What Now?

Have the days of making it on your own come and gone? A new breed of partnership may be the way of the future.
Magazine Contributor
9 min read

This story appears in the June 2001 issue of Entrepreneur. Subscribe »

The recent boom years were good while they lasted. Making money was easy: Just strap your fortune to the overall economy, and ride the rocket to riches. And just because Alan Greenspan took the punchbowl away, that doesn't mean the party has to end for entrepreneurs.

"The opportunity for fast growth, profits and accumulation of wealth is still possible," says Nina McLemore, chair of the National Foundation for Women Business Owners and president of Regent Capital Partners LP in New York City.

However, you shouldn't expect to grow your business in overfarmed fields. Yes, some of you will still be able find venture capital, but you are the exotic breeds. If entrepreneurs want to achieve 20 to 30 percent annual growth, most of them will have to find a new way.

The old business model relied on large capital inputs to offset high fixed costs, says Elizabeth Gatewood, the Jack M. Gill chair of entrepreneurship at Indiana University, Bloomington's Kelly School of Business. "If the VC spigot is turned off," she notes, "you've got to look to a different model: lower fixed costs, higher variable costs."

If that approach sounds vaguely familiar, it's because businesses worked this way before, oh, 1995. Back to the basics is the new mantra. And one cornerstone of the old-time strategy for building a business is the alliance. But before you go pulling out your college economics textbooks for a refresher course on running a business, recognize that the Internet revolution made drastic changes in all our familiar business concepts-including the partnership.

:: The Party's Not Over
1. What Now?
2. Get A Grip
3. Take My IPO...Please!

Thinking Big

First off, recognize who controls today's market. There are still plenty of opportunities to form alliances with smaller businesses (more on that later), but corporate America looms much larger than it has in recent years.

"The companies that were going to be done in by the dotcoms are calling the shots in this marketplace," says John Rymer, founder of Upstream Consulting, an Emeryville, California, business strategy consulting firm. "If you're going to sell, that's who you'll sell to."

Despite their market power, these giants need your entrepreneurial pep. "Large companies are under tremendous pressure for growth, which is in direct contrast with pressure for immediate financial numbers," says Mark Rice, director of the Severino Center for Technological Entrepreneurship at Rensselaer Polytechnic Institute in Troy, New York.

The CEOs of large companies have felt these demands since the late 1980s, but the 1990s boom made it easier to achieve growth. Now they need small companies to help them grow without dramatically increasing costs.

Corporate America sees entrepreneurs as a fairly inexpensive source of new products and services that it can resell, according to Rice. They also represent a way to quickly put out new products that might otherwise languish in the R&D labs. Corporate CFOs often prefer a revenue stream from licenses for spun-off technologies to lower returns on sunk investments. And, of course, you may be able to take over a service-warehousing products or designing packaging, for example-that isn't part of a larger company's core business.

In turn, you'll find such alliances attractive now because the boom years left corporate America's balance sheets in relatively great shape, despite the current profit crunch. "You can have partnerships with companies where they provide vendor financing or sale of equity," says Todd Dagres, a general partner at Battery Ventures LP in Wellesley, Massachusetts, and senior lecturer at M.I.T.'s Sloan School of Management. "Some suppliers are willing to help their customers. That money is not easy to get, but it's another way to top off the tank."

Funds from partnerships don't just come in the form of direct investment, says Steve Spinelli, director of the Arthur M. Blank Center for Entrepreneurship at Babson College in Wellesley, Massachusetts. "You can get a lease or 180-day terms," he says. "That's cash flow of a strategic nature."

Harsh Realities

Here's where things get tough, however. In the short term, you're going to have to work hard, because corporations are turning inward right now to sort out their own operations while the economy is in a funk. In other words, it's difficult to get attention when people are worried about how to slash a department's budget or about getting laid off. They may also be picking up the slack as colleagues depart. "Everybody has to answer to shareholders, so a lot of people have been focusing internally and ignoring outside activities," says Jack Lowden, vice president for equity groups at the Association for Corporate Growth.

Once you manage to establish contact, you'll still face the intense job of managing the relationship. These days, large firms have multiple partnerships. What is a bet-the-farm project for you might be a once-a-week consideration for your partner. "You have to go in with your eyes open," says Larraine Segil, author of Intelligent Business Alliances (Times Books). "You'll have to do all the work."

One area where you'll have to put in some extra effort is your computer systems. Spinelli notes that the Web continues to be critical in corporate decision-making. "They're looking for a fully enabled Web value chain," he says. "So the more nimble companies are asking where they can make changes to add value."

