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Evaluating A Potential Partnership

As a company, we have chosen to partner as opposed to build, so I want to leave you with four things I have learned from the Ambra experience of outsourcing significant portions of our company to partners, as well as the Value America experience where we have fundamentally done the same thing. There are some key points to keep in mind when you evaluate what companies you want to do business with.

First of all, make sure that you have a clear business plan before you undertake engaging people in partnerships. A partnership will not solve problems for your business. You have to know what you want to do before you go into discussions with a prospective partner. You have to know what you are looking for and what you don't have yourself. Frankly, you have to know what things you are good at before you evaluate providing parts of your business to someone else as an opportunity to partner with you. You have to be very clear on your own business plan. I often see people in rooms together, in our company and in others, having synergy discussions. They're trying to find new solutions to business challenges. Those are entertaining, but they aren't going to be productive in terms of running your business over the long haul unless you clearly understand what you want, what you believe your business should do and where you believe a partner is necessary.

Second, underpinning any great partnership is knowing how to measure it. Whether it's something you do that's free for exchanged value between you, or something in which you actually exchange money for services, know how you are going to measure it on both sides. If you are providing a service, you have to know that you will make money at the end of the day. If you are buying a service, you have to know how you will measure the performance of the service provider. It's critical, and I find that it avoids more confrontations and bad relationships when things are clearly documented before you get started.

Third, when seeking a partner, do business with people who have a core competency in the area you want. One of the great consulting phenomena is, "there is nothing I can't do." If you are working in some arenas, people will say, "I'm an advertising agency, yes, but, as a matter of fact, I can probably tell you how to do better distribution because a lot of my clients are distribution companies." The fact is, you need to partner with the right people who are best of breed in what they do.

Lastly, and this has served me well over the past 10 years, do business with people you respect and whose values you believe are common to your own. At the end of the day, you are going to be under pressure. Things aren't always going to go well and there will be confrontation. You need to know that the people you are dealing with have standards, ethics and values that are the same as yours and your company's. You should like doing business with them. If you treat them as "people on the other side of the wall," it will always be a we/they relationship. If you treat them as an extension to your own organization, as if they are your department in McLean, Virginia, then it's going to be a partnership that will work over the long haul.

I believe that partnership is a new frontier for American business, and I believe that we are all in the most exciting part of American business, right now. I'm delighted to have the partners I do in womenCONNECT.com and to be part of this Netpreneur Program event. Thank you.

 

the audience: questions & answers

Ms. Smith: Thanks so much, Glenda, your last comment ties right into one of the questions we had come in over the Internet. This person asks: I found that I need to trust the people I'm partnering with before I'm willing to work with them. If I trust them, I never write up an agreement. It's always verbal. The two times I had a written agreement, the other person tried to steal my business. Is a written agreement always necessary in a partnership? If yes, how do you do it without ruffling the feathers of both parties?

Ms. Dorchak: My beginning position would be, yes, you always have to render everything to writing. It's not because I spent 23 years with IBM that I say that, it's because it provides clarity. The exchange that this individual had probably shows that what he thought and what the other person thought were slightly different. That's human behavior. Communication is a complex science and rendering things into agreements provides clarity and a basis for both companies to operate successfully. It is a good business practice, and it doesn't have to be complicated. I advise people to write things down, but make it simple and make it something without all the "wherewithal's" and the "whatever's." They basically become documents that define the scope of the relationship and how it will be measured.

Mr. LaFever: If you see the people laughing hysterically at the middle table it's because I've had to have that beaten out of me over a decade of being a lawyer. You don't need the "whereas's" and "therefore's" and "ipso facto's," but you absolutely, positively have to have it in writing. If you can't agree to agree when you are friendly, it's going to get nasty later on. As Glenda said, you may think you have the same intentions, but until you see it in writing, unless you are a mind reader, you don't know that that's the case. Secondly, not every relationship works, and it's much better to have in writing what happens if it doesn't work; otherwise, it will get really ugly. I can tell you—unfortunately my legal training is resurrecting itself—that many times it's the very earliest transactions that a company or entrepreneur gets into that causes problems later on with funding. It may be awkward, but you'll continue to live if the thing unwinds, so make it happen, make it simple, but put it in writing.

 

Ms. Smith: Another question from the Internet: I could use some help from the group in negotiating strategic partnerships. In our case, it would be a partnership where we would be providing content to a large branded site. We have assets that are very valuable in this relationship. What I want back from the partnership is visibility and eyeballs—that is, two clicks from the home page and promotion. What else should I be looking for?

