer can break partnerships
Ownership of a client and the flows generated by their business is key to any company’s commercial success. Which makes it no surprise that disputes over who owns the client are a common cause of failure in partnerships. The success of Kenya’s M-Pesa payment platform and the lending/savings service that sits on it, M-Shwari, is well known. But less well known is M-Shwari’s stillborn predecessor, M-KESHO, a partnership between Safaricom and Equity Bank, which failed to take off owing to their inability to agree on who owned the client relationships.
Ownership of customer data – the backbone of ecommerce and the digital economy – is an even more contentious issue. In order to avoid disputes there must be clear agreement on which parties have access to customer data – and under what conditions – and on where this data is stored. One approach is to agree that neither partner owns the customer outright, but that there is an agreed fee/profit share for each transaction and full transparency over how each partner is gaining from the customer relationship.
4) The alignment of values is critical
Partnerships present an awkward trade-off for start-ups who need to balance safeguarding their future business against the desire to stay true to their values. If the values of both partners are misaligned – for example, a social enterprise and a cut-throat bank – the partnership could damage the start-up’s brand and force it in a direction it doesn’t want to go. But when values are aligned, partnerships can help reinforce these values in both partners and embed them in the way they do business together.
The key is to seek out people working at a potential partner whose thinking is aligned with yours. You cannot be expected to change the thinking of an institution from the outside without a partner on the inside who thinks the same as you do. Find the pain points that can be addressed by your innovation and get the support of key stakeholders (i.e. the budget holder and team boss) for your partnership pitch.
5) Building trust is the key to long-term success
For partnerships to succeed in the long-term you need to build a layer of trust. Just like marriages, no partnership is a perfect fit from the start, but it is something that grows and matures. For the start-up this means taking the client on a digital journey and leading them to a different mental space. This requires an environment for open discussion, without fear of ideas being stolen, and a system for rewarding the idea generators of both partners.
6) Governments can help connect start-ups with corporate clients
As the DIT was sponsoring this event we discussed how governments and policy makers can act as a bridge between long-established corporates that need innovation and the new wave of innovators who can provide it. One suggestion was for government bodies to award kitemarks to vetted start-ups, giving their stamp of approval that the start-up has met the required standards for transparency, data protection and ESG. This kite mark could be leveraged to connect more start-ups with commercial clients.