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‘Startup’ is the buzzword right now within the entrepreneurial club. Almost everyone has an idea that he wants to turn into a startup company, but only few who have ventured into the world of startups know that setting up a business is like walking on a tightrope. You need to balance out what you have as your resources and what you want to achieve while starting up a company. It’s hard to survive when you are lacking resources such as funds, technologies, expertise. To avoid turning into an easy prey of the competitive business environment, startups need to look for opportunities that’ll help them grow.

Setting up a business is like walking on a tightrope. You need to balance out what you have as your resources and what you want to achieve while starting up a company

(source: www.startupworkout.com) 

The best form of growth for a startup is internal growth (organic growth). Internal growth involves working with the strengths of a startup generally from its own knowledge, expertise and employees. Internal growth is favourable because it pushes the firm towards even-paced growth. 

But let’s be realistic here, startups lack many important resources and focusing only on organic growth runs the risk of ‘hitting the wall’.  Let’s take an example of a hypothetical phone company whose optimal production level is of 100,000 phones a year. This level of production is ‘the wall.’ With current resources and capacities at hand, the company can produce 100,000 phones at maximum but if it opts for external growth it can go beyond ‘the wall’ and increase its optimal production level that can be closer to 700,000. 

When profitability, market growth or cost-reduction cannot be gained through organic means, it’s time to look outside your business. You have three potential strategies: either you buy, build or partner. Startups, in general, lack funds to buy expertise or technologies to build upon. Hence, the third option to partner seems like the best choice. One form of partnership is building a strategic alliance.

Peter Simoons, Entrepreneur and Certified Strategic Alliance Professional (CSAP), says, “Strategic alliance is a strategic partnership between two or more organizations with an aim to achieve a result which one of the two parties cannot achieve alone.” This being said, you might reach a conclusion that a strategic alliance is the best option to pursue, but that is not always the case and not all startups are eligible for an alliance.

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An alliance exists only when there is a win-win situation for both parties. If your core strength complements your ally’s and a synergy is met, then you are eligible for an alliance. It’s a case where 2+2=5. If the value generated from the alliance is not in sync, then there’s no point in allying with each other. Many strategic alliances fail because they are not strategic. When synergy is in question, we not only look at the surficial value where a combination of the two parties creates greater value. Special emphasis should be given to evaluate whether the allying organization’s missions, objectives and cultures align with each other or not. Moreover, trust issues arise when companies share resources, and communicating openly to understand each other’s businesses is vital for alliances to eliminate trust issues.

 If your core strength complements your ally’s and a synergy is met, then you are eligible for an alliance. 

The outstanding advantage of a strategic alliance is the access to the partner’s resources. Catalyst for Change, a consulting company in Kathmandu, was using the shared office space provided by Biruwa ventures for operations. In return, Catalyst for Change provided consultation services to Biruwa’s customers.  This is a case where both firms created value for each other, which led to the creation of ‘Biruwa Advisors’. Through Biruwa Advisors, these two companies shared resources to provide greater value to their customers. If they had ventured alone, it’s less likely that they could have given the same value to their customers. Besides sharing resources, the other significant advantage is they also share risks and costs related to the consultation business.

(Source: leadlakeenergy.com) 

Michael Dell, founder and the CEO of Dell Computers Inc., talks about Dell’s early years to gain advantage from synergy, “As a small start-up, we didn’t have the money to build the components (used inside a PC) ourselves. But we also asked, ‘Why should we need to?’ Unlike many of our competitors, we actually had an option: to buy components from specialists and leveraging the investments the specialists had already made, allowed us to focus on what we did best—designing and delivering solutions and systems directly to customers.  The added benefits included focusing on one’s core competency, opportunity to learn from partners and lowering the risks of competition brought by the alliance’s added market power.”

If you want to avoid a bad alliance, think about who you’re partnering with, think about your own objectives and cultures and analyse if they synchronize with your partner’s.

(Source: www.southfront.org)

However, there are two sides to this coin. If alliances can make a business, then they can also break it. If you want to avoid a bad alliance, think about who you’re partnering with, think about your own objectives and cultures and analyse if they synchronize with your partner’s. If the alliance seems like it would be beneficial for both, then take advantage of the opportunity. It’s all about “You scratch my back, I’ll scratch yours.” But you have to be aware of the size of the back. Unequal contributions and unequal gains from an alliance is unhealthy. 

It’s all about “You scratch my back, I’ll scratch yours.” But you have to be aware of the size of the back.