Structuring A Strategic Alliance

Emerging growth companies at some point generally will need to develop strategic alliances with other businesses. Partnering with an established company can provide a wealth of benefits for a startup, not only in terms of access to the larger company's resources but also from the increased visibility that such a relationship can generate. However, studies have shown that the failure rate of strategic alliances may be as high as 60% to 70%.1 Therefore, it is prudent to consider some of the ramifications of these relationships so that reasonable expectations are set.

WHAT IS A STRATEGIC ALLIANCE?

Broadly speaking, a "strategic alliance" is a relationship among two or more parties who for mutual benefit desire to share resources. These resources may include money, intellectual property, distribution channels, and expertise.

Strategic alliances can be formed to achieve one or multiple objectives. Some common examples of these objectives include:

Business development or referral: Your company seeks out a marketing partner that has broad reach within a customer base that your company desires to penetrate, or access to an analogous customer base that offers your company an expansion opportunity. Headspace, a developer of guided meditation courses offered via an app or online, developed marketing alliances with companies such as Starwood Hotels and Virgin Atlantic, recognizing that stressed-out travelers presented an attractive market to tap. Stand-alone referral or affiliate marketing relationships, such as those offered by companies like Amazon, can be as simple as links between two companies' websites; broader marketing arrangements with stated budgets and deliverables can be more complex. If your company is pursuing such a relationship, you should be considering what the referral partner can offer you in terms of reach and support.

Supply chain/OEM alliances: In this type of alliance, businesses seek to create streamlined and efficient supply chains that lead to increased sales for both parties. SiriusXM has relationships with many automobile manufacturers to supply satellite radio and telematics services, among other items. Makers of artisanal food products desire relationships with large retailers such as Whole Foods to increase sales and distribution. As with business development marketing alliances, supply chain alliances permit suppliers to leverage the broad reach and brand of the OEM to better penetrate an existing market or to enter into a vertical arrangement that may not otherwise be possible for a smaller company. However, there is a risk that a small company may become overly dependent on OEMs for its sales and marketing and does not establish its own presence and pursue other channel opportunities.

Strategic integration: In this type of alliance, companies collaborate with each other to offer joint products or services to their respective customers. These relationships may have features of supply chain/OEM alliances but also entail some integration of the product or service offerings. These alliances are common among technology companies—a PC manufacturer that ships its product with preloaded third party software, or two software companies or app developers that may work together to allow their products to communicate with each other, such as Google integrating its mobile mapping service with Uber. Issues may develop concerning which alliance partner actually "owns" the customer.

Development alliances: Development alliances feature collaboration on research and development activities among parties with shared objectives. Such relationships often entail each party bringing a specific set of resources such as know-how, expertise, or capital. Typically, the objectives include mitigating the risks and costs associated with R&D and leveraging the resources of the other participant. Sometimes a separate legal entity may be established for a development alliance so it is treated as a standalone entity for operational, legal, and accounting purposes. Because these relationships often last several years...