Early Stage Partnerships

Founders of early stage startups are often deluded into believing that there is a dream partnership that will send their company into the stratosphere. It will be a silver bullet and cheat code that enables them to skip steps and grow faster than ever anticipated. This sentiment is pervasive, particularly in consumer startups. I've fallen victim to it many times. It's dangerous and seldom works. It's wishful thinking that comes at a real opportunity cost, wasting time and draining emotional energy.

At GroupMe we had a hypothesis that we'd be able to embed our group chats in third-party applications and that would help us monopolize the market and acquire new users through other established brands' properties. Since we were a "hot startup," other corporate companies wanted to work with us. We ended up spending a lot of time building custom things for AmEx and ESPN and ultimately launched embeddable group chat in two of their experimental applications. It was a ton of effort that yielded practically zero incremental user growth. I'm sure we got a couple PR pieces out of it, but relative to focusing on and improving our core product it was a total waste of time. We were less than one year old.

During our first year at Fundera we spent an inordinate amount of time chasing down a deal with Staples. They reached out as part of an RFP process to create a co-branded loan center for all of their SMB customers. They said they had millions of SMBs that were "members." It felt too good to be true. If we could work with one single partner to open up a channel directly to millions of SMBs in a trusted environment, we would overnight become the dominant player. We wasted days modeling out scenarios in spreadsheets to win the deal and put together an elaborate performance-based deal structure loaded with warrants and clauses where they could invest in the company to ultimately get to double digit ownership. We would quickly go from originating millions of dollars in loans a month to billions. This was utterly delusional. We lost the RFP process to one of our biggest competitors. I saw a press clip of their CEO and the leader from Staples in charge of the initiative ringing the NASDAQ bell together to celebrate the partnership launch. I must have rewatched it 100 times like a psychopath. I was fucking livid. The partnership produced approximately jack shit for both parties and was shut down within months.

One lesson learned from this experience and others is that partnering with someone who has an orthogonal value proposition almost always doesn't work. Just because Staples sells office supplies to companies does not mean that they will be good at helping their customers secure loans. We partnered with FTD which works with most every florist in the country. Helping florists fulfill customer orders does not mean you can help them fulfill their credit needs. The partners that ultimately worked best were the ones that offered nearly identical products (e.g. a bank that declined customers for a loan or credit card and referred them to us to meet their demand) or ones who offered an adjacent product (e.g. Nerdwallet who had an identical value proposition for consumer credit and wanted to enter SMB credit).

Another lesson that I've learned repeatedly from both building companies and helping other entrepreneurs is that there is absolutely zero substitute for developing your own audience/network/user base. If you're early, do not fall into the trap of being starry eyed by doing some BD deal with your dream partner. It likely either won't happen, or even worse, if it does happen it won't move the needle. You will waste your time and energy getting your hopes up only to have them completely crushed. That will happen enough times on your entrepreneurial journey, you don't need to self-inflict it by fantasizing about the magical partner. Would you rather focus on making your product the best it can be and honing your unique strategy within customer acquisition channels? Or do you want to endlessly compile make believe data, presentations, and impossible scenario planning for partners for whom you're an insignificant -rounding-error-fifth-tier-pet-project? Control your own destiny and don't be someone else's bitch.

It's worth understanding the incentives of these potential partners. A lot of people at these companies search for startups to partner with as part of their "innovation" efforts, but nobody really expects these things to move the needle for them in any meaningful way. There are people whose job it is to hunt down cool new companies and figure out what they're doing and how they could potentially use them to improve their business. Be wary. While they seem like the golden ticket, their incentive is to just learn as much as they can about you so they can present upwards and look good doing their job. There are plenty of horror stories about corp dev people fishing for information and then going completely radio silent, only to resurface months later announcing a competitive product or feature of their own. You are a source of free information for them that can potentially be used against you down the road. It's like a VC doing diligence on you when in reality they're trying to get information about you to decide whether or not they should invest in your competitor. A healthy dose of paranoia doesn't hurt.

There are times when chasing down partners makes sense. If your GTM motion is primarily going to be driven through channel partners, collecting logos helps. Each partnership makes the next one easier to land. Herd mentality is everywhere, and a corporate sponsor probably won't get fired if you've already partnered with other familiar companies - it's social validation. Also, most partnerships don't work, so you'll need to do a lot of them in order to see the fruits of your labor. And sometimes there are partnerships that can create a new exponential curve. We pursued one at Fundera later on once we knew what actually drove customer demand, but our counterpart wanted a board observer seat, first right of refusal on a sale, the ability to invest at our last-round price, and economics that would have made every transaction unprofitable for us. These were their sticking points which were totally irrational given that they'd be bad for any shareholder of the company, including them. That one was worth chasing down, it just didn't end well.

Early stage, don't get distracted by this fool's errand. Stay focused on how you will help customers and defining what will differentiate you. No partnership will make up for deficiencies here, and it surely will not be a substitute for doing the hard work yourself.

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