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Understanding the Partnership Lifecycle : An interview with Eyal Shavit, AxcessNet

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Eyal Shavit is the founder and president of AxcessNet (Waltham, Mass., Tel. 781-466-8888) which since 1985 helped dozens of early stage companies effectively penetrate the US market. AxcessNet is also the Broadview representative to the Israeli market. Prior to AxcessNet, Eyal was a founder and executive in a number of successful Israeli enterprise software companies. He is also the author of a seminal e-commerce patent that was sold to Oracle in 2001. Eyal has invested and serves as board member and advisor in numerous start-ups and venture funds. He is a member of the Walnut Ventures angel investors group. Eyal’s primary interest is in software ventures, with specific focus on security applications and infrastructure.

MarketCapture: People use the terms “partnerships”, “alliances”, etc, to describe many different things. Can you help us define and classify what type of relationships companies get into?

Eyal Shavit: There are many types of partnership, including some programs that you can sign up for on large companies’ websites. These are not what we refer to as strategic or significant partnerships. We look at partnerships or alliances as relationships that are structured to reach the market by leveraging the sales and marketing powers of a third party. In most cases, it’s a small company with new and innovative technology solution that partners with a larger company that has established marketing and sales channels.

MarketCapture: You’ve been in the technology business for many years. What makes partnerships so important in your mind?

Eyal Shavit: Partnerships provide a way to avoid huge investment in sales and marketing. Raising large amounts of capital is not an option for most companies today, but even when capital was readily available, the result in many cases was significant dilution of founders’ and early investors’ equity. Partnerships enable small companies to leverage on core competencies and get to market with efficient use of capital.

Many young companies fail to develop and deliver follow on products and remain a one-product company. Partnership is a good way to allow a young company to continue to develop new products while relying on the partners to develop marketing and sales channels.

Another reason partnerships are important is that in many cases the partnership is a catalyst for acquisition down the road. Acquisition has always been the most common liquidation strategy for young companies.

MarketCapture: Are partnerships still the right thing to do given the current economic climate?

Eyal Shavit: Partnerships have been a good option in the past, for all the reasons mentioned above. Today, partnerships are a must.

There used to be a level of openness in the market, when buying organizations really looked at the solution as the primary decision criteria. This phenomenon was to large extent unique to the US, and much less common in Europe or elsewhere.

Today, companies that are looking for solutions are screening primarily based on vendor size. Buyers were burned buying from small companies – they may have gotten a better solution or better price – but they paid dearly in the long run because of small companies’ inability to support them. They also incurred higher cost of ownership because they ended up with a multitude of point solutions that did not always fit into an overall solution architecture.

This is the most profound change we have spotted in the market in the past 2-3 years. I believe this change is fundamental and is here to stay, as buyers look to control TCO (Total Cost of Ownership) and prefer dealing with a small number of large and dependable vendors. This is a sign of the maturing state of the information technology industry.

MarketCapture: What are some of the requirements for striking a strategic partnership deal?

Eyal Shavit: In the past, we have seen many “nice to have” partnerships formed, and most of these did not translate into any significant business relationships. These days, we see fewer partnerships formed, but the deals actually close quicker.

The reason is that companies are more selective about the partnerships they get into. They look for clear synergy. A deal has to be strategic to both sides. While it may be a clear win for the smaller company that brings the technology to the market, it has to be significant for the larger company as well. Although it may get lost in the overall numbers of the larger company, it has to have a significant impact on the revenues of the business unit your deal with. It has to move the dial for the head of the business unit.

There is also the issue of timing. Large companies do not want to deal with a product that is not ready for the market. They look for proven customer demand for the product so revenues can be realized in a matter of weeks or few months. They want joint customer verification for the value of the partnership. If you can be proactive in pursuing such customers, it helps jumpstart the partnership discussion.

MarketCapture: What are the most common barriers to the success of partner relationships?

Eyal Shavit: The most common fallacy on the small company side is the feeling that their work is done the day they signed the deal, especially on the marketing and sales end.

In many cases the small company miscalculates the economics. They tend to overvalue their solution and they don’t understand the margin requirements of a larger company. This leads to disappointment, which could derail the relationships.

MarketCapture: We’ve all seen many relationships formed but very few that actually work. What is the secret to making partnerships work?

Eyal Shavit: The only way to really leverage a partnership is to manage it very closely. You have to have someone at the very top level managing the relationships and you have to have people at all levels working to address any issue that comes up – be it a technology issue, an unhappy customer, channel conflict, or any other issue.

For example, one of the companies we have recently helped sign a lucrative partnership deal is now allocating over 50% of its sales support resources to working with the partner. They have been training the partner sales force. They go with them on sales calls.

Managing relationships is not about being right. Things go wrong all the time, in your own company as well as at the partner organization. The minute you work with a partner there are going to be channel conflicts. You need to address these conflicts when you structure the deal, you need to monitor them, and you need to be generous from time to time. You need to give up some higher margin sales and give it to specific sales people at the partner organization. This will win you a lot of goodwill that will pay off in the long run.

Another conflict that often comes up is development priorities. You can leverage some of these issues as bargaining chips. For example, you may ask for higher margins or more marketing dollars in exchange for altering your product roadmap to address the partner wishes.

MarketCapture: In “Crossing the Chasm”, Geoffrey Moore talks about partners’ desire to “design out” their partners as time goes by. Do you see partnerships as marriage or more like dating?

Eyal Shavit: This is a natural process. Partnership typically last 2-3 years, five at the most. The large company gets into the partnership because it has a need to expand its solution offering using the small company’s technology. But managing these relationships is costly, and over time, the large company is going to look to assimilate this new technology into future generations of its own offering.

The small company needs to understand this lifecycle and use this window of opportunity to develop new products and establish market presence.

MarketCapture: Speaking of market presence, how can a company establish such presence if it relinquishes control over its marketing and sales to the partner company?

Eyal Shavit: Partnering is a mean and not an end. It does not eliminate the necessity to build a company with strong foundation, which means continuous investment in technology and the development of multiple distribution channels.

A company should never give exclusivity to a partner. The company can, and in many cases should, build direct sales approach to specific segments of the market where it can capture greater account control and higher margins. It should be able to leverage on the installed base developed by the partner (preferably through co-branding) to bring new products into the same market.

MarketCapture: Is there a good way to end a partnership?

Eyal Shavit: Many M&A situations start with some sort of partnering relationships. It allows the big company to evaluate both the technology and the people. If the relationships prove to be significant, the dynamics are positive on every dimension of the relationships, and good chemistry is developed between the people, it is likely that the large company will look to acquire the small one.

In order to create a favorable endgame scenario and increase the value of the company going into an M&A deal, it is important for the small company to have multiple options. While in the past the IPO was a viable option, it is no longer one for most companies these days. If you can partner with two potential suitors you would be in better shape in terms of M&A likelihood and value.

It is also important to find the time when the perceived value of your company is highest. There is no set formula for finding this timing, but it has to take into consideration not only the revenue stream but also the uniqueness of the technology and the availability of alternatives for the potential buyer.

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Eran Livneh is the founder of MarketCapture (http://www.MarketCapture.com), helping software companies enter new markets, introduce new products, and increase market share. Eran is also the publisher of the MarketCapture Newsletter (see past issues and subscribe at http://newsletter.MarketCapture.com).

Understanding the Partnership Lifecycle : An interview with Eyal Shavit, AxcessNet
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