Startup Funding Option: Strategic Alliances

Entrepreneurs often look to friends, family, their bank account, and even credit cards when funding a startup, but many perhaps overlook this startup funding option: The strategic alliance.

A strategic alliance is a cooperative arrangement between two or more businesses for the mutual benefit of all involved businesses. The idea is that each involved entrepreneur or business entity brings something to the alliance which enables a greater opportunity for near-term success for all parties than the parties might achieve individually. While it is possible one company might invest in another to gain access to products and services more quickly than it might develop the same for itself, the more likely scenario is one in which two companies with complementary services align to improve long-term revenue generation opportunities.

For example, one entrepreneur with design experience might align with another entrepreneur with software coding experience to form a structured partnership to pitch new software projects to a prospective client or develop a software-as-a-service (SaaS) application to offer to a broader customer base.

Another example might be a larger company that needs support products or services provided by a startup and agrees to partner to gain access to that startup’s offering. More specifically, a mapping software company may find it has difficulty selling its software for certain business applications. It could partner with a business consultant who understands how to apply business thinking to the software tools to help a prospective customer better understand the software’s value. When a sale occurs, the consultant helps implement the software and train the client.

There are challenges to strategic alliances, of course, particularly among startup ventures. The biggest obstacles appear to be difficulty in finding suitable cooperating partners, an inability to assess the upside and downside of the alliance accurately, the challenge of properly structuring the arrangement, and the fear that cooperation might result in the expropriation of business (Hsu, 2007). Moreover, some alliances can pose a challenge to future investment funding if investors have a conflict with one or more of the alliance partners, or if cash flow rights to alliance partners dilute the opportunity for investors (Ozmel, Robinson, & Stuart, 2012). However, if entrepreneurs are open to such alliances, these obstacles can easily be overcome with the support of experienced business mentors, attorneys, and accountants.

Simple strategic alliances might occur with a “memo of understanding” that outlines what each party in the alliance will bring to the table, while a more complicated partnership might involve a formal agreement that holds each involved party accountable for providing the products and services to be delivered jointly to a customer. The most complex alliance might require the formation of a joint entity such as a corporation or limited liability company where all parties have ownership relative to their level of responsibility and risk in the alliance. The structure chosen is dependent on the products and services offered, the desired outcome of the collaboration, and the level of tolerance for risk by the parties involved.

While strategic alliances do provide an option for funding a startup or small business, it is important to remember that most strategic alliances do not usually result in direct investment for an entrepreneur’s business. Instead, the alliance should enable an entrepreneur to secure his or her first projects or to create the initial products necessary to launch or grow a business. As a source of funding, the goal of a strategic alliance is to facilitate new opportunities, to improve the probability of cash flow, or in the case of a startup, to get a business off the ground. Finding and aligning with the strategic partner might be the first step to securing the funding needed for long-term success.

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Reference

Hsu, D. (2007). Venture Capitalists and Cooperative Start-up Commercialization Strategy. Management Science, 52(2), 204-219.

Ozmel, U., Robinson, D., & Stuart, T. (2012). Strategic alliances, venture capital, and exit decisions in early-stage high-tech firms. Journal of Financial Economics, 107(3), 655-670. doi:10.1016/j.fineco.2012.09.009