Entrepreneurship: The Benefits and Pitfalls of Partnering

Stephen DeAngelis

September 23, 2010

In a post entitled Avoiding Mistakes that Lead to Failure, I discussed a Wall Street Journal article by Rosalind Resnick, the founder and CEO of Axxess Business Consulting, a New York consulting firm that advises startups and small businesses. She previously was a co-founder of NetCreations and hosted AOL’s NetGirl Forum. Resnick also serves on the board of Do Something, Inc., a New York-based nonprofit organization that empowers young people to change their world. The subject of Resnick’s article was “10 Mistakes That Start-Up Entrepreneurs Make.” Number five on that list was “Entering a market with no distribution partner.” Commenting on that “mistake” I indicated that I would publish a post on partnering in the future. This is that post.

One of the challenges that a successful start-up company can face is rapid growth. It’s a good challenge to have; but, it’s still a challenge. There are several strategies that a company can use to meet this challenge. First, it can hire new employees in sufficient numbers to meet growing demand. As any good HR person will tell you, however, hiring a lot of people in a very short time is no mean feat. If demand for a product or service erratic, a company may hire enough people to meet a spike in demand then realize that it is carrying an excessive payroll when demand falls. Hiring temporary employees to solve this situation risks affecting the quality of what is being produced at a critical time in young company’s fight for survival. That leads to a second strategy — outsourcing. A company can outsource activities that keep essential individuals from focusing on more important tasks. Unfortunately, these kinds of activities are rarely the ones for which a young start-up must hire a lot of people in a short period of time. Third, a company can find a partner (i.e., a larger, established company) that can immediately overcome any labor shortages the start-up may have. There are other advantages to finding the right partner as well. For example, good partners have established business connections and sales channels. Additionally, when demand slackens, it becomes the partner’s challenge to keep its workers gainfully employed, not the start-ups. Sometimes, however, what appears to be a good partnership in the beginning can turn out to be a bust in the end [“In a Partnership of Unequals, a Start-Up Suffers,” by Steve Lohr, New York Times, 18 July 2010]. Lohr explains:

“Technology start-ups and big companies work together all the time — refining ideas, seeking mutual advantage and accelerating the pace of development of new products and services. But these odd-couple relationships can be fraught with peril. Steve A. Stone, a veteran product manager at Microsoft, had an idea for an innovative way to identify and track digital objects across the Web. So he set up shop for a new company in his garage in suburban Seattle, and convinced a few Microsoft colleagues to join him. They began building their software, working late many nights, fueled by spaghetti and takeout Subway and Quiznos sandwiches. The start-up, Infoflows, began working with Corbis, the big photo library and licensing company owned by Bill Gates, Microsoft’s chairman, and in June 2006, the two signed a multimillion-dollar development agreement. But four months later, things fell apart, culminating in a Washington State jury verdict against Corbis for misappropriation of trade secrets, fraud and breach of contract. The jury awarded damages of more than $20 million.”

Corbis is appealing the case. But Lohr claims that “the Infoflows-Corbis story is a striking case of a partnership between a start-up and a big company gone bad, and a catalog of pitfalls to avoid — courtroom battles, millions in legal costs and a business in limbo for years.” The split between Infoflows and Corbis has been mean and messy. It doesn’t have to be that way.

“‘What you want is the business equivalent of no-fault divorce,’ said Josh Lerner, a professor at the Harvard Business School. ‘You want the ability to experiment, fail and disengage, and move on, to keep the innovation process moving forward.'”

That obviously didn’t happen in the case at hand. Lohr explains the positions of the two sides:

“Corbis asserted that Infoflows was a poorly performing contractor that Corbis had patiently tried to work with, but finally gave up on. Except for a small sliver of technology belonging to Infoflows, Corbis said, all the work produced and the intellectual property was owned by Corbis. Infoflows saw things differently. ‘They took our ideas and tried to claim them as their own,’ Mr. Stone said. ‘And they tried to crush a little company.'”

The appeal process could take years and Infoflows won’t see a penny of the court award until the appeals process is complete and it remains victorious. The litigation has wreaked an enormous toll on the entrepreneurs that started Infoflows. Lohr explains:

“Infoflows may hold the upper hand now, but the long legal battle has taken a toll on the founders, they say. Retirement accounts and savings, they say, have been drained to pay legal fees. Still, unlike many start-ups, the Infoflows founders did have resources to battle the big company. And they had little choice. … Infoflows, its founders say, talked to potential customers and venture capital backers. But the litigation with Corbis scared them away. ‘No one wanted to come near us,’ recalled Carlo Martin, a former engineer at Microsoft. ‘It shut us down.’ Infoflows, which had leased offices in Redmond, Wash., retreated to Mr. Stone’s garage. For Mr. Stone, overseeing the legal battle with Corbis was a full-time job, but the other five founders sought outside work, mainly as consultants and contractors.”

