When to Partner with a Competitor?
Leadership teams in technology startups and emerging companies today know that angels, strategic and institutional investors, as well as PE firms and VCs are actively holding back on investments and tamping down valuations.
Separately, the news of the day is filled with stories about the war in Ukraine. Everyone knows about the global supply chain mess because it’s touching them personally or their businesses, or both. We also know that Wall Street is worried that U.S. stocks may be headed for a bear market because of rising inflation and interest rates. This is already reflected in the steep decline in the share prices of publicly traded tech companies. Not only has the IPO pipe closed but while startup-to-startup acquisitions remain strong, public companies have pulled back on M&A activity.
Under these circumstances, startups should actively analyze and seriously assess opportunities to partner with a competitor. A lot of research and internal discussions are necessary in order to understand the risks and tradeoffs involved in making such a move. There are, however, many potential benefits that can be gained by working with a competitor. Among the most compelling are getting help realizing your vision and goals, and advancing your business in innovative ways.
So, the question is: “When should you partner with a competitor?”
There are eight (8) separate answers that can be combined in various ways. Here’s the list:
During Times of Trouble –The COVID pandemic and supply chain mess are global challenges with effects that are broad and deep. The war in Ukraine impacts markets in Europe and beyond, and is casting a pall on all kinds of business activity. For example, a combined go-to-market (GTM) initiative in Europe, production deal, or supply chain program are the types of partnership opportunities which may help both parties and serve the market while navigating the rough waters of multiple crises.
For Industry Innovation – Rapid technological advances in life sciences, AI, cybersecurity, FinTech and other hot industry segments will drive partnerships with a competitor or multiple competitors. Forming partnerships to propel innovation is a good move to help a startup business enter new markets and spawn inventions within an industry.
U.S, semiconductor companies – Apple, Intel and others – have been partnering for years despite being direct competitors. They do so in order to compete more effectively with the Asian titans in this sector such as Samsung and Taiwan Semiconductor.
Samsung’s licensing of its SUPER-Retina edge-to-edge OLED screen to Apple for its iPhone X was advantageous to both sides. It was a win-win because Samsung had the best screen technology and Apple had the largest, most loyal customer base. While Samsung had several other wireless phone screen competitors (especially LG who provided screens for Google’s Pixel phone), both companies had other wireless phone hardware competitors. Still, the Samsung-Apple arrangement was innovative, mutually beneficial for the two companies, and it created great value for customers.
For Market Expansion – It’s often difficult to enter a new market – such as U.S. startup companies entering markets in Japan, China, South America or Europe. It is also difficult to expand in existing markets or new territories – such as U.S. companies entering Canada – especially in French-speaking Quebec – or Mexico. When considering such a move, companies must leverage market knowledge, distribution expertise, channel presence, and they must fully understand all the risks. But when everything lines up, and the calculus works, you arrive at the important conclusion that partnering with a business in your own or an adjacent space may be the only pragmatic approach to reaching your market expansion and business growth goals.
In the case of Amazon, it gave competitors access to its Marketplace. By doing so, Amazon reduced its potential profits from this co-selling arrangement, and also diminished branded product dollar volume and up-sales opportunities. But these Marketplace partnerships do provide a sales commission (as much as 30%), increases to overall dollar volume and more products – thus helping to realize Amazon’s vision of offering the biggest-best superstore for shopping. It may also have a positive impact on regulatory (read: antitrust) concerns since it shows a democratization of the store. There may be negative consequences, however, if the merchants come to believe they are being exploited inside the store. (Stay tuned; several cases are pending.)
To help Finance the Company – Sometimes a startup needs more “there, there” in order to get a Series A or other financing done. Real partnerships – those that produce leads, revenues/ARR, and other tangibles – are a way to seal the deal. Having successful direct sales and subsequently supplementing it with a sales channel, makes a more compelling case for further growth and expansion, and thereby makes additional financing more likely.
To Help Defray Technology and Financial Risk – When Ford invited VW to invest in ARGO AI – an autonomous vehicle company – VW invested $2.6 billion in the new company and $500 million in Ford shares. Both parties managed the significant financial risk, respectively brought intellectual property to the combined solution, and in the process catapulted ahead of their industry competition. This also played into the company’s regulatory strengths – Ford in the US and VW in Europe.
When There’s a Big or Bigger Competitor in the Market – When a corporation or entity dominates a certain market, it is incumbent upon startups, emerging companies and even other established companies to figure out ways to partner with that large player. In March of 2022 Uber partnered with yellow taxi companies in N.Y.C. – the very companies Uber was trying to disrupt and the entity they said they’d never partner with. By joining forces, they increased their market share and satisfied customers in the process.
When Complimentary Businesses Lead to a Combination – Sometimes competitors are sufficiently differentiated that when combining strengths, synergy results. This complimentary synergy may provide the basis for deeper discussions about business combination(s) for additional synergy.
For Common Cause, Charitable or Good Works – Recent examples of this include drug companies cooperating to address AIDS in Africa by cooperating on patent issues or working together to address vaccine production problems during the early phases of the COVID pandemic. The same concept was pursued by lots of businesses – including many competing companies – that supported the Black Lives Matter movement last summer and fall.
Of course, two parties negotiating a partnership agreement and subsequent relationship try to achieve a win-win outcome, one that provides equal advantages and benefits to both parties. On the face of it, going in on such an arrangement with a direct competitor is antithetical in the minds of most startup types.
However, by thinking bigger and looking deeper at such arrangements, company leaders can often have an epiphany. They see that the partnership they’d previously never considered actually will allow two previously competing parties to work together towards a common goal. And by joining forces, they’ll greatly increase the probability of success for all involved. These are bold moves, but ones well worth considering when the right factors come into alignment.