I have said many times before that with respect to doing deals that saying No is as important as saying Yes. Let me elaborate. A portfolio company has recently been in trials with a potential strategic partner about a reseller relationship. We got in first, set the criteria for success to leverage our technical and business advantages, and were selected as the winner. We had the most customers, the best product, and best customer support. There was one huge caveat-one of our competitors who came in second place was willing to do the deal at a 50% discount. The strategic partner asked us to do the deal at that price if we wanted the win.
Of course, there was much deliberation on our side and as we ran the numbers over and over again there was no way we could understand how this competitor could ever make money on the strategic partnership. From our calculations, it would take a couple of years to breakeven off the deal under the very best circumstances. Trying to make the deal work for both sides, we went back to the potential partner and asked them to give us an NRE (non-recoverable engineering expense) and to handle level I customer support. At the very least, if the partner handled the first tier of customer support, we could be marginally profitable. The potential partner said no, and we walked away from the deal. Trust me, it was a tough decision, and we tried to rationalize why it made sense. However, when the deal is not a win-win situation it is very hard to make it work successfully.
From my perspective, one of the huge problems is that there is tons of VC money out there and lots of me-too deals as Brad Feld elaborated in a post recently. A space gets hot, lots of venture money pours in, and only a few companies survive while the rest vaporize. We do live in a competitive world and taking market share and killing your competition is part and parcel with being in a startup in a large market. That being said, what killed many companies during the bubble was pursuing market share at all costs. I feel like that mentality is coming back in the market. In my mind, losing money on every new customer signed up is not a long-term winning strategy unless you think you can get financed to infinity (yes, many did during the bubble). At some point in time, to be a real business you have to generate cash flow from internal operations. Having done enough deals, I am of the opinion that if it is extremely one-sided and never makes economic sense, it is a recipe for disaster. To that end, I wish my competitor the best of luck because I can see the train wreck around the corner. We will stay close to the strategic partner and when the time comes reopen the dialogue.
Ed,
I totally agree with your assesment. On previous entries, you have discussed the important of the right management team. Tying the two together, some executives are so determined to get a deal that they are incapable of saying no even if the deal mortally wounds the company. I have seen this too many times. Executives who are generally smart and experienced become obsessed with market share at any costs, celebrate short term victories while dooming their company’s future. Most of the people who I have seen done this would do it again, even though intellectually they are aware of the danger. It is as if this is a fatal character flaw in some.
John
I totally agree with you, and would like to stress the importance of staying close to the potential customer/strategic partner/acquiror. More than once I have had to deal with a competitor who made a substantially better offer to get us off the picture, in order to start creeping back taking advantage of lack of time and negotiation fatigue.
So true. Any space with an overflow of venture money leads to a massive price pressure on all incumbents, unless one or two cos have a clear feature/value differentiation (integration capabilities, deployment or support costs, etc.).
Luca is right, in many cases, loss leaders can come back your way if the competition does not perform, or goes under because of their commercial practice.
The worst is that this competition on pricing just sets price points in the mind of economic buyers, who will then have a hard time agreeing to pay “fair value” for a piece of functionality.
I’ve been on the other side of these types of negotiations — working with startups to leverage their technology with our distribution channel. The bids are extremely competitive at times with some companies putting out firesale prices because they are about to go under. In the long run, it does not serve our own interests if the deal makes no sense for the other side. For software, requirements specification is so soft that it is extremely important for both sides to perceive benefit. The party that does not benefit can easily fulfill the legal requirements of the contract while abusing the spirit (or intent) of the agreement.
If you have never considered “no”, your yes sucks.
When the potential customer/strategic partner returns, I have concern that they will walk at the next cheap offer from another supplier. When they return, I am concerned about 2 extremes: giving too much or taking too much. Learning to say ‘No’ until a win-win agreement has been put together is difficult but critical for long-term success. I jotted this down today on lads.typepad.com. Great article.
I think many people underestimate the power of “No” in a lot of situations. It’s tough with strategic partners and even tougher with customers. And it’s often analogous to Matt Blumberg’s post on “Don’t Just Do Something, Stand There.”
http://www.paulgraham.com/venturecapital.html
When they return, I am concerned about 2 extremes: giving too much or taking too much. Learning to say ‘No’ until a win-win agreement has been put together is difficult but critical for long-term success. I jotted this down today on lads.typepad.com. Great article
http://www.download10.co.uk
I think many people underestimate the power of “No” in a lot of situations. It’s tough with strategic partners and even tougher with customers. And it’s often analogous to Matt Blumberg’s post on “Don’t Just Do Something, Stand There.”