Mr. LaFever: Notice that nowhere in that question did the writer ask, "How can I best show this partner what we can do to make them successful?" I would lead with that. You want to show them why the particular type of content you have is going to make them more successful. Find out what their important metrics are. Are they trying to get greater traffic? Are they trying to get greater and higher CPM? What is it they are trying to accomplish? If you can take the assets you bring to the table, put them through that filter and do it right, then they are going to find everything they can to make you successful. It's the old "help me help you," but it's true.

Sure, you want to make some money on it. The easiest way to get a deal is to get paid on a click-through basis, but I think there's a real fallacy with that because it involves the way they position you. The best deal is a lot of money up front, and you are probably not going to get that. However, if you can get a combination of money up front and some advertising revenue or sponsorship share, I think that's probably a great home run for someone who is not a marquee player yet. You also want to make sure that it's not an exclusive arrangement unless you really have to agree to that. Sometimes you agree to something just to get the deal done, but what you thought was a great deal today, might be not so great tomorrow. The one thing we have learned is that you never give anybody everything you've got. Try to give them a subset of what you have so that you have a reason for people to come to your site after they've read whatever you've put on that party's site.

Ms. Dorchak: I support what Gary said. It's important to recognize that you have to provide value, and I echo his comments about exclusivity. I think it's very important to keep business open. That's very different from establishing an exclusive partnership for a company to be your manufacturer, but business shouldn't have to be legislated as exclusive between two parties. I think open business relationships work very well.

 

Mr. Stapleton-Gray: I'm Ross Stapleton-Gray of TeleDiplomacy (http://www.telediplomacy.com). This is a question for Glenda. In your space, how much are you finding existing relationships between manufacturers and brick-and-mortar retailers retarding the partnerships you can form? For example, a retailer telling a manufacturer, "We are very important to your distribution. Do not sell products online for less than we sell them in the store." How much could you do if those relationships weren't there, and how do you see the old brick-and-mortar manufacturing relationships changing now?

Ms. Dorchak: Great question. It varies by industry. Value America carries products from 25 industries today, growing to 40. How I respond to that question in the technology category is very different from the apparel category, and we have had to reconcile it with each. It's very interesting because we clearly are being viewed by the manufacturers as a solution to a problem that, in many cases, they have with the retail industry. Personally, I believe that there are segments within the retail industry that should be concerned about a Value America model, particularly the vertical superstores, where we add more value in depth of category and we are not anywhere near as confrontational in our relationships with the manufacturers as they are. In the case of the small retailers, we believe that they add a tremendous amount of value. I use the example of consumer electronics. I believe that the store that has two versions of every form of stereo system—a couple of low-end and medium systems—is the one that's going to suffer in this. The audiophile store that's got the finest in a whole range of products is going to coexist with us, and we very much support that specialized store model.

In terms of dealing with the manufacturers on retail, first of all, it hasn't been getting in our way. Remarkably, these companies are rushing to our doors because they are trying to solve a business problem. It doesn't matter whether it's the white goods area, appliances or apparel; they are all going through the same process where specific distribution channels have squeezed margin out for them and they have had great difficulty reaching the marketplace they want to reach. What we have done is, where they hold manufacturer's advertised price—certain industries do that, such as consumer electronics and technology products—we observe manufacturer's advertised price, we don't break MAP (Minimum Advertised Price, the price set by a manufacturer for Internet, print and radio advertising. Companies cannot advertise at a price lower than MAP.) and that's how they manage to allow us to coexist with their retail channels.

I have been to a couple of retail industry forums recently, and there is a lot of buzz in the brick-and-mortar industry about the impact that companies like ours are having on them. It hasn't been a problem, we believe, because we don't buy through distribution and our model is to work directly with the manufacturers to form a relationship with them first. We may choose to distribute through some of their channels, but we do have a relationship with them. We work out the pricing formula, the supply formula and go forward. It's an interesting question to watch over the next year, however.

 

Mr. Greathouse: I'm Mark Greathouse with New Vision Financial (http://www.nvfi.com) and EDIE Online (http://www.edie-online.com/EDIE). Something that a lot of people face with early stage and startup businesses is that they get a partner early that they give equity to, then later find that it's necessary to part ways. Please talk about how you might handle that and what the options are.

