Find Your Partner When industry giants and dot.coms come together, it's profits that fly round and round.

Andrea Reisman had a problem--a huge, "Is this the end ofmy business?" crisis. Just a few weeks earlier, the30-year-old co-founder and CEO of San Francisco-based Petopia.com,an online pet supply store, had been on top of the world: She hadclosed a May 1999 venture financing round that pumped $9 millioninto her start-up. But then came June 14, and her world tiltedupside down when arch-competitor Pets.com announced it had closed a$50 million venture round that included cash from Amazon.com.Pets.com was simultaneously forming a strategic alliance with thee-commerce godfather. That meant visitors to Amazon.com would bepeppered with continual reminders to buy kitty litter and 100-poundbags of puppy chow at Pets.com.

More aggravation came when Petsmart--a billion-dollarbrick-and-mortar pet chain--announced it would merge its onlineoutlet with independent online store pet.net, thereby transformingPetsmart.com into a formidable and slick e-commerce player.

Was it lights out for Reisman and her Petopia? It more thanlikely could have been, because in today's bullet-pacede-commerce battlefield, there's no nostalgia foryesterday's leaders. But Reisman pulled a fabulous rabbit outof cyberspace and, in July, closed a $66 million funding roundincluding buckets of cash from pet store powerhouse Petco, whichagreed to give Petopia exclusivity--Petopia would be Petco'sonly online retailing outpost.

"It's been a wild year," Reisman gushes. "ThePetco deal enabled us to leapfrog over many competitors. It'sreally given us a head start."

Bigger and Better

Reisman's not alone. Now the big news in the dot.com arenais that branding is crucial--it takes a name and a sizable amountof consumer mindshare to win eyeballs, and getting there is anexpensive proposition. The days when a little start-up could prettymuch go it alone the way Yahoo! and Amazon.com did are waning, anda new philosophy is taking hold: "If you're a smalldot.com, you have to build alliances with bigger companies. Youhave no choice," says Philip Anderson, an associate professorat the Tuck School of Business at Dartmouth College in Hanover, NewHampshire. "You need to build share fast, and that means youhave to leverage more resources than you can get your mitts on byyourself."

Jim Datovech, 45, president of ComVersant, an e-commerceconsulting firm in Gaithersburg, Maryland, adds, "Speed tomarket is critical today, and that's why alliances make so muchsense. An alliance brings more strengths together."

Back at Petopia, Reisman heartily concurs because, besidesproviding money, the partnership with Petco transformed Petopiainto an online bruiser overnight. "This partnership gives usso many advantages," says Reisman, who ticks off a few:

• "We get better pricing on products because we'repooling our procurement with theirs.

• "Every Petco store will feature marketing materials forthe Web site, and we'll have access to its database of fivemillion customers.

• "We're using [Petco's] distribution centers, so wecan get products to customers more efficiently.

• "We're doing our media-buying in conjunction withPetco, so we'll get better deals on advertising."

The ironic punchline to Reisman's good fortune in snaringPetco as a partner is that she didn't even seek out Petco; itcame to her. "They'd retained [investment banker] MorganStanley to help them select an online partner, and Morgan came tous."

She didn't spurn the overture. And, very quickly, theconversations got down to the nitty-gritty of how much money Petcowould put into the business and what it expected in return. Thedeal took three months to finalize, but when all the papers weresigned, Reisman says she got just what she wanted: "We remainan independent company," she says. "Petco's share isless than 20 percent of the equity, so we can sell differentproducts at different prices. They are a partner, not the owner. Weretain complete freedom to run this business. Petco is good atbricks and mortar; we're good at the dot.com space, and itsmanagement knows that."

Everyone's Doing It

Reisman is just one of countless entrepreneurs rushing toembrace large partners in the dot.com world. Another case in point:Last August, Toysmart.com, based in Waltham, Massachusetts, closeda deal where Walt Disney Co.'s Buena Vista Internet Group tooka controlling interest in the dot.com start-up. Exactly what Disneypaid for its slice of the virtual toy store is undisclosed, but,says Toysmart.com's 34-year-old president and CEO David Lord,as important as Disney's money is, it wasn't the decidingfactor. "We had a great venture capital syndicate put togetherthat was ready to fund us," says Lord. "Money wasn'ta problem for us. We decided this based on other factors."

Like what? "The Disney brand is powerful, and, with Disney,we're getting premium [advertising] space on its Web sites thatwe couldn't get if we weren't part of the family. We fitinto Disney's strategic vision, and that will help us reallygrow this business."

Lord also offers insight into the deal Toysmart negotiated, andit includes two crucial elements:

• "We insisted that the deal had to be approved at thehighest levels of Disney," says Lord. Why? Lower-level execscome and go; their clout rises and falls. If a little business isdependent on an executive who falls out of favor, it too can seeits luster diminish in the eyes of the larger partner.

• "Our contract says we only sell good toys. We do not sellall Disney toys, and there is no pressure on us to do so,"says Lord. "We are passionate about what we're deliveringto our customers, and that attracted Disney. It understands andsupports our passion."

