How To Stop Your Partner From Killing Your Startup
Empire Startups Contributor Sam Hodges breaks down startup relationship dynamics, firsthand.
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A wise startup trope familiar to many is that, “Partnerships are where startups go to die.”
But for FinTechs and Insurtechs, this is hard-to-follow advice.
Leveraging the 'regulated rails' of incumbent financial partners is often necessary – and, even when not, can accelerate market entry and efficient growth. Neobanks and alternative lenders have all embraced this “partner playbook” with a variety of approaches. Most large FinTechs today partner with incumbents for banking, lending and insurance licenses, underwriting capacity, and other regulated financial product areas.
While partnering with an incumbent can offer significant advantages, it also introduces a critical factor: Partner Risk.
The Nightmare Scenario: My Story
With a seed round in the bank, a promising team, and a huge market – the wind was at our back. Our next goal: secure a carrier and reinsurance partner. We traveled the globe, from New York to London to Tokyo, for boardroom pitches, long dinners, and round-the-clock discussions with senior executives. Gradually, a shared vision crystallized, terms were negotiated, and we signed a contract with a marquee partner, a name we were proud of.
Then, a macro event. The partner gets spooked and the mandate becomes “pull back”. Suddenly, our partnership is on the chopping block. Despite a seemingly ironclad deal, reality sets in: they can, indeed, exit. I flew to their headquarters, navigated the discussions with as much empathy and understanding as I could muster, and offered to kiss the metaphorical ring. We salvaged the deal – but it was a close call.
As a repeat FinTech entrepreneur, I've encountered these challenges time and again. Particularly in the early stages, when you desperately need a partner to launch and diversification is not yet an option, the quality of your partnership can be the deciding factor in your venture's success or failure.
A Simple Mental Model For Understanding Your Partner's Strategy
Every partner, though unique, shares a common goal: to secure a portion of your future market share. Your first task is to decipher their strategy for achieving this.
Partnership strategies can be categorized along two dimensions:
Category Approach: Is your partner developing partnerships in a small number of carefully considered categories where they have a strategic advantage (Focused), or developing partnerships across a wide range of sectors (Broad)?
Partner Exclusivity: Within any one category, are they betting on a single partner (Married) or betting on multiple competing startups (Dating)?
The answers to these two questions will dramatically influence the quality of your partnership and the tools you can use to manage your risks.
Broad & Dating: The Service Provider
Here, your partner adopts a 'long-tail' strategy, often monetizing the partnership from the onset. This model is akin to a service provider relationship. Your focus should be on crafting a robust contract that prevents lock-in and protects your upside while also ensuring you have a fall back option if your partner changes course.
Broad & Focused: The Hunger Games
This approach mirrors a venture capital firm's seed investment strategy. Easy to get started, but as your startup scales, expect comparative evaluations against their portfolio. The risk of being sidelined as they consolidate their bets is real.
Broad & Married: The Starter Marriage
Your partner is committed to your category and specifically to you. However, this alliance can be fragile, often contingent on internal champions and the buzz of your category. Despite a seemingly strong relationship, prioritize a strong contractual foundation.
Focused & Married: True Love
If you find yourself in this rare alignment, where your partner is fully invested in mutual growth, consider it a significant win. This arrangement often leads to successful M&A. The key here is to foster deep alignment, typically through meaningful equity investment, and maintain strong ties, extending to the board level. Your biggest risks are an economic crisis or a new CEO.
Your Toolkit for Partnership Success: Advice and Practical Measures
1. Invest in and Diversify Your Relationships
Most partnerships are championed by a single executive at the partner company, and founders understand that this relationship requires significant nurturing. But having a single champion puts you at significant risk should they depart the company or fall from favor. You should cultivate strong relationships beyond your champion, ideally at the C-suite and board level. I’ve found it works best to be forthright in your approach, emphasizing the mutual importance of the relationship and the desire for comprehensive alignment from top to bottom. Also, work hard to make your champion look good in front of her boss. And perhaps most importantly, don’t lose their trust – trust is both a function of integrity and competence; be sure to demonstrate both attributes.
2. Invest in Your Contract
Your first partnership contract is likely to be the most important document you sign in your startup’s lifetime. Do not rush, and do not skimp. Engage a lawyer that specializes in fintech partnerships; someone that has seen firsthand how partnerships succeed and unwind. Ensure your contract includes:
A lengthy and well-defined notice period for termination, ideally providing a six-month cushion for transition.
A cure period of 60 to 90 days, allowing time to rectify issues before they escalate to breaches.
Financial deterrents for premature withdrawal, such as a breakup fee proportionate to the contract value or transition costs.
As a benefit, by pushing hard on these terms during negotiation, you can learn a lot about how your partner thinks about the potential longevity and probability of success of your partnership.
3. Incentivize Long-Term Commitment
Foster a partnership where your partner is incentivized by the long-term success of your company, not just near-term financial gains. Early-on, strategies might include offering stock warrants based on partnership performance/utilization or rights to future investment. Another tact is to consider implementing a vesting strategy, or the ability for each party to receive value in a “downside” scenario. By definition, the first few years of a company are a bit volatile – so plan for that, and have clear mitigation strategies in place from the get-go.
Building a Resilient Partnership Foundation
I’ve had far too many ruined months due to partner issues, now across three tech-driven financial services companies I’ve helped build – and I’ve seen even more of these issues in other companies run by friends. Partnerships are lifeblood for many FinTech and Insurtechs – and by planning out a thoughtful approach to setting up and managing these partnerships, an entrepreneur can take a lot of risk off the table and save themselves more than a few sleepless nights.
Co-founder & CEO of Vouch, Empire Startups Contributor
Empire Startups Contributors are a community of experts providing unique perspectives and insights on the latest in FinTech. Our model is is merit-based and does not offer monetary compensation.
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