Wednesday, December 2, 2009

3 Ways Your Software Business is Already Attractive to Potential Strategic Partners

Entrepreneurs tend to be very driven individuals.  Their twin mantras are "capital" and "growth", and they pursue both with a white-hot intensity I personally find invigorating.  They focus obsessively on improving their product, getting it to market, and selling it like crazy, and of course, there have been fortunes made in just this manner.  Then again, most entrepreneurs I know have spent years running around that particular hamster wheel, and have yet to reap the rewards.

Fortunately, then, it turns out that there are other paths to growth and capital beyond the build-release-sell cycle.  Strategic partnerships can turn your existing product into a quick or recurring source of revenue (or both). Even better, there are probably a number of ways in which your venture is already attractive to potential strategic partners.  Here are three of them:
  1. Market segmentation or integration
    Large companies might be capable of focusing their resources on any area they like, but even the largest can't focus on all of them at the same time.  There are always going to be opportunities to fit your product into the cracks in somebody else's portfolio.
    Let's say your product solves a big problem in the HR space. You may look to partner with, for example, a large business services company, one that offers a broad range of solutions across a number of industries. If your product can address a pain point for their customers, and the larger company doesn't already have a solution in that space, a partnership opportunity exists.

    It works in the other direction, too. Say you have built a platform for something like identity management, an application that could work for any kind of business.  Often I find that, with a little tweaking, you can take a broad solution like that and customize it for a particular market, such as financial services, or a particular function, such as HR. The trick is to find a partner selling into a particular vertical market, or into a particular corporate operational area — one that will pay you to configure a version of your product to meet the specific requirements of that space.

  2. Distribution
    Yes, sometimes the classics are still the best. You have customers, thus demonstrating you have a product that fills a need.  There are always companies that want to get a piece of that action; the trick for you is to find partners who specialize in selling into hard-to-reach markets.  My favorites are the government sector, which has its own rules and can be very difficult - and expensive - for a new entrant, and international markets. China, in particular, is a very tricky market, but even the European Union is awfully far away and downright foreign (just ask Oracle) if you're used to selling in the US. Generally, sector or geographic distribution arrangements can be negotiated to provide up-front capital, and cost you very little if you were not planning on entering these markets directly yourself any time soon.

  3. Private labeling
    Web developers have become incredibly sophisticated at building sites with eye-catching designs and interesting and engaging content.  Luckily for you, though, they often still struggle with taking the next step: converting their visitor flow into cash flow.  If your existing product offers a feature that can be leveraged by the site for that purpose, a partnership opportunity exists.

    Let's say, for example, that your software calculates an optimal portfolio allocation based on an investor's goals and external factors such as prevailing interest rates and technical market conditions. You might partner with a site devoted to financial news and discussion forums, which would offer your service to its users (either for a fee, or as a way to drive advertising revenue) using its own branding. Your partnership could involve revenue sharing, or perhaps just a recurring monthly or annual license fee - and all you had to do was to configure your software to enable easy rebranding (something you should consider doing anyway, if you haven't already).

The great thing about partnerships it that there are as many flavors as there are companies.   In my own work helping emerging growth firms find and land strategic partners, I've seen an amazing array of deals.  Some of these arrangements provide up-front capital,  some supply an ongoing source of recurring revenue, and most are non-dilutive or only mildly dilutive.  But the one thing they have in common is that they provide a stepping stone for the venture on its road to growth and profitability.  Even better, as the partners learn more about one another and become more comfortable working together, these deals can often lead to a liquidity event benefiting founders and investors alike.

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