Does Lord have regrets about selling a huge chunk of hisbusiness? "You always have hesitations about going into a deallike this," he says. "Earlier, we had talked with Toys"R" Us and went down the path [toward a part-nering]fairly far with them. But we decided we couldn't live with thedeal, so we walked away. With Disney, there weren't anydeal-breakers. There were only signs telling us to go forwardbecause it will really help us grow."

Another take on the benefits of partnering with a big company isoffered by Michael Franz, 46, chairman and CEO of HotOfficeTechnologies, a Boca Raton, Florida, developer of virtual intranetsfor small businesses. Last August, Franz closed a venture roundthat included $6 million from Staples, plus an agreement by Staplesto market HotOffice to its customers. "By ourselves, we'reone thing. With a partner like Staples, we're a very differentthing. Customers trust us much more because of our partnerships. Itmakes us seem more reliable."

It Works Both Ways

As good as some of the news may be about the partnershipsproliferating throughout the dot.com world, like most things,there's a dark side, too. "Partnerships can be anincredible opportunity, but for the relationship to work,you've got to work at it," says ComVersant's Datovech,who cautions that often big companies put up their money but areunprepared to offer the smaller company anything more."They're looking to learn from you but often aren'tprepared to put much else into the relationship," he says.

And that's just the beginning of the negatives. "Ifyou're not careful, the big company will `gut' you,"says Ed Roche, a vice president with The Concours Group, aresearch-based management consulting firm in Kingwood, Texas."They learn how to make your products then dump you. There isoften very little a small company can do to fight back." Yourbest defense? Always remember to step very lightly when choosing apartner.

Dartmouth's Anderson points out another trouble spot:"Almost by definition, you're taking the larger brandwhere it hasn't been before. That's a recipe forconflict."

Chew on that because it's at the paradoxical core of mostsmall-big alliances. The big company wants the little partner forits creativity, its innovation and its ability to plunge intoterrain previously unexplored by the big fellow. But once the dealis signed and sealed, the risk aversion that is at the core ofvirtually all mega-corporations kicks in--and, suddenly, thepartner is counseling caution and slow forward motion.

Some problems are even created by the small business itself."It's easy for small-business management to take its eyesoff the ball," says Larry J. Lenhart, a principal of NorthernCalifornia High Technology Practice at Deloitte & Touche in SanJose, California. Bluntly put: Once an infusion of cash from alarge partner eases the pressure to perform, some small businessowners just get lazy or--just as bad--suddenly adopt the methodical"big company" thinking of their partner and lose thehard-charging drive to succeed that every entrepreneur needs toprosper.

A chilling potential by-product: "Often the littlecompany's best employees will quit," says Roche. Why? Theywere initially attracted to the fast pace of a small business, butas more bureaucracy takes root in the aftermath of a partnership,they might just bolt.

One last thought to keep you gnawing: "The big company mayacquire effective control of the little company but notformally," says Roche, meaning a straightforward acquisitionhasn't been done. Instead, by taking command of keyfunctions--accounting, say, or by assuming multiple boardseats--the big company simply grabs control. "Small companiesusually don't have the expertise to negotiate a fair deal. Youabsolutely need a third-party to assist you."

That recommendation is seconded by Ken Burke, 33, founder andCEO of Petaluma, California-based Multimedia Live, an e-commercetool developer that brought in publisher R. R. Donnelley & SonsCo. as a sizable partner last September. It took eight months tonegotiate that deal, which left Burke still in full control of thecompany's ownership. But the key for him, says Burke,"[was] hiring really good lawyers. They found many things inthe deal we had to get revised or deleted. You don't want tonegotiate that sort of thing alone."

The Happy Couple

In her bustling San Francisco offices, Reis-man must surelyunderstand the downside of being in a partnership with a mammothcompany, but for right now, hers remains the happy glow of ahoneymooner. "This partnership has gone amazingly well forus," she says. "A key is that Petco knows we'rebuilding our own brand and own identity. They support us in this,and there's no way we could have come this far so fast withoutthat level of support."

Doesn't she have any worries? Well, she admits, there aretwo concerns that have continued to win her attention. "Achallenge for us is winning the support of management at the storelevel," she says. Top level management may have signed on tothis deal with full enthusiasm, but that doesn't necessarilymean that store managers--who see both their income and advancementwithin the company as being directly linked to how much salesvolume their shops generate--will instantly jump on board.

If they don't? The promised in-store promotion just may notamount to much if banners are left in stock rooms at the back ofstores and Petco customers aren't given the word about the Website. "We recognize this as a potential problem, and we'retrying to work on it," says Reisman. "Besides, mostmanagers are Petco shareholders as well, and the value of theirshares will go up with our success--and all the local managers knowthey're going to lose some business to the Internet, so theymight as well lose it to their own company."

