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Will the enterprise market spend significant IT budget on Windows Vista in 2007?

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Partnerships Become As Important As Cash For Today's Technology Startups

By Elliot Katzman, General Partner, Kodiak Venture Partners

Entrepreneurs seeking to get startups off the ground in today's market should be considering factors beyond just money when looking for the backing of venture capitalists. Because funding rounds now tend to be smaller (thus requiring entrepreneurs to do more with less), strategic partnerships can be the critical means to make up for the lack of cash. So rather than simply seeking out any available funding, however attractive that might be, startups today should look for backing from venture capital companies that have the depth and experience to bring key partnerships to the table.

Today's investors are paying strict attention to the amount of capital it will take to bring an enterprise to cash flow breakeven. To succeed, early stage technology companies must have strong technical innovation and the ability to bring it to market in the least amount of time with the least amount of capital. The right strategic partnerships, carefully considered and implemented, can be a huge help for startups in terms of capital conservation as well as for leverage in, and validation of, target markets. By selecting experienced VCs, startups can ensure that they will have essential assistance in the many aspects of developing, managing and harvesting the kinds of partner relationships that can do them the most good.

That is not to say that new startup companies cannot pursue the traditional route of raising capital, building products, developing initial distribution capability, and bringing them to the market to get revenue. However, the scarcity and higher price of capital today increasingly is leading early stage companies to opt for models based on developing partner relationships they can rely on from inception and onward. There are many types of early partner relationships that can save capital, and/or enhance revenue and market opportunities and that can be structured in many different ways that may or may not involve giving up equity.

SolidWorks, a successful 3D computer aided design (CAD) early-stage software firm, provides a good example of a company that was able to use partnerships to save capital. SolidWorks did a terrific job of partnering with multiple companies early on -- thus gaining access to various component technologies that were incorporated into the final product. The initial aim of the company founders was to incorporate the various technologies to build the very best product and get it to market as quickly as possible. The knowledge of which companies to partner with, which components to rely on, and how best to integrate the components into the revolutionary new product that resulted was a tremendous value add for the startup. Without the key partnerships, the company would have had to build the product itself from the ground up, and would have missed the market opportunity.

Partnerships give startups access to the invaluable expertise and knowledge of the large, established companies in their market space. This expertise and knowledge can be the key to avoiding common startup mistakes and gaining industry endorsements from leading vendors. For startup companies with hot technology innovations but no market credibility or visibility, relationships with established companies can provide an efficient route to early recognition. Storage management startup, Epoch Systems, provides a case in point. Epoch was unknown in the market and was unsuccessful in trying to sell its products to large corporate customers. However, when it announced its relationship with the largest storage company in the industry, it gained instant credibility with end users and analysts. For Epoch, this relationship was difference between success and failure.

Access to valuable distribution channels is another benefit of strategic partnerships. Startups that enter into these types of partnerships can leverage such channels for market validation and endorsement, as well as for greater near-term revenue (which is the cheapest form of capital). And partners with established positions in the market not only can validate ideas and products, but also can provide access to their existing customer base early on so that startups can get to market, learn a lot more about their product, and generate revenue much sooner. Distribution centered partnerships sometimes can be structured with prepayments that provide needed capital without causing equity dilution. Companies generally agree to prepay for future products in this way only in cases where they view the technology as especially innovative. Companies making prepayments tend to be highly motivated to help the product sell so that they get value from their investment. Atria Software, an early stage development tools company, is an example of a startup that entered this type of partnership. Atria was able to structure an early OEM deal with a leading workstation company in which that company prepaid $1.5 million for future products, significantly lowering its equity capital requirements. Atria got the benefit of very valuable feedback when the workstation company introduced the product to its customer base early on. Based on the information it was able to obtain, Atria was able to respond to customer demands for a direct distribution channel.

Although strategic partnerships can be key success factors for early stage companies in today's market -- these relationships can carry a number of potential pitfalls. Entrepreneurs must be able to understand the pitfalls in order to avoid them. Common pitfalls include partners who try to "acquire the company without buying the company" by establishing restrictive terms or obtaining certain rights.



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