Greg James is always on the lookout for the next big hit for his Renton, Washington, video publishing business, Topics Entertainment. Instant Immersion, the company's language-learning software, now has 80 percent market share and is sold at major retailers such as Best Buy and Costco. And Success, the company's educational software package that bundles CD-ROMs from different producers into box sets, has also performed well.
Two years ago, however, James saw a market opportunity he couldn't resist: the Baby Einstein-dominated children's educational DVD business, where small video production houses with sales in the $1 million to $2 million range had similar products but not the power to get into big retailers. James, 49, thought that Topics' vendor relationships with major retailers, combined with products from these small production houses that it could bundle into box sets, would offer the one-two punch needed to get some of Baby Einstein's market share. "We basically took the same idea that had worked so well in CD-ROM software," he says, "and started making calls to these producers and pitched them the idea."
Topics' pitch worked. The company is partnering with four small video production companies in the children's educational DVD space. These companies create the videos that Topics' 55 employees bundle, sell, distribute and market through major retailers under the label Little Steps. "It's a classic David and Goliath story," James says. "Baby Einstein is a $200 million business for Disney." So far, thinking small has paid off big-time: Licensing and bundling partnerships with other small companies now constitute 80 percent of Topics' revenue, and the company projects sales to reach $75 million this year.
Partnering is an important strategy for growing companies because it spreads the risk of entering new markets and helps entrepreneurial companies appear more stable to the end buyer. Smaller companies "might not have balance sheets that look attractive enough to win a contract," says Gary Dushnitsky, assistant professor of management at the University of Pennsylvania. Through partnering, "you can immediately amass that kind of critical mass, that kind of capacity to provide presale and postsale support."
Conventional wisdom says that partnering with a very large company is the best way to maximize resources and opportunities, but what about partnering with another small company to go after a piece of the market? The strategy has its naysayers, but Sarah Gerdes, a former small-business consultant and author of Navigating the Partnership Maze, thinks small-small partnerships are a feasible alternative. She sees an increase in the number of entrepreneurs--especially in the service sector--who are creating partnerships with other small companies. "Five years ago, partnerships were a course of last resort," she says. "Now, time to market plus internet competition for retail services means [entrepreneurs] look to others for leverage."
James views these small-small alliances as a simple division of labor that allows his company to get into the big retailers a lot faster while eliminating producers' worries about cash flow or liability related to product returns. "It really frees them up to focus on what they want to do, which is just the creative stuff," he says. "The benefit for us is we don't have to spend money producing product; we can spend all our time on packaging and sales."
Look for intersections between your company and other growing companies to sell each other's product lines, create new products and find new market opportunities. "Too many people get caught up in the science of it, and it's so overwhelming, when in fact it's just common sense," Gerdes says. "Look next door; look across the street."
But do your homework, because a small partner who knows both your strategy and your customer base could become a fierce rival overnight. "A collaboration can gain you scale very fast, but you are potentially setting yourself up for competition," Dushnitsky says.
Find out how a potential partner's growth and product development plans jibe with yours. James suggests working a performance clause into your contract that offers a way out if the other party doesn't sell a specific amount of your product every year. "That was a lesson I learned early," he says, predicting that Topics' share of the children's educational DVD market will grow to between 10 percent and 25 percent this year, propelled by its alliances with small production houses.
This David, however, still faces an uphill battle to slay Goliath. Taking on Disney's marketing and distribution machine isn't a small job, and James concedes that Disney has big advantages. At press time, Topics was trying to get its Little Steps product into Wal-Mart and Target, and James believes there's strength in numbers. "We have as good or better content than Disney at basically one-half to one-third the price," he says. "Eventually, [consumers] are going to figure that out."
Chris Penttila is a freelance journalist in the Chapel Hill, North Carolina, area.