Lesson: Channels & Partners with Steve Blank

Step #9 Risks: Partners sound great; what could go wrong?

This sounds great. Partners sound wonderful. Boy, what could go wrong with this. Let's take a look at partnership risks. Now everybody talks about all the great things that could happen. Partnerships and large companies partner all the time. Let me start with the large company partnership risks. One of the greatest partnership disasters probably ever, not only in the 21st century but probably including the 20th was when Boeing was building the 787. Their new jet airplane made out of carbon fiber. Not only was it a unique technology advance but at the same time, they have decided to do something that no other airline manufacturer had ever done.

What they decided to do was instead of Boeing now building all the parts; they were going to outsource all the manufacturing risks to a series of partners spread around the world. While Boeing's unions and machinists argued, no, no, no there's 50 years of expertise on how to build these components. Boeing because of other pressures, financial and union decided that it would be a much smarter, strategic move to have people building the center fuselage in Italy and the tail fin somewhere else and the stabilizer somewhere else and the forward fuselage by another vendor until all of a sudden, their supply chain was scattered around the world and at least to have these parts being made by people who have never made airplane components. It looked great on paper. It was going to save them enormous amount manufacturing costs.

It turned out to be the worst business decision of the 21st century because it was made by accountants and not by engineers. Turns out their partners delayed the program by about three or four years because there was a tremendous amount of rework. Parts didn't fit, parts didn't work and this wasn't your living room furniture. These were devices that we are going to carry hundreds of people in the air and there was no margin for error. Turns out Boeing actually had to go buy back a good number of these manufacturers and bring back their expertise and oversight which they assumed wouldn't be necessary.

I just used this as an example not to bash Boeing but to understand that even the smartest companies sometimes make partnership decisions that look good on a spreadsheet but at the end of the day, partnerships are not driven by spreadsheets. They are driven by technical competence, customer needs and the ability to deliver a final finished quality product. Let's think about risks in managing partners.

Well the biggest one is what I call impedance mismatch and again I have been talking about this a couple of times in this lecture. In a startup, you barely register on a large company's radar. In fact your entire company's staff is probably less than the administrative staff of the CEOs of some of these companies. The longest of the partners schedule becomes your longest item. What does that mean? I have seen many times large companies say, "Well we will make that decision when we get to our planning meeting." Then you ask, "Well when is the planning meeting?" "Oh we have that quarterly." Well quarterly, 90 days to startup is like we make decisions in an hour and a half. Now all of a sudden, the longest of their meeting and decisions schedule becomes your longest item and if you are working like startup should on an intense speed and tempo, they are now slowing you down.

The third thing is when you are using strategic alliances or joint ventures, there's no clear ownership of the customer and in fact, if there's any owner at all, the large company will say, "We have a thousand people on the field. Don't worry, we will take care of this." But what you typically never realize is your product to those thousand people in the field might be a little asterisk on page 49 of their sales price list.

Again, when you do joint ventures, you got to make sure who owns the vision because products by committing are probably the worst thing that could happen to a startup and your objectives tend to differ. You need to understand what happens in a large company when you become part of the partnership. Were you there as a checklist item that someone said oh we need one of these in our catalogue? Were you there for someone's career to look good or you absolutely is essential for their success? Don't confuse big name company being interested in you with a potential liquidity event. Most of these partnerships fail.

One that isn't intuitively obvious is that great person who you are dealing with in that large company, the odds are in 15 months, they are no longer in their jobs because if their career is heading in the right direction, they are going to be promoted or moved to another job or another division or another location, and therefore the person who is passionate about your relationship is now gone. If there is no underlying rationale, if there's no real what's in it for them, the churn in partners and strategies or personnel might put your company out of business and they will never notice the difference. You were just a short term play for whoever was in the job and if this wasn't important to their company, so it might have been essential to yours, that deal is over even though you might have a contract.

The other thing that startups worry about is intellectual property issue, typically not much of an issue in the United States. Typically a very, very, very, more very sincere to tear important issue in dealing with China. Intellectual property and the rule of law for trade and trademarks and IP is not quite the same in the U.S. as it is in China, Russia, India and other developing nations. You should make sure that you are not dealing with IP issue in these countries as you would in the U.S.

Finally, these deals are difficult to unwind or end. This might have looked like a great idea when you were a struggling startup. Eighteen months later when your revenue is rolling in, you realized that you gave these large companies or these joint ventures or these strategic partners resources or assets or other things you never would have done two years later. So really think through, what happens two years from now.