Lohr reports that “the Corbis deal was a big bet on one customer” for the founders of Infoflows. But perhaps the biggest mistake they made was allowing the company to enter “into the partnership without patenting its software or system for tracking digital rights.” Lohr continues:

“Technology start-ups that work with big companies, said Kevin Rivette, a Silicon Valley consultant, should take care to protect their most valuable ideas, even as they collaborate. ‘Innovation without protection is philanthropy,’ said Mr. Rivette, a former vice president of intellectual property strategy for I.B.M. Mr. Stone said he felt no rush to patent because he wanted the joint work with Corbis to move closer to a finished system. Infoflows, he said, would develop the underlying system for identifying and tracking digital objects across the Web, and Corbis would own the application for its photo-licensing business. In December 2006, after Corbis terminated its agreement with Infoflows, Mr. Stone met with Corbis managers to discuss details of the breakup. Corbis said the intellectual property it claimed as its own was covered in the nonpublic patent Corbis had filed back in January of that year. It was the first time Mr. Stone had heard of Corbis patenting the work, he said. ‘I was shocked,’ he recalled. The Corbis patent, Infoflows said, was a move on its ideas. Mr. Stone said he had an oral agreement with Corbis, supported by an e-mail exchange, that neither side would file for patents until their work was well along. Corbis denied any such agreement.”

You’ll have to watch the papers to discover how this sad tale ends. However, don’t let the Infoflows/Corbis debacle sour you on seeking partnerships that could benefit your company — just do your homework. Make sure you have good legal advice, iron-clad signed agreements, and patents to protect your intellectual property.

Sometimes partnerships are formed for reasons other than rapid expansion. One such reason is to obtain the services, ideas, and name recognition of a particularly important individual [“The perfect partner to provide a new spark,” by Luke Johnson, Financial Times, 18 August 2010]. This scenario is the topsy-turvy version of partnerships where a large company is looking for a smaller partner (i.e., an individual innovator). Johnson explains:

“How do large corporations discover the creativity that founder-led companies seem to enjoy? The answer can lie in finding an implant entrepreneur. By this, I mean by forging a commercial relationship with a serial entrepreneur – a type of joint venture that suits both parties. The corporate benefits from the entrepreneur’s flair, reputation and self-confidence; the entrepreneur obtains access to the corporate’s capital, covenant and infrastructure. Classic cases of such arrangements were those organised by George Davies, who essentially invented the clothing retailer Next. He developed labels with Asda and, later, Marks and Spencer. The collections George and Per Una respectively seem to have proved to be winners for all concerned. Another example was Carluccio’s. Here Antonio Carluccio, the well-known Italian restaurateur and writer, provided his name and credibility to a new chain of casual dining outlets. Before this involvement he was famous for running a single, top-end restaurant in central London, and his television work and cookery books. His association gave the Carluccio’s chain an authenticity that was vital to its success. Yet the true management brains behind the operation were various ex-colleagues of mine from My Kinda Town, a pan-European restaurant business, including Stephen Gee, Simon Kossoff and Peter Webber.”

Johnson notes that these kinds of partnerships can be tricky because “almost no high-achieving founders want to work for someone else. They enjoy their independence too much – and are simply too proud – to be a conventional employee.” He claims that there are other ways that implant entrepreneurs can contribute (e.g., “serving as non-executive directors”), but to gain the most benefit from their energy and ideas, they need to become partners. Otherwise, Johnson writes, they “won’t necessarily deliver enough of their magic formula.” He continues:

“After all, how much incentive do they have to really apply themselves? The answer is to devise some sort of partnership, licence, franchise or concession that permits the corporate to exploit the entrepreneur’s genius without suffocating it. In particular, this sort of deal works if the personality is a celebrity who is looking for funding and administrative support. Typically, it proves most advantageous in consumer sectors such as food, sport and fashion. By entrepreneur implant, I do not mean celebrity endorsement. I mean a long-term, exclusive enterprise where each party has a genuine economic interest and is mutually dependent. Each supplies ingredients the other lacks. Entrepreneurs get scale, while corporates get innovation. Increasingly, consumers want to patronise establishments with character. Large concerns struggle to invent these. So teaming up with individuals who have imagination and a track record, but want someone else to risk their cash, makes complete sense.”

Johnson admits that the idea sounds easier to make happen than it is to accomplish. Personalities really matter in these kinds of partnerships. Corporate leaders have to swallow a bit of pride and admit that someone may be more creative than they are and the implant entrepreneur has to learn to compromise on some of his or her ideas. When it does work, Johnson claims, it provides a number of benefits. He concludes:

“It can be hard to break through the bureaucracy within a traditional hierarchy. Yet, with the backing of a serial entrepreneur, even the most radical concepts can receive a fair hearing. The latter can break the rules because they have the ear of the boss and access to the board. Working with an implant entrepreneur is not the same as corporate venturing or even intrapreneurship. Corporate venturing is the financing of external projects by industrial companies using venture capital techniques, while intrapreneurship is the cultivation of in-house entrepreneurial initiatives by full-time, permanent staff. Occasionally, implant entrepreneurs are freelancers who consult for a fee, rather than proper partners. That sort of looser scheme is less likely to do well, but may still provide the necessary spark to launch a new idea or process. Enlightened multinationals might do well to find the right entrepreneur partners, who can bring fresh thinking, profile and brand integrity. They are a sort of R&D department combined with a marketing resource. In an ultra-competitive world, the leaders are those who use every tool available to gain an edge.”

In the end, of course, a partnership needs to make sense for both sides. I think that Johnson hit the mark when he defined a good partnership as one where both sides have “a genuine economic interest and [remain] mutually dependent. Each supplies ingredients the other lacks.” Get it right and a partnership can help take your company to the next level. Get it wrong and a partnership can take you to court.