Providing the goods and services isn't enough. Systems have to be adapted to your partner's information needs. Your father's business probably never had to worry about adopting electronic data interchange or learning XML. Yours very well may.

Alternate Routes

Be warned: Some companies may consider you too small. Rather than force the issue, try an end run, suggests Rymer. Many firms have long-standing outsourcing agreements with various companies. When you can't crack the main account, think about becoming a subcontractor for one of those established partners. That way you'll have someone to act as an agent between you and the large corporation.

This multitiered partnering system works down the food chain, too. Although alliances between entrepreneurs have been around for ages, the economy is much more diverse than before. Thousands of companies in business today didn't even exist five years ago. Plus, millions of laid-off executives have become free agents rather than return to the corporate fold. Each of these players represents a potential partner down the line.

"Opportunities to grow by partnering with smaller companies are different, but just as compelling," says Rice. The main benefit of smaller alliances is motivation. Both you and your partner will likely move much quicker than a big company.

Spinelli has invested in one example of a company using this approach. TenCorp, a Needham, Massachusetts, computer networking firm, is expanding beyond New England by partnering with smaller tech firms-many with about $1 million in annual sales.

Because TenCorp targets mainly schools and small businesses, it needs the expertise of local computer specialists who know the local players. TenCorp provides its partners with discounts on equipment and expertise in various technologies. "They've reached down in the food chain rather than up, but it gives them dramatically bigger growth," Spinelli says.

So how is this different from a 1930s wholesaler doing business with small grocery stores in a region? Today, technology plays as important a role in these partnerships as it does with bigger firms. TenCorp has developed an extranet that allows its partners to tie directly into its systems to check product deliveries and scheduling.

Day-to-day strategies of alliances are changing. Here are some guidelines to help you set up your partnerships and make sure they run smoothly:

1. Reward positive outcomes: The most important person in ensuring a good partnership is your business development specialist. "That person has to be rewarded when the deal works out," says Denise Brosseau, CEO and co-founder of the Forum for Women Entrepreneurs. If that person is you, then you must make sure the deal works financially rather than just doing it for the sake of making a deal.

2. Tap universities: Indiana University, Bloomington's Elizabeth Gatewood suggests partnering with universities. Like corporations, schools are keen to commercialize their research. Many operate offices that license technology to businesses. "That way," she says, "the entrepreneur avoids the high fixed cost of R&D."

3. Negotiate carefully: "The biggest challenge for small companies is valuation," says Upstream Consulting's John Rymer. "The prices suck." Recognize that you'll probably have to give up more of your company than you'd like to land an equity deal, but don't resign yourself to the first offer.

4. Avoid ethical quandaries: William Weisberg, counsel in the Tysons Corners, Virginia, office of international law firm Reed Smith LLP, cautions against giving equity to corporate executives at a potential partner. Although well-intentioned, such actions put your would-be partner in a conflict of interest with fiduciary responsibilities to his or her employer. That won't win much long-term business.

Get Personal

Of course, partnerships are no cure-all. "Over 60 percent of alliances fail," says Segil. She lays the blame on too much attention paid to the business aspects of the deal and neglecting softer issues: "As you go along, the business concerns decrease, and the personal issues increase."

But schmoozing is what running your own firm is all about, right? This new environment requires that you work with the big kahuna as well as the smaller fish. You have to be adaptable and able to swallow your ego if your dreams of partnering with a Fortune 500 firm fade into working with a five-person shop down the street. Think strategically about the role you can play in partnerships with both bigger and smaller companies. Your systems have to be alliance-ready.

Sounds like a challenge any entrepreneur would relish-as long as it keeps the party rolling.

That's not all, folks! Here are even more tactics you need for success in 2001:

THINK GLOBALLY:Vincent S. Daniels, director of the international MBA program at Florida International University in Miami, says to look overseas for opportunities to grow your company. "Globalization is going to be the driving force for the next decade or so," he says.

"Franchising is the biggest area internationally," says Mike Cosgrove of the University of Dallas. "The U.S. is franchised out, but much of the world is not-including India and Latin America."

DESIGNATED HITTERS:Stop beating yourself to a pulp every day-find someone to share the burden of running your company. Cosgrove notes an increasing number of talented, wealthy executives want to run small companies. Taking advantage of this talent pool may give you the expertise necessary to take your company to the next level. If someone else can do the job better, the best move for you and your company may be to excuse yourself from day-to-day operations.

Chris Sandlund is Entrepreneur's "Management Buzz" columnist.


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