For a Startup, What’s the Upside, and the Cost, of a Flattering Partnership Proposal?

One of my advisees, social-analytics startup SentiGeek, was approached by another startup that wants to use SentiGeek’s technology to build out a consumer-focused solution. My advice to SentiGeek CEO Mara Tsoumari, who is otherwise quite busy with pilots and more-conventional business development: Attention is flattering, but take a hard look at the risk, costs, and upside – and be very wary about going off-plan – before saying Yes.

Mara’s report: “They want to use our technology for [review text] processing. They have some sort of partnership in mind, sent an intro to start with, expect something similar from us to start thinking about ways to integrate. “ 

What’s your immediate reaction? My own thoughts jumped right to the bottom line: There’s no cash involved.

Cash and Product

Early-stage startups need to focus on two things, in my opinion, cash and product. This focus translates into three questions:

  1. What’s the benefit?
  2. What’s the cost?
  3. Will it – whatever “it” is – get us to market faster?

Mara will benefit from this deal only if the partner succeeds, and since her tech would be embedded in their solution, she’d garner only a portion of the revenue they bring in. But the prospective partner is an early-stage startup itself, building out a platform and a market of its own, so substantial revenue won’t happen soon. (Mara has cleared me to post this analysis, by the way. There’s no embarrassment in admitting that you think before making decisions.)

Are there non-cash benefits? In this case, seemingly few. A deal with an unknown partner, building an unlikely-to-disrupt solution for a commodity market – I didn’t mention that aspect – isn’t going to create visibility for you or entice funders to invest or customers to buy.

So there’s modest expected upside to this proposed deal.

Costs and Risks

Next questions: What will the interaction cost, and what are the risks?

This proposed deal is neither a sale nor an investment. It won’t generate cash, which means that it’s effectively an investment on SentiGeek’s part, of time and effort. Is the would-be partner asking for any special development or deployment assistance or service-level guarantees or anything like that? If they’re not, cool. But if they are, I suggest the question, “Is helping a third party bring a solution to market the best way to invest energy and attention?” Of course I wouldn’t be asking if the answer was a clear Yes. So regarding costs, ask, “How much time and effort are you spending on them?” and “Is this investment distracting or diverting you from other go-to-market activities, for instance, from paid pilots underway or planned?”

There are risks too. Depending whether the prospective partner would be using the SentiGeek tech via a cloud API or via and embedded run-time, I’d be concerned about intellectual property vulnerability and off-the-meter, unreported use. (Another point I haven’t mentioned: The would-be partner is located in a country not well known for high business ethical standards.) What’s exposed, and what controls are possible? If not, there’s probably no issue.

Bottom line: If the interaction is low risk and low cost, no worries. But if there are significant risks, stay away, and if there are high time (attention) or financial costs, they should be justified by the return.

The Bottom Line

You’re an early-stage startup. You need paying customers. Can you afford to invest in another startup, especially one that you don’t have any relationship with?

To reprise my key advice: Attention is flattering, but take a hard look at the risk, costs, and upside – and be very wary about going off-plan – before saying Yes.

P.S. Meet Mara, and me, at a conference I organize, the Sentiment Analysis Symposium, taking place June 27-28 in New York.

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