The challenge of doing business development

12:21 PM    
Two case protagonists (e.g., Dropbox, Cake) pointed out the challenge of doing business development deals with big corporations. Can we generalize about when this challenge is greatest? Do lean startups face special difficulties on this front?

by Krizia Li

“No significant tech company has been built solely through distribution deals without having a strong brand of its own.” – Drew Houston, Co-Founder and CEO of Dropbox

After surviving two stages of evolution in Dropbox’s lifecycle, Drew Houston pinpoints “brand” as one of the critical junctures where lean tech start-ups begin to tip the balance of power as they strike business development deals with large corporations. This key differentiator is public identity; the stronger your perceived brand equity, the more robust your bargaining leverage and protection vis-à-vis partners.

During early development stages for a lean startup, the desire to acquire user growth and operational scale via distribution deals using market-share dominant and resource-rich third parties can lead to increasing risk of loss of control during its structured “hypothesis-driven” entrepreneurship process. To illustrate such special difficulties, let’s use Dropbox’s experience as an unknown startup, as it pitches established PC security software providers to bundle-in its application:
  1. Setting an overarching vision: Clients demand high levels of feature customization, which distracts a lean startup from perfecting its individual core processes, as dominant partners draw focus away from Dropbox’s broader user base towards separate brand-specific needs.
  2. MVP testing: During the customization process, Dropbox cannot sequence accurate MVP tests to research its unique product-market fit, as its team focuses on supporting tangential industries or targeted demographic agendas set by dominant partners. As a consequence, Dropbox’s core business model can be led astray by initial hypothesis testing fallacies or bias.
  3. Operational efficiency: Invaluable time, cash burn and human capital are wasted on evolving negotiations with debatable ROI, where it remains likely suboptimal financial and technological investments will be made for Dropbox as dominant partners usually contribute the lion’s share of operational advantages in the relationship.
  4. Persevere, pivot or perish: Dominant partners control budget allocations and manage startups as units of a portfolio of brands, leading to ultimate dictation of lifecycle and strategic direction of Dropbox. Volatility caused by over-reliance on dominant partners amplifying shifting fundamentals may inflate, or restrict, vital alternatives lean startups face.
  5. Idea theft, reputational risks: During the collaboration period, dominant partners can learn about proprietary IP, eventually negotiating to bury Dropbox in white label deals, which will destroy its nascent brand and commoditize future services.
In contrast, as Dropbox matures, PC and smartphone manufacturers propose to distribute its application via their sales channels. OEMs have switched to consider Dropbox as an essential tool for creating customer value and expanding customer acquisition funnels, thus revenues. Although Google / Android might move to crush Dropbox by duplicating online storage technology in the future, in our current state of play, active protection of Dropbox’s now respected trademark and defensible internal business development model is considered synergistic to its partners’ success.

Dropbox’s simple but proven takeaway on “branding” is one lesson Cake could have profited from if they had foresight to build such assumptions into its growth trajectory. Without decisive, rapid and focused reinforcement of a distinctive value proposition and coveted brand equity, early-stage startups are perceived as secondary priority for big firms and the weaker party during negotiations. By staying a steadfast course for intelligent and calculated sacrifice of early revenues, it is possible to buck the trend that “startups are bought, not sold”!