Partners won’t save your startup from failure (but clients will)

From the startup in 2008 to date, we announced at least 10 unique partnerships between Leverate and other companies. They cost tons and, at times, took all the brainpower and sweat we had. Every single one of these partnerships has failed (channel partners aside).

When I listen to startup founders, I sometimes notice the abuse of the word “partner”, and it reminds me just how unclear we were around the partnerships we took. I’ve heard this word from startup founders to describe what I would otherwise call “client”, “vendor”, “distribution channel”, “an opportunity to get some PR”, “another company that we want to have an integration with because it’s cool” or in the worst case “an established company in the industry who thinks we’re neat but we’re not sure what’s in it for us or them”.

Undefined partnerships are dangerous. And they often come with the promise of some PR, especially in fintech, where banks and consulting companies enjoy setting up accelerators and hanging out with the cool kids (startups). This has been funnily described as the fintech zoo. An executive at a bank or established company may talk to a startup about partnership opportunities that can generate a mention or two in the press, but…

Pictured: the beginning of an epic failure

What’s in it for the startup? Not too much, I believe. Why? Because startups founders should be working day and night to de-risk their startup assumptions, reach paying customers and build a profitable business. Many partnerships I see don’t serve this purpose, and many startup founders don’t seem to realize that 2 happy customers are better than 20 partners.

Here are some dark and often overlooked facts about partnerships:

  • Partners hurt your ability to learn the market and fix your product– founders that decide to spend less time talking to customers and more time talking to partners, might end up with a product that doesn’t fit the market. Or they might have such a product now, and they’re just not fixing it. This reminds me of how some companies choose to enter China with the wrong product but they can’t realize it fast enough… because they chose to do it through a JV with a local partner. When you’re a startup founder, you must face customers to get feedback on problem/solution/pricing, return with insights and execute to fix them. Partners isolating you from customers will hurt your ability to collect feedback
  • If you have partners before paying customers, it could signal wrong priorities– I’ve seen some startups, pre and post-funding, announcing partnerships before they have paying customers, or when they have very minor traction after 18-24 months of work. As an investor, it gives me a dangerous sign: the founders have set the wrong priorities for the company. They see more value in PR, personal relationships and handshakes than real success with a real customer. And it happens a lot in fintech, where strong personal relationships often trigger those partnerships
  • Every partnership is an experiment– my friends once launched a product that lets people look at online recipes and order the ingredients from a local supermarket. They built the product and turned to the classic partners: recipe websites. They signed an agreement with one of them to display a “buy now” button that leads visitor to buying the listed ingredients. But guess what? It didn’t work. People hardly clicked the button, and when they did- they never bought the ingredients. Why? Sometimes nobody knows. Or nobody has time to check and the partnership dies. The point is that partnerships are experiments- they have many underlying assumptions- and many times they just don’t work. Don’t make assumptions about execution, either: I’ve seen many times how a big “partner” can under-deliver by being too slow, disengaged or unstable. Don’t rely too much on your assumptions or the other side’s ability to deliver
  • Every partnership requires effort– I’ve seen many people making partnerships sound effortless. They are definitely not. Only bad businessmen underestimate partnership costs in time, money and opportunity. Working with a different company requires you to agree on commercials, legal issues, technical integrations and timelines. You then exchange knowledge, solve problems and measure. You need to manage personal relationships with the people on the other side. Partnerships without strong mutual investment don’t surivive. And even when you do invest… well, we’ve invested as much as 50,000 USD in partnerships that we never even launched or got revenue from
  • There is a risk asymmetry between a startup and a big corporate partner– if bigcorp terminates a partnership, it’s not a big deal for them. But it’s definitely a big deal for the startup on the other side that might have invested 10% to 50% of their time in this partnership. For some startups that means closing shop

Now that we’re aware of the dark facts, my 5 partnership tips for startup founders are:

  1. Obsess over the customers and their problems before you touch partnerships– because partners, just like funding, don’t validate your right to exist as a company. Paying customers do. Some companies (such as QuickBooks) thrive on channel partners. If you’re selling product X and a bank, or a supermarket chain, or a big e-commerce website can help you sell more, they solve a real distribution problem for you. But you must validate your value to customers before you look for partners to solve your distribution challenges
  2. If it’s not a “spot on” partnership that solves a real pain for both sides, drop it. If you see “value assymetry”, the partnership is almost guaranteed to fail
  3. Be very, very specific about partnerships. Understand how the partnership serves your top priorities as a startup and define your partnership really well from a commercial standpoint: what’s in it for you? What’s in it for them? Why should it work now and in the long term? What strategic reason they have not to compete with you? If it doesn’t serve your top priorities, or you don’t have really good answers for everything, there’s a good chance you’re wasting your time
  4. Treat all partnerships as experiments– for all of the reasons above. Limit your investment in partnerships. Define exactly what’s considered success or failure after a certain amount of time. Don’t put too much hope into them. And make sure that even if they fail, you learn something– about distribution channels that work vs. don’t work, or the industry, or your business model
  5. Kill the failed partnerships (=experiments)– if a partnership has failed, man up and give yourself and your team some clarity: stop it completely and officially. Don’t let it live in your agenda in “zombie mode” and don’t let it confuse your team just because you still have some hope in it or because you don’t want to offend the other side

We failed with partnerships over and over again, but it didn’t kill us. In the case of an average startup, wasting time on the wrong partnerships or putting too much hope into a partnership that seems right might lead you to failure.

So, startups: avoid suicide by waste, even if partnerships are tempting and may entail some PR. The world might get excited about partnerships sometimes, but don’t live by what the world expects. Be focused and live by what your business needs. It needs to validate tons of risky assumption about the product and the market, and it needs paying customers. Quick.

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