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Oct 102012

Best friends.

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Every software startup is faced with a fundamental dilemma . No matter how well your startup is funded, you can’t go it 100% alone.

Your customers are looking for complete solutions.  To some extent, this has always been true, but in today’s hyperconnected world, it is crucial.  Workflows and departments are connected, companies want to be better connected with customers and suppliers.   No software, no matter how good, will exist long as an island.

You want to focus on your added value.  Let’s face it,  you have limited resources, and don’t want to spend them working on problems that have been solved, or areas outside of your real area of expertise.    You want your development resources focused on addressing the highest value problem.  Your goal is to have the BEST solution for that problem, essential to find the niche where you add highest value.

Dealing with this dichotomy is a challenge throughout the entire software industry.   Customers want a complete solution – your product, by necessity, is aimed at only part of the problem.      Over the years, many software vendors have attempted to solve this problem by trying to become the “one stop shop” for whatever.  This is almost always a bad idea, and I say this as someone who has created my share of  “one stop shop”  PowerPoint  presentations.  Customers may say that they want a one stop shop, but only if every item in their cart is best in class.

The answer for most companies involves some sort of partnership.  The basis of the partnership could be marketing,  development, or it could be a set of alliances that becomes an ecosystem.     Clearly, these partnerships are necessary, but there are downsides and dangers, particularly if you are a small company  forming a partnership with a much larger one.  It is OK to get in bed with an elephant, but you better watch out if the elephant rolls over.

The potential benefits of  getting into a partnership with a larger company are enticing.  A partnership with a larger company can provide you with some instant credibility,  access to a large installed base,  and sometimes even a much needed cash infusion.  Even so, the risks are high enough that Dharmesh Shah over at the OnStartups blog offers this advice to those considering a partnership with a big and powerful company –“Don’t      I recommend the whole article, including the comments.

Shah highlights a number of problems, including what impact of the right of first refusal on the ultimate acquisition value of your startup, and advises you to consider the downside of partnership arrangements.

They volunteer to use their powerful sales resources to help sell what you have into their market.  It could be game-changing!  All they ask in return is that you exclusively work with them.  So, in this kind of situation, the question to ask yourself is:  “What if they don’t sell?”  Could be intentional, could be uninentional,  (sic) but the result is the same.  Dollars are not coming in your door.  And, unless you planned for this contingency, you’re sort of “stuck” into an exclusive arrangement where you can’t change your strategy to something that will deliver sales.

OK,  one of my over riding principles is “Have a plan B” – and exclusive arrangements might prevent you from implementing your plan B.  Overall, I prefer flexibility, but if you go into an “exclusive” make sure that there are guarantees and “outs” available if it doesn’t work out.

A worst case scenario is laid out in the DealBook blog about Corbis and Infoflows.     Infoflows was a startup with a vision “for an innovative way to identify and track digital objects across the Web”.

The start-up, Infoflows, began working with Corbis, the big photo library and licensing company owned by Bill Gates, Microsoft’s chairman, and in June 2006, the two signed a multimillion-dollar development agreement.

But four months later, things fell apart, culminating in a Washington State jury verdict against Corbis for misappropriation of trade secrets, fraud and breach of contract. The jury awarded damages of more than $20 million.

The big problem from Infoflow’s point of view is that they didn’t protect their IP before going into an exclusive deal, betting their whole company on one customer.

And the start-up went into the partnership without patenting its software or system for tracking digital rights, a further risk.

Technology start-ups that work with big companies, said Kevin Rivette, a Silicon Valley consultant, should take care to protect their most valuable ideas, even as they collaborate. “Innovation without protection is philanthropy,” said Mr. Rivette, a former vice president of intellectual property strategy for I.B.M.

Mr. Stone said he felt no rush to patent because he wanted the joint work with Corbis to move closer to a finished system. Infoflows, he said, would develop the underlying system for identifying and tracking digital objects across the Web, and Corbis would own the application for its photo-licensing business.

In December 2006, after Corbis terminated its agreement with Infoflows, Mr. Stone met with Corbis managers to discuss details of the breakup. Corbis said the intellectual property it claimed as its own was covered in the nonpublic patent Corbis had filed back in January of that year. It was the first time Mr. Stone had heard of Corbis patenting the work, he said. “I was shocked,” he recalled.

The Corbis patent, Infoflows said, was a move on its ideas. Mr. Stone said he had an oral agreement with Corbis, supported by an e-mail exchange, that neither side would file for patents until their work was well along. Corbis denied any such agreement.

I think that this is a fairly extreme, but not entirely unusual case, where a bigger company has power and resources to bully a smaller company.    But even in the best of cases, incentives will change, and startups need to be careful and protect themselves.

In  a future post, I will explore these issues and the problems of choosing an ecosystem to live in.







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