In the race for recognition and rapid growth, many startup founders see large companies as a "lifeline". However, reality is not quite like that: forming a partnership with a large company can help a startup scale up, but it can also hinder its development and innovation and, in the most extreme cases, even end its business.
A notable example of a startup that went bankrupt after partnering with large companies is the case of Quibi. Launched in April 2020, Quibi was a streaming service aimed at offering short-form video content, ideal for consumption on mobile devices. The platform received a significant investment of approximately $1.75 billion and established partnerships with major Hollywood studios for the production of exclusive content.
However, in October 2020, just six months after its launch, Quibi announced that it was shutting down its operations. The combination of high investment, unbalanced partnerships, and lack of market adaptation led the startup to failure, despite support from major organizations. Therefore, there are appropriate times and ways to seek these partnerships, which, if not well managed, can be harmful to startups.
The right time to seek partnerships
It is crucial to consider the right moment to seek a partnership with established companies. Most of the time, the later, the better. Very young startups still do not have a product-market fit, and having a large corporation behind them can solve problems but can also suffocate the company if the attitude is not appropriate.
For startups that already have a validated product in the market, partnering with large organizations can begin at a different level. Large companies can bring significant value by becoming clients, endorsing and distributing products. However, there are exceptions for startups that require large capital, such as hardware startups, where an initial partnership can be beneficial.
A real example of this successful dynamic is Slack, a business communication platform that has become one of the most popular tools for collaboration in the workplace. In 2020, Slack announced a significant partnership with IBM, one of the world's largest technology companies. IBM decided to implement Slack as the main internal communication platform for all its 350,000 employees worldwide. This movement not only validated the effectiveness and usefulness of Slack's product but also solidified its position in the market as an essential tool for large corporations.
Avoiding offers of free services
A common mistake is offering free services for long periods. If a solution solves a real problem and the investment of time and resources is worthwhile, it is important that the service is paid for. Testing the solution for two or three months is reasonable, but offering free services for longer may cause cash flow problems for startups, as well as create an unbalanced relationship.
Remember what happened to Homejoy, a startup launched in 2010 that quickly grew by offering residential cleaning services with good discounts and, in many cases, free services to attract new customers. The company raised $38 million in venture capital investments and expanded its operations to several cities in the United States.
This initial strategy helped the company quickly grow its customer base, but also created a series of problems. By offering free services or significant discounts, Homejoy struggled to generate enough revenue to cover its operating costs. This led to a rapid depletion of their financial resources.
Furthermore, customers have become accustomed to paying little for services, making it difficult for Homejoy to adjust prices to a sustainable level without losing a significant portion of its user base. The low-price strategy created an unbalanced relationship, where customers expected high-quality services at very low prices, putting additional pressure on employees and affecting the quality of service.
In July 2015, just five years after its launch, Homejoy announced that it was shutting down its operations. The organization cited financial challenges and legal actions related to classifying its workers as independent contractors rather than employees as reasons for the closure.
Defending the value of the product
At the beginning of partnerships, it is essential for startups to defend the value of their products. When someone wants to use the service for free, the entrepreneur must stand up and defend the value they are creating and the quality of their services. If the company wants to establish a partnership, it needs to pay the fair value for the service.
Foursquare, launched in 2009, quickly became popular for allowing users to check in at different locations and share their activities with friends. A startup caught the attention of major organizations that wanted to use their location data to target marketing campaigns and improve their business strategies.
Initially, renowned companies tried to use Foursquare's data and services for free, hoping to explore the new technology at no cost. However, the founders, Dennis Crowley and Naveen Selvadurai, understood the importance of advocating for the value of their product. They insisted that companies pay for access to data and services, highlighting the quality and exclusivity of the information that Foursquare offered.
This firm stance helped Foursquare establish lucrative partnerships with major organizations like Starbucks and Microsoft. By defending the value of its service, Foursquare not only secured a sustainable revenue stream but also solidified its position in the market as a valuable tool for location-based marketing.
Therefore, partnerships between startups and large companies can be extremely beneficial when made at the right time and in a balanced manner. But remember that these giants are not a "nice guy" who wants to help your startup grow just because he loves doing good. They have goals and interests and are seeking a business partnership that is beneficial for them. In this way, do not fall into illusions; adopt a strategic and conscious approach so that these partnerships can leverage the growth and success of both parties.
