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Summary:

Start-ups backed by industry peers almost never work out. The latest example being “U3″:http://www.u3.com/, a start-up that was pushing the concept of running applications off a USB flash drive. U3 was co-promoted by M-Sytems and Sandisk. (Read U3 to U-Zero The Sandisk decision made me think […]

Start-ups backed by industry peers almost never work out. The latest example being “U3″:http://www.u3.com/, a start-up that was pushing the concept of running applications off a USB flash drive. U3 was co-promoted by M-Sytems and Sandisk. (Read U3 to U-Zero

The Sandisk decision made me think about the relationship between start-ups and the big brother. I have seen it time and again, the strategic investments or partnerships work against the start-ups. While it is alluring to team up a big brother, it also limits your options.

Remember how @Home, backed by large cable companies unraveled. More recently large media companies are promoting a big YouTube killer, but it is hard to imagine News Corp and NBC having similar end goals. Taking money from a large industry peer, such as Sandisk, can artificially shorten a staretup’s runway. If “Big Brother” decides the startup’s R&D conflicts with its own best interests, it’s game over. (Of course I’m assuming the most founders start their companies with more than just a quick exit in mind. That was the 1990′s!)

Thoughts?

  1. “Never” seems a bit strong to me– it’s like never take Venture Capital! But there are definitely perils… .

    I’d love to see this developed out into a longer article. Strategic partnerships are so important, since they lend a name-brand to your fund raising effort, and usually bring in money as well. They can be seductively comforting, especially when you are tired of going from door to door, begging for money. Suddenly someone is offering you a chance to get paid to build something, with the comforting certainty of … gasp!… a job!

    But they can be distracting from your company’s vision, as the company’s vision slowly muscles in, and as the service mindset takes hold.

    How can you evaluate a strategic partnership? How do you set up the relationship to avoid trouble? What to look for/what do avoid? When to play and when to punt?}

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  2. I agree somewhat, and disagree somewhat :)

    In aligning any business with a potential “big-brother” you do limit your acquisition options such that the value of your company declines because your big-brother investor already has a “hand in your piece of the pie” and therefore it expected that if they acquire you – it will be for a reduced valuation. This is particularly important if you have allowed them to dilute your stock such that they have a controlling interest.

    Conversely, I would also think it could be a good thing. If your startup takes off, you have some serious firepower behind your startup and also have the chance to interact with industry professionals and increased your team valuation. A lot of people dont want to walk into start ups until there is a “major reduction of risk, and high probability of return”.

    Teaming up with big brother substantially disperses the risk and therefore you will have a lot more people willing to leave “secure jobs” to help you with the startup.

    It really depends on the concept, and the team implementing it. :)}

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