Building enterprise value is about building confidence in the perceived value of a company’s business. One way to promote this confidence is through third-party validation. This involves having external sources to the company (such as customers, partners, regulatory bodies or other credible organizations) step forward to provide aligned support for the company. For example, validation could be the result of an important regulatory certification granted by a recognized governing body, or it could represent a significant contractual alliance with a key strategic sales partner. Third party validation thus provides concrete evidence that the company is valued by an outside source. This is a significant strategic tool in raising capital as the support can speak volumes to investors about the company’s viability in the market.
As a company moves from its initial idea to the first sale, aligning with key customers is a powerful example of business viability. For example, gaining a commitment from a leading-edge customer who is supportive in working with the company on, perhaps, preliminary concept testing or market trial activities is just as significant as the emphasis placed on the first product sale.
Identifying customers who can provide valuable feedback in product development activities sends a strong message of potential market acceptance. It is not an easy task to enlist the support of customers, but it has obvious positive payoffs.
If an entrepreneur aims to select a dozen such potential customers, she probably will have a good chance of landing one. Getting that first customer, or at least a customer commitment, can be a significant milestone. For example, imagine if you are creating security software that you believe will enhance every credit card out in the market. Now think what it would do to your company if you could sign on a card issuer—maybe not Visa or MasterCard, but a smaller credit card company – as a customer, or win a commitment from that company to buy your product, or to run a pilot program or secure a letter of intent. Clearly, it can do wonders to the process of attracting venture capital, as well as contributing immensely to your eventual success.
Many entrepreneurs who have experienced difficulty in raising capital have found, to their surprise, how easy the task was once they got one customer on board. Often called “customer traction,” it signals to investors that – a) there is a market appetite for what the company is selling and b) the company can potentially deliver on the promise of revenues. This very real-world validation shows there is movement from the theory (business plan) to the practice (building a business) of growing a business is quite possible.
Just as important as customer commitments are to the capital raise efforts, partnership commitments fare well, too. No company, particularly, a start-up, can be successful entirely on its own. The world stage is populated with examples of strategic alliances established to create enhanced value because of the union of the two or more organizations to create a stronger whole.
There are many reasons for alliances – from levering each partner’s specializations, creating powerful competitive advantages and to cost sharing benefits such as streamlining value chain systems. However, for an entrepreneur focusing on building a business while simultaneously looking for investment dollars, the costs and benefits of any partnership must be heavily weighed. Here are some of the reasons why.
A partnership is like marriage – while it takes a lot of work to maintain, if it is healthy it can be extremely rewarding. Partnering arrangements can validate an entrepreneurial company. It can confer clear evidence of value and strategic advantage. But there is also a dark side: it can de-value the investment proposition if it is not handled properly. Here is an example.
A start-up had a unique data storage product that could complement both the new and existing customer base of a very large brand named computer manufacturer. This large, well-known company had broad sales expertise within multiple consumer markets. Its sales distribution strength was identified by the entrepreneurial company as being extremely beneficial as a conduit in generating revenues. So after months of negotiation an agreement was signed between the manufacturer and the startup company. The investors and founders thought this was a marriage made in heaven!
However, after months and months of effort the start-up company grew increasingly frustrated with the large company’s bureaucracy – slow decision making, laborious reporting and approvals, and rigid processes. Investors of the entrepreneurial company also became disenchanted as key milestones were being missed and the projected revenue forecasts kept being pushed forward by the entrepreneurs.
Although the partnership was important to the young company it was not a priority for the larger company. It was like a mouse trying to dance with an elephant. Eventually the start-up company terminated the agreement and went on to other sales distribution options. Nevertheless, the damage was done, as valuable time and money had been wasted in efforts to make the failing partnership work.
There are significant lessons here: Choose partners wisely. Make sure each company’s compatibilities are aligned with partnership expectations. This is even more imperative when a small company is dealing with a much larger one, as available resources are not in alignment between the companies. Secondly, ensure the partnership can deliver on its promise because if it does not investors will lose faith in the smaller company management’s ability to execute. Finally, having a signed contract is no guarantee that a partnership will work. If the companies are like oil and water, no amount of legalese will save the day.