Startup Funding Option: Strategic Alliances

September 29, 2017 ENT650 – Adv. Entrepreneurial Finance, M.E. Program Coursework Comments (2) 183

ENT650 - WEEK 5

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 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 successes 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 that 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 the 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 a 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 an 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 which 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 a 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.

 

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

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Featured Image Source: Getty Images/Jose Luis Peleaz Inc.

David Harkins is a serial entrepreneur, which is a more professional way of saying he is still trying to figure out what he wants to be when he grows up.
When not working for himself, he has had a fulfilling career in marketing, advising both large and small companies including several in the Fortune 500 and many of America’s largest nonprofit organizations. In his spare time, he consults, speaks, writes, hikes, explores, and creates art. Although, not necessarily in that order. Connect with him on social media below:

2 Responses to :
Startup Funding Option: Strategic Alliances

  1. David!

    This is another great article/post. We should understand that it is a duty for us to make great connections as we start a business and continue the business. Networking is so important and it could lead you to making strategic alliances. I believe in the power of people, you never know who you will meet that can change your life!

    Christina

    1. Thanks!

      Networking is essential. I truly believe strategic alliances can be a great way to help a business get off the ground. The challenge is finding the best fit. And you’re right. You just never know who you will meet that can change your life.

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Startup Funding Option: Strategic Alliances

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