Speaking of share prices, that brings up Reisman's secondproblem: the timing of an IPO. She remains tight-lipped as to whenit might occur, but certainly a buy-out by Petco is not herultimate goal. Seem surprising? Not in today's dot.com world,where, increasingly, comparatively new Internet businesses accruemassive market valuations in just a few blinks of an eye. Prettymuch all dot.coms see themselves plunging into the public markets,and, with that target in mind, Reisman can only smile: "Infact, we're looking for more partners with strengths in areaswhere our present partners aren't strong," she says."In today's market, there's incredible pressure toproduce short-term results, and partners are the key. There'sno doubt about it: The fastest way to grow in the Internet economyis through partnerships."

Irreconcilable Differences

Don't pop the cork to celebrate a business alliance toosoon: Fifty-five percent of alliances fall apart within3¹¦2 years, says Los Angeles business consultantLarraine Segil, author of Intelligent Business Alliances(Times Books). Just why do these marriages unravel? Segil surveyedexecutives with alliance experience to get the answer:

• 75 percent cited incompatible corporate cultures

• 63 percent pointed to incompatible managementpersonalities

• 58 percent said differences in priorities contributed totheir falling outs

That's why Segil tells small companies in alliances with bigpartners to ask themselves this: If the marriage ends in divorce,do we have the resources to recover? If you don't, get movingon developing a separation stra-tegy. It may never be deployed, butwith more than half of all corporate marriages ending in quickiedivorces, prudence dictates having a scenario on hand for survivalwithout the larger partner. "Partnerships can provelife-threatening to small businesses that aren't prepared forthe day when the wheels come off the alliance," says JimDatovech, president of ComVersant.

More hard-eyed advice comes from Steve Patti, president of TheMedia Farm Inc., a content services agency in Dallas that hasprospered from close alliances with Compaq, Hewlett-Packard andother mammoth tech businesses--but that's also seen its shareof deals go south. His advice:

• "Properly manage the big company's expectations.Don't let it tell you, `It's our way or the highway.'Don't appear too eager to do the deal.

• "Protect your ideas--don't give away everything. Keepa few secrets. The more keenly the big company is aware that itneeds your skills and know-how, the harder it will work to make therelationship a two-way street that's genuinely awin-win."

Pre-Alliance Counseling

Want to dig deeper into the benefits--and perils--of forming analliance with a bigger business? If you're contemplating analliance, you'd better do this due diligence because, quiteplainly, there are more ways for deals to go sour than there areprobabilities they'll prosper. These Web sites offerwell-formed, incisive analysis:

• "Dispelling the Myths of Alliances" (http://www.ac.com/overview/Outlook/special99/over_specialed.html)is a thoughtful article written by a couple of Andersen Consultingpartners, who say that 30 percent of alliances are outrightfailures (compared to 39 percent that are deemed unequivocalsuccesses). They offer tips for getting your alliances in with the39 percent.

• SmartAlliances.com (http://www.smartalliances.com),put up by consulting giant Booz-Allen & Hamilton, offers thefirm's advice to clients considering alliances. Don't missthe "Chart of the Week", which offers at-a-glance visualson how to do an alliance right (and how most have been donewrong).

• "Eat or Be Eaten! Strategic Alliances in Business"(http://www.ocri.ca/presentations/Zone5ive/Freeman/ppframe.htm)is a fast- moving slide show optimized for display on the Web. Thissite walks viewers through the how-tos of minimizing risk andmaximizing gains.

• "There's Strength in Numbers" (http://onlinewbc.org/docs/expanding/alliances.html),sponsored by the SBA, is a one-page site offering tips on thebenefits of alliances.

• "Strategic Alliances" (http://www.larrainesegil.com/strategicalliances.htm)is an overview of alliances from Larraine Segil, an internationalconsultant specializing in alliances. The site is packed withplenty of stats and facts.

• Association of Strategic Alliance Professionals (http://www.strategic-alliances.org)lets you talk with a pro before saying yes (or no) to a marriageproposal. And don't miss the white paper on putting together analliance that achieves big returns at http://www.logosnet.com/main/alliance_law.htm

• "Mergers and Corporate Consolidation in the NewEconomy" (http://www.ftc.gov/os/1998/9806/merger98.tes.htm),a statement from the Federal Trade Commission (FTC) supported byrich statistical analysis, gives you the goods on alliances and theeconomy. The FTC, by the way, points to several factors as fuelingthe current trends: the need to be globally competitive,technological advances (deals often allow a company to acquire thetechnology it craves) and the ongoing wave of downsizing.

Made For Each Other?

Ready to dive into business with a heavyweight? Before you jump,make sure you know the answers to the following questions, fromPartnering Intelligence: Creating Value for Your Business byBuilding Strong Alliances (Davies-Black Publishing) by StephenM. Dent. The answers should be in line with your business goals andvisions.

1. What is your potential partner's vision?

2. Where does it want to go as a business?

3. What are its values and ethics?

4. What kind of corporate culture does it have?

5. What types of relationships and partnerships does it alreadyhave and how well have they been working out?

6. What are its strategies to achieve its vision?

7. Has it conducted an internal assessment?

Contact Source

Robert McGarvey is Entrepreneur's "StaffSmarts" and "Web Smarts" columnist.