A Balancing Act: business focus versus exit planning...

I trust everyone is having a fine summer, and more rain than we have in Central Texas!

Boards of Directors will make it clear to a CEO that building and running the business is central to success, and suggest strongly not to focus too early on who might acquire the company and when. Good advice. It is a world-class team, a solid value proposition, and a strong revenue growth curve that create value in the business - and that eventually affects price and interest from potential acquirers.

But hold on - forming strategic alliances is often critical to both the marketing and revenue picture as well. And, if my competitors are out talking to their friends at potential acquirers, am I not missing the boat by focusing on the business?

Most startups that reach the go-to-market phase where customers are buying their products are balancing business execution with Corporate and Business Development. It is a balance. The executive staff needs to be involved in development of alliance strategy, but generally line organizations should not. Details about progress with strategic alliances should be compartmentalized.

An Alliance Strategy should be based on:

• A clear sense of the value of your product and service capabilities, including both what you sell to your customers and any unique capabilities and components that underly
• A well-considered view of adjacent markets that leads to partner selection - thinking as broadly as possible
• Articulation of a rational joint value proposition to approach each potential partner, and any desired outcomes
• Availability of someone skilled in approaching partners and driving a strategic exploratory process (refer to my June 17 post!)
• Availability of technical resource (e.g. CTO) to keep them honest, technically.
• A market view of your competition and what they might or might not do

I work with each of my clients at quarterly offsite or board meetings to fully develop this plan, and formulate an evolving list of targets. From there, the team can start to execute and then refine the process over ensuing quarters.

Business development becomes more complex as you look 1-2-3 years down the road, consider potential acquirers (or "Chairs" - see May 13 blog), and start to understand what will attract (or repel) you to those chairs. It is not always the right answer to approach or form an alliance with your comfiest chair early on.

There are good examples of companies who tried to get a deal done in the wrong sequence, without considering broad market factors, and drove their preferred chair to their stronger competitor. Consider this example: A company has a market-leading flagship product, but a competitor has both a poorer, but often sufficient, offering in the same area and an adjacent product offering that could provide additional value to partners. A strong alliance strategy may be to complete the offering by internal development or forming an alliance with someone who also has this adjacent capability, and then to approach the desired chair with the combined offering. Approaching the desired chair too early might simply educate them and send them to your competitor.

So, given the importance what are some techniques to manage the balance between business execution and corporate exit? If you have a designated executive running the BD process who manages their strategic work separate from any day-to-day responsibility, you already have some separation. Maintaining confidentiality of the process from the line organizations, particularly if the effort is bearing fruit, is important - but the pressure to pre-announce a revenue or go-to-market alliance to the sales team can be distracting. Choose carefully what you communicate. Sales teams are paid to find out information - including from your corporate team - so I recommend having a clear executive decision process for what and when BD information is provided to line organizations.

In the end, strategic BD should start at the go-to-market phase of the business. The challenge is to find good, focused resources to begin the Corp and BD process - aimed at supplementing revenue and market presence, but always playing the game with an eye to the exit.

Next time, we'll talk about when negotiating actually starts with a potential partner?

Peace,

Michael

Barney? What's he got to do with this?

As you set alliance goals and develop the relationship, you must consider the type of relationship that you and the potential partner seek, ranging from a simple joint press release to a strategic alliance focused on managed services or outsourcing, to value-added reselling, OEM and beyond.

The joint press release is fondly known as a "Barney" relationship because of its superficial nature, but it does have its place in the spectrum. As an aside, I have found that companies who overuse Barney will tend to lose credibility with analysts and press, making that strategic alliance press release harder to pitch.

As you walk across the Alliance Spectrum, you can explore a range of co-selling/marketing alternatives with both products and services. Further to the right on the Spectrum you will find revenue sharing and OEM deals, joint ventures and, of course, the exit: mergers and acquisitions.

As you engage your partner, I encourage you to share expectations about where each firm would like to start, and where you would like to end up on the spectrum. Many leading technology firms now have formal programs that are designed to evolve from a co-selling model at the start to a value-added reselling or OEM relationship as both partners gain experience and success. This makes good sense, and I applaud those who have recognized that truly strategic alliances evolve over time.

Under the Alliance Spectrum you will see a typical distribution of work between the partners. While the distribution of work varies from what is shown here, I have found it important to be clear about precisely who is going to do what. Who is going to build the product or the integration between products? Who is going to market the solution, and sell it? Who will provide customer support and other services? And so forth... From experience, I have found that companies name these types of relationships differently: For example, some companies use the terms "Strategic Reselling" and "OEM" to mean the same thing, and others use them to mean something quite different, so it is crucial to discuss in fundamental terms who is going to do what in order to determine how the relationship, and the contract terms, will develop. Failure to do so can result in misunderstandings and unmet expectations.

So, don't get caught expecting an outcome based on the "name" a relationship is given; talk to your partner about the distribution of work, and how your alliance might evolve across the spectrum so you have a clear picture about the value each is adding to the relationship over time. From there, you can set expectations, and determine how to allocate revenue, cost and margin to each in the term sheet.

Next time I will explore the corporate development arena, and how your eventual exit impacts how you act today, even if it is years away. If you like the game of Chess, we will have some fun!

Until later,

Michael