Create An Industry Alliance: Entrepreneurs Need Friends On The Startup Playground

HippolyteIn early December of 1818, Jose de la Guerra devised a brilliant plan to thwart the French pirate Hippolyte de Bouchard who was lurking off the coast of Santa Barbara, contemplating an attack. Even though the Santa Barbara garrison was outmanned nearly six to one, Commandant de la Guerra tricked de Bouchard into believing that his force was formidable by repeatedly marching his small cavalry over a ridge that could be readily seen from the pirate’s ship.

Each time the men crossed the hill and descended out of view, they changed clothing, mounted different horses and then paraded again before the pirates. This ruse caused the pirates to assume that each corps of horsemen was a different contingent of soldiers streaming into the Presidio. Believing he was outnumbered, Hippolyte aborted his plan to sack Santa Barbara and proceeded south where he subsequently pillaged San Juan Capistrano.

Entrepreneurs can emulate de la Guerra’s strategy and make their adVenture appear far larger than reality and thus increasing its influence and market reach while discouraging competitive threats by creating an industry alliance.

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Friends On The Playground

As a child, I moved frequently. At each new school, I had to quickly assess the playground politics and determine with whom to form alliances. I knew that having friends and allies on the playground that would back up “the new kid” was of paramount importance. The same phenomenon is true for startups. As noted in Corporate Venturing, startups should pursue allies who have a vested interest in their success. Such playground friends serve to ensure the startup’s ongoing viability by providing resources, access to customers and technology and market validation.

Computer MotionAt Computer Motion, we created two alliances, comprised of a dozen companies with an aggregate market capitalization in excess of $28B.

At the time we established these Alliances, our annual sales were less than $20 million and our market value was approximately $60 million or one-fifth of one percent of total capitalization of our Alliance members.

Audacious? Exactly.

Creating an effective alliance requires a delicate balance between humbleness and hubris, as described more fully in Humble Pride. You must be highly presumptive when approaching potential members of your alliance. Big Dumb Companies (BDCs) are surprisingly compliant when they are presented with a “Program”. BDC employees are used to playing by the rules, so give them a rulebook. To this end, we created an Alliance Program which generated few objections from our alliance members.

By centering our alliances around our products and not our company, each group was comprised of complimentary partners. This enhanced the relevance and cohesion of the alliances. Members were also more comfortable aligning their brands with an emerging technology, as opposed to a fledgling company.

Hermes
Our Hermes Alliance was based on the first voice recognition technology approved by the FDA for use in an operating room. A variety of medical device companies joined this alliance, in order to voice control their beds, electrocautery cutters, surgical lights and endoscopic equipment.

 

ZeusOur Zeus Alliance was based on our surgical robot which enabled a number of complex medical procedures to be performed minimally invasively, including cardiac surgery.

The Zeus Alliance members sold visualization equipment, surgical instruments and special sutures, all of which were incorporated into our robotic system.

Without these partners, neither Zeus nor Hermes would have been commercially viable. In addition to commercializing our technologies, our alliances afforded us a number of other competitive advantages, including:

Rule MakerCreating an alliance is akin to defining what is cool when you are in High School and self-servingly including yourself in the definition. Our alliances helped establish Computer Motion as a thought leader within the emerging digital operating room.

Exclusivity – As noted in Excludesivity, startups should avoid entering into exclusive arrangements. Our alliances included arch rivals, each of which preferred to be the exclusive provider of their products within each alliance. Despite tremendous pressure, we avoided exclusive relationships, with one troublesome exception. We knew that if we had created alliances which included only one manufacturer for each type of medical device, we would have alienated potential partners and ultimately encouraged the creation of competitive alliances.

Ironically, our non-exclusive approach created a sense of exclusivity within each alliance. We certified each member’s devices as compliant with our standards and allowed each member to market their products using the Hermes and Zeus Alliance logos. Such certifications and  associated PR opportunities were highly valued by our members. The proliferation of the alliance logos, across a variety of leading products, also reinforced our Hermes and Zeus brands.

ValidationThe reflected glory of our high-profile associations gave us significant visibility in the medical device community, which enhanced our sales, business development and fundraising efforts. Like de la Guerra’s small garrison, our creation of the Hermes and Zeus Alliances caused us to appear much larger, and thus more influential, than otherwise would have been possible.

Allies – On and off the playground, friends are preferable to enemies. By delivering value to our alliance members, each had a vested interest in our continued success. This manifested itself in a number of ways, including prospect lead sharing, joint marketing, sharing space at tradeshows and warm referrals to alliance members’ customers.

Revenue – We generated significant fees, over and above our product sales, from our members. Such revenue included membership fees, certification fees, non-recurring engineering charges (to integrate our technology with each member’s products) and User Conference fees. This last category proved to be especially lucrative.

We hosted an annual user conference in Santa Barbara, attended by a couple hundred of the world’s top surgeons. It was readily apparent that large medical device companies were willing to pay significant sums to gain access to these leading surgeons, especially in the intimate setting we provided. We naturally exploited this market reality by allowing alliance members to set up small booths at our conferences. Even though we charged substantial fees for this privilege, our rates were far below those of traditional tradeshows and thus the BDCs generally participated without complaint. As a result, we transformed our conferences from expense line items to profit centers.  

The conferences also served to enhance our stature and influence within the medical device industry, which drove sales and business development partnerships. By design, they were Computer Motion lovefests in which alliance members sang our praises to the world’s leading surgeons, many of whom were prospective customers. Our alliance compatriots were not acting altruistically. It was in their interest to promote the alliance, in order to sell their products as part of an integrated solution.

When Does An Alliance Make Sense?

Clearly, creating a formal alliance is not appropriate for all startups. They require significant energy and focus to ensure each member gains an adequate return on their out-of-pocket expenditures and implicit opportunity costs. At a minimum, your technology should meet the following criteria:

  • Key component of larger system which delivers significant value to end users
  • True differentiator to each member’s products
  • Difficult for alliance members to replicate
  • Sexy enough to garner public relations coverage and breathe new life into otherwise staid product categories

Road Rules

Arms DealerGiven that some members of your alliance will likely be sworn enemies, you must actively maintain the peace. Although the analogy is distasteful, when you organize an alliance of rivals, you are akin to an arms dealer who sells weapons to all sides of a conflict.

Some methods to minimize discord and drama within your alliance include:

No Favorites – Just like rival siblings, alliance members are resentful of real and imagined preferential treatment of alliance peers. Thus, take care to be consistent and transparent in all your member interactions. This can be facilitated via formal communications sent to all members simultaneously, such as newsletters, podcasts, webinars or conference calls.

Share No Sensitive Information – You will gain tremendous industry insights by listening and learning from your members. However, never cross pollinate anything that could remotely be construed as confidential. If you share sensitive information learned from an alliance member, you risk losing your position as a trusted arms dealer, which could jeopardize the very existence of your alliance.

Safe Environment – Encourage members of your alliance to meet in person and interact on periodic webinars. Do not force them to communicate with each other, but provide them a safe and comfortable venue for them to do so. Positive personal interactions, especially those built around social events, will strengthen your alliance’s effectiveness and longevity.

Pirates Be Gone

Jose De La GuerraAs evidence by our experience at Computer Motion, creating one or more industry alliances can be an economical (and profitable) way for your startup to gain mindshare and visibility that would otherwise be impossible. Much like de la Guerra, we appeared far larger than our actual size which enabled us to exert an outsize level of influence within our industry.  

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John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses.
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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.


Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.





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