NASSCOM, the influential Indian IT association, is having its annual event called India Leadership Forum in a few days. Manmohan Singh (Prime Minister of India), Amartya Sen, John Hagel, big name CEOs and others will be there. I am chairing a panel discussion on the first day. It’s about “Building World Class Emerging companies through Partnerships”. I have been thinking about this topic and have some new ideas that I thought of running by you. Do jump in with your comments.
Coming back to the role of partnerships in startups. Partnerships are important but the role they play varies a lot from startup to startup. As I have thought about this I feel that one can make some generalizations based on the type of opportunities the startup is chasing. Let me explain.
One set of startups go after an opportunity that is to do with new class of consumption. Ringtones, MMORPG, blogging platforms, data mining software in late-80s, online retailing in late-90s are all examples of these new classes of consumption. Startups have an edge here over established firms. Because of their lack of legacy mindsets and higher nimbleness they are best positioned to offer the most compelling solutions. The marketplace recognizes this fact and expects startups to win, and sometimes win big. The pattern of firm evolution is predictable. They first try and get the offerings right, leverage that to acquire customers and only then look for partners to scale-up. Partnering is important but only after some scale has been achieved.
Separate from the new class of consumption opportunities are the value chain transformation opportunities for startups. We are living in a time when a number of vertically integrated value chains are morphing into modular value chains comprised of a clutch of specialist firms each focused only on a part of the overall value chain. The IT industry offers a perfect example. It moved from vertically integrated firms to specialist firms of microprocessors, operating systems, services, etc. This transformation is now moving deeper into the industry. We are seeing the rise of data centers on a tap obviating the need to have them inside the firm. Pharma/biotech industry is another example where the value chain is going modular. Media industry is also getting disaggregated.
The way the value chain transformation plays out is that you start relying on some other firm to do what you did internally. If you made computers, you now buy the microprocessors from somebody else. If you develop drugs, you now rely on specialist drug discovery firms to identify molecules for you or to do stage 1 clinical trial for you. Instead of doing your own sales order processing, you rely on a specialist firm to do it for you. Inherent in this transformation is a big opportunity for specialist firms. They are not creating a new class of consumption. Instead these specialist firms are delivering what existed before in a new form-factor, often at a lower price and with higher cadence of innovation.
In effect, startups can aspire to be the new class of specialist firms that come up in a value chain transformation. This has a totally different pattern of firm evolution compared to the first case that we considered earlier. Here the offerings don’t start out by being distinctive so the firm’s initial clout instead comes from the power to evangelize a new category. This involves explaining the benefit of value chain modularization to upstream and downstream stakeholders. It involves thought leadership, not about offerings, but about the new industry structure. This category leadership is the basis, in place of superior offerings, for forming the right partnerships. Typically market traction builds only after some category building has happened.
Think of how Infosys acquired clout by strongly evangelizing the global delivery model. Evalueserve, a relatively recent startup, has used the same formula taking lead in creating the KPO category. The same dynamic is playing out in the drug discovery space with, possibly, GVK Biosciences leading the pack.
In summary, my take is that the startup firm evolution is different for the two kinds of opportunities that we have considered. In one case, thought leadership goes into creating an offering power that is then leveraged to acquire customers followed by partners. In the other case, thought leadership goes first in building a category power which then underpins strategic partnering and customer acquisition. If this distinction is valid, then this has obvious implications for entrepreneurs and for VCs.
Even though I have perhaps over-simplified the argument, do you think there is some substance in what I am talking about? Look forward to hearing back from you.
[Update: See the post, A Different Startup Mantra, for evolution of these ideas]
Sharad,
I liked the article and agree with the hypothesis. In addition I need some clarification to better understand some nuances.
One could categorize new consumption along many dimensions – a new class of product, a new channel, a new business model, or something else? For e.g. Amazon.com is old product delivered via a different channel hence a new consumption category. Similarly salesforce.com is both a new channel and a new biz model – same functionality. Intuit starting quickbooks for SMEs where they were already selling tax prep software is a new product same channel and biz model. Google starting to sell payment services to its SME customers is likely none of the above as the product already existed.
So new consumption could be either of three – is that fair?
If so, the partnership model distinction is more pronounced when the channel is what defines new consumption. If new consumption is new product, that can be pushed thru existing channel, then partnership ahead of customer traction may be a reasonable strategy - if one can find a willing channel partner. This is being demonstrated by the likes of TCS who are offering their channel to startups with no proven customer traction. Or Junglee where we realized that our product is best pushed thru existing channels (strategic investments frequently are made for this reason). Often, the channel partner may want to see customer traction in which case we are indeed compliant with the distinction you make.
So net net, the only nuance that seems worth considering separately is if the channel for product is well established then the startup should consider partnering ahead of customer traction.
Thoughts?
Thanks, Ashish. I like your clarification of what’s new consumption. Also, your conclusion that “if the channel for product is well established then the startup should consider partnering ahead of customer traction” is bang on target. Very helpful.
Sharad,
As always, a nice article and good thought.
As I have seen an experienced that startups tend to spend a lot of cycles “partnering” expecting that the business will grow through that route. Your framework gives some practical guidelines on how startups should be evaluating partnering.
I thought I will add a few points, that may appear trivial or commonsense. But, it may be useful considering some of the confusion that one observes with startup companies who have several partners listed.
In essence, there is a distinction between being a partner, customer or supplier. These are sometimes mixed up. A startup is a Customer when it buys from an external company and is a supplier when it gets paid directly for the services. Whereas in partnership, there has to be interest and stake from both parties, to realize revenue from a third party together. The essential aspect of the partnership has to yield higher revenue for all partnering entities, that could not have happened without the partnering in place. Startups should therefore have a very candid evaluation criteria before they spend time (which is the most expensive resource they have), money and effort in developing partnerships. Partnership has to be thought at the business model development level, and RoIs worked carefully in terms of time and cost.