CEO Coach Blog
When The Big Company Comes a Knockin’
Fine-tuning Your Funding Part 4
By Anne Kennedy & Gillian Muessig
Let’s talk about strategic partnerships – how to protect yourself and still close the deal when a really big company takes an interest in your startup. What do you do when a Really Big Company wants to invest in your start up? Sounds perfect, right? But scary. How do you protect your interest?
Find Your Champion
We turn once again to Elizabeth Yin, partner in 500 Startups, who has learned a few secrets along her way. Currently Elizabeth runs the 500 Startups Accelerator in Mountain View. We strongly recommend you check out her blog that notably has the title “Bringing Transparency to Seed Investing” at http://blog.elizabethyin.com/.
Ms. Yin breaks down difference in how decisions are made among various VC firms, and more important, how, how you need to adjust your approach, and ultimately how you make your own decisions about pending deals. She says, “VC firm dynamics are not altogether clear to entrepreneurs, and it’s important to understand how these dynamics work”. <http://blog.elizabethyin.com/post/145108986225/the-secret-behind-vc-partnerships>
Indeed, that seems an understatement!
The thing to do, she says is to strategize your dealing with VC’s. Figure out if you are dealing with a consensus-based in which all partners need to agree, or champion-based, where if one partner really wants your deal, the others will go along. Clearly the latter is an easier place to close your deal. But you may wind up with only a single advocate at that firm. Make sure that’s a person you will love working with, because it may be the support all you will have there.
Finding the right champion may be a matter of luck. Looking for a new one in a firm will depend on whether you have anything new and significant to bring to the table. Or, if you can show something of personal interest of your new potential champion. Big firms keep track of whom they talk to; hey will know if you have approached the firm before -- even at 500 Start ups, where they average 1 deal per weekday. If you’re one of the lucky ones, then upsell in the firm and make more friends/champions.
Ignition Partners was the first investor at Moz. And in that instance, it was all about Michelle Goldberg’s unwavering instinct that the CEO, Rand Fishkin, was going to bring in a big win for Ignition Partners. So there was had one solid VC who was championing then SEOmoz through to the group.
In the second funding, Brad Feld had been following Moz for some time. At a meeting in Boulder, he asked about Moz, a company was of great interest to him. He had Moz in his sights already. Although Moz wasn’t raising funds at that time, it was a good connection. When they did look to raise funds, the connection with Brad was actually cemented through Rand’s spouse, who writes a wonderful travel blog, the Everywherist. Brad’s wife was a big fan of the Everywhereist and wanted very much to meet the author in person. So dinner was arranged. By the end of the meal, an offer had been extended to invest in Moz. But, make no mistake, investment wasn’t made because someone’s spouse wrote a cool blog that an investor’s spouse enjoyed.
Connections beyond the business in question helps to provide a robust image of WHO the investor will be dealing with for some years to come – remember, it’s generally 7 – 10 years of working together. We are all looking for broader signals about the people with whom we are about to work. In this case, the ‘champion’ was cemented because he had an opportunity to get to know the full measure of the person with whom he was about to do business . . . and he found it good.
Tapped by a Big Company
What about when there is a really big company that wants to make a strategic investment in you? Sound really good? Well, maybe. We found wise advice from Patrick Meenan, who sat on the ‘big company’ side of the table at Microsoft, and now as a VC, sits with another view. He provides lots of important insights on how to make a deal with Goliath when you are David. <http://pmeenan.com/2014/07/15/my-10-guidelines-for-startups-on-partnerships-with-big-companies>
Patrick provides a good rundown of what is likely to go through your head if a large corporation appears to be considering working with you or investing in you, when you’re still a very small startup.
- Fiesta! – Wow! BIG-HUGE Corporation wants to work with us! This is going to be amazing!
- Fear – Are they going to steal our tech or IP and then bury us?
- Frustration – if you work with them, you’ll find large companies SO SLOW! They crawl while the speed of startup is blazing fast.
Don’t worry about that progression – DO something about it. Here is Patrick’s cogent advice:
- Make sure the relationship truly warrants a strategic partnership
Be sure the opportunity is TRANSFORMATIVE – that it warrants months of documentation and negotiations. If the big company just wants to buy more of your product than other customers and wants a good deal, you don’t need a partnership. Make ‘em a deal and move on. If both parties feel like it is something more than that, but are unsure if it will be big, start with an informal relationship and see if anything comes from it. If this is worth your while to pursue, you’ll hear words like “enterprise-wide roll-out,” “multiyear, “ “reselling,” “co-marketing,” “joint development,” etc.
2. Add 6 months to your closing expectations and make sure that timeframe fits with your business
It sucks, but it’s true. You might feel like everything so simple that the agreement will move quickly. But things will get about 20 levels deeper before you actually close. Big companies create task forces and have internal approvals to deal with. Delays are caused by executive travel, personal agendas, and of course has an entire legal department who wants to protect their company from every possible risk. They will fuss over stuff you would have never even thought of. Make sure you have the runway to get there before you start.
When RR Donnelly acquired Helium after first investing in Series B and gaining two seats on Helium’s board, it was a great deal when the two CEO’s put it together, with lots of benefit on both sides. Then the corporate attorney’s got hold of it and a 16-page agreement ran to 500 plus pages in many, many weekly iterations for what turned out to be a very successful exit for all.
One of the points of contention was a right of first refusal. This is something Meenan warns against; granting a strategic partners ROFR severely limits opportunities for other companies for acquisitions, and your fundraising.
3. Pick the platform, not the person
Patrick’s golden rule on partnerships that guides everything. What does it mean? You must want to work with the company, not a person at the company. We hear it all the time: ‘Person A at the big company really gets our vision. She is going to be great to work with and make it a success’. The reality is big companies reorganize all of the time. Execs leave for greener pastures. Your interest in the big company must extend past a single person. It should be nameless and faceless.
Tips for Dealing with Goliaths
- Recognize the stages of response to having a big company come calling, asking for a partnership or to invest in your company
- Determine whether this is the company you want to sell to, if you choose to take their investment. If BIG-HUGE is invested in you, their competitor HUGE-BIG is NOT going to try to buy you. Are you leaving money on the table by excluding competitors when it comes time to sell?
- Look carefully at the reasons why BIG-HUGE wants a partnership or to make an investment. You are still small potatoes – are you going to be STRATEGIC BUY for BIG-HUGE? If so, get on with it; your valuation will reflect and you will do well. If not, walk. RR Donnelly acquired Helium to gain the online presence they lacked, and rebranded us as the RRD Content Network – a win-win all around.