April 8, 2011
Unfortunately, I’ve been forced to reflect a lot of late on the dangers of big, seemingly “company-making” deals for early-stage companies. You know, the relationship with the huge whale of a channel partner. . .that company that, when sketching out the strategy for your start-up you thought, “if only we can get a distribution deal with WhaleCo, we’ll be golden!”
I long ago learned to run for the hills anytime a prospective investment I was talking to started talking about a relationship with WhaleCo as central to their go-to-market strategy. Logical as they may seem, it just never makes sense to rely on those relationships, because they never happen the way LittleCo thinks they would or should. They can be great boons for your business if you get lucky, but if you don’t have a sustainable business model on your own, you’re unlikely to make it.
I stumbled across an excellent old Marc Andreesen post on this topic recently. It’s lengthy, but enlightening, and he describes a great many of the ways that WhaleCo can suck the life out of you while meandering its way to maybe, or maybe not, consummating a deal with LittleCo. It’s an important skim, at least.
Regrettably, a good friend founded and runs a company that I’m an advisor to, and which is involved in a situation that Marc doesn’t contemplate, but which is equally perilous. His company landed, signed, and implemented their deal with WhaleCo two years ago. Total company-maker, we were all convinced at the time. We raised a substantial Series B at a great valuation on the heels of signing the deal. It was a brutal process getting to that point – the twists and turns and starts and stops to the discussions were as torturous as anything Marc outlines. But we got there. Big press release, lots of attention for the company, CEO named to lists of key industry innovators, etc. etc.
And then, the deal quite literally sucked the life out of us. And that’s where Andreesen’s post stops one rule short of being complete. He needs a ninth rule for dealing with big companies:
Ninth, NEVER, even after the ink is dry and money is in the bank, assume it’s going to roll out the way they said it would, and make DAMN sure you’ve still got plenty of eggs in other baskets.
When my friend’s LittleCo landed its deal with WhaleCo we all strapped ourselves in for an exciting and lucrative ride on their coattails. Sure, we had some discussion about not counting on it too much, and the importance of building other relationships and other go-to-market channels. But as WhaleCo put $2MM on our balance sheet – a non-dilutive up front payment negotiated to support implementation – it became understandably hard for management to think about anything else. Clearly these guys were committed, and they were forecasting $10MM of annual revenue coming our way as a result of the deal! So LittleCo scaled up to deliver, and took its eye off almost all other balls.
And then. . .silence.
WhaleCo pulled their big launch of our program at the annual industry conference just a day before it started. We were told it was just a temporary delay – some internal something-or-other. But ultimately, nothing ever happened. NOTHING.
For two years, WhaleCo kept making small, minimum monthly payments, kept talking about when they were going to launch, kept sharing with us revised versions of their internal models for the relationship. They even started to plan the international rollout of the thing they hadn’t yet launched domestically. Surely they were serious if they were devoting resources to expanding the program!
They did just enough to keep our hopes pathetically alive, just enough to keep us distracted from running full speed against a range of other opportunities. Finally, after two years, they stopped paying, and stopped returning calls.
Time will tell where LittleCo ultimately ends up, but wherever it is, it will at best have taken a lot longer to get there, and most likely be a place that is not nearly as exciting or lucrative as the one we would’ve gotten to had we navigated this dance with WhaleCo more effectively.
So what’s to be learned? Looking back at it, Marc’s post sums it up pretty well – you just can’t depend on anything when dealing with WhaleCo. There are a million reasons that deals get done and not done. I’ve seen big companies get crazy excited about things that seem idiotic to us on the outside, and I’ve seen them not do things that seem like no brainer, bulletproof, totally strategic, obviously huge ROI decisions. The point is, you can never know what’s going on inside WhaleCo, and you can almost never even trust the people you’re working with on the deal to really know. Even if it’s the CEO saying he’s all in, there’s a million ways that the winds of change can suddenly blow through a big company, and he might for good reason no longer care about you tomorrow.
Navigating these deals is one of the most challenging elements of building a startup. As a rule, I generally root against WhaleCo opportunities even presenting themselves early on, especially if pursuing them would require any shift in core strategy. As we saw with my LittleCo, our big, company-making deal presented itself at a time when we didn’t have our core business model sorted out yet. As a result, we got knocked off of what should be the A#1 priority of every young company – designing, executing, and proving a repeatable and sustainable business model that is not overly dependent on any individual actor.
Had WhaleCo come along a year later, we would’ve had our feet under us, a business model that had started to really work, and a better sense of our own priorities. But they approached us early, and shame on us for not reacting the right way.