Mr. LaFever: First, I hope you have it in writing because that could get very ugly. You have to be very careful in giving away equity. We did it because, if for no other reason, everyone else was doing. iVillage gave some equity to NBC. It was a cool thing to do.

Seriously, though, we have raised $5 million to date. I know that's a lot of money to a lot of people here because it's tough to get the first dime, but iVillage raised more than $100 million before they went public, and another $100 million in their IPO. Women.com raised close to $80 million and they are slotted to go public at the end of this month. When you compare what we've done to what they've done, it's very, very different. The reason for that is, although the sales people hate this, our real priority has not been traffic so far; it has been developing the quality of our core competency—the content and the knowledge of the demographic. When we went to increase traffic, which is obviously an important metric, we had two choices. One, we could raise a lot of money and give up a lot of the company to investors. Now, I don't want to begrudge what investors bring to the table because they bring you opportunities, but that was one way to go. The other way to go was to find corporate partners who wanted our content and could give us breadth and coverage. One of the things we do with Value America is put our content on their site to provide them with the ability to have contextual sales, stickiness and repeat visitors. Why do they want that? Because they want to sell products over and over again and make money. That content, though, has links back to us.

With respect to the equity given to CNNfn, in that particular situation we thought it was a cheaper means of acquiring what we wanted. We could just as well have raised a couple of million bucks and paid them had it not worked out. What you can do, and we did this in our deal with CNNfn, is to negotiate things in the contract that act as break points. If a particular thing happens or doesn't happen, depending on your perspective, it means the contract's over. If a break point occurs within a certain period of time, you either get some of that equity back or they don't get to exercise the option as fully, depending on how it's structured. It's very difficult to do, but it makes sense to negotiate break points or performance milestones, depending on whether you are an optimist or a pessimist, and have the equity rights tied to that.

Ms. Smith: To follow up on that, many companies, especially the public companies that have a nice war chest of cash, are developing strategic partnerships by way of investment. To what degree might this be part of the eventual acquisition strategy, and to what degree might it be just a good way of creating a partnership?

Ms. Dorchak: Value America has a lot of business and a lot of partnering decisions to make over the next while. It's publicly known that we raised well over $200 million in our private and IPO offering rounds. As we go forward, the decision on how we use our money in terms of acquisitions versus partnerships is an optimal question. Critical over the next couple of months, and I advise anyone who is doing an IPO to do the same, is fortifying the infrastructure on which you run your business. We are building a company that we believe truly will be the largest E-tailer, in the world within the next couple of years. We're optimized to be an E-tailer, not a content site or any of those other things. That means it has to be built for the traffic and the substance. It has to have the scalability and the infrastructure, so we are pouring significant sums of money into creating our infrastructure. The second thing is, we are going to look for things that create shareholder value, and shareholder value in today's stock market environment is revenue driven. We are going to look for partnerships that potentially lead to acquisitions that support growth in that scalable fashion. We will look for other partnerships to bring out our breadth and pursue those more on a partnership basis. Whatever we do in the form of acquisition has to have a direct value back to our shareholders and the way that we are measured today.

Mr. LaFever: If you do a partnership that involves equity, and/or if somebody invests in you, you probably are increasing the likelihood that they might acquire you. You are also just as likely to be striking all of their competitors off the list of acquirers, and you need to be okay with that. General Electric (http://www.ge.com), which owns NBC, is one of our investors, although we didn't do a deal with CNBC (http://www.cnbc.com). They tried to help set it up, but we just didn't think it fit, and we went with CNNfn. Who knows in this space, but I don't think GE or CBS or NBC or ABC is therefore ever going to want to acquire us, because we aligned ourselves with Time Warner. It's not a bad thing. It's nice to have an opportunity to align with Time Warner, but the point is, any time you do any kind of equity relationship, whether it's barter or cash, you should make the conscious decision that you are probably writing those other people off the list.

What's your exit strategy? I can't figure out why investors still act like it's a question. There are only two exit strategies—acquisition or IPO. There is a third that an investor taught me: "We blow out the management team and bring in a new one." I don't like that one. The point is, if you think your exit strategy is acquisition, then you have to be very careful with everything you do and how you position yourself for that sale.

 

Mr. Kling: Arnold Kling with Homefair.com (http://www.homefair.com). We provide relocation information on our Web site. We did our first co-brand partner relationship a few years ago. It was completely unplanned and it was very expensive. We learned how to do it by doing it, so by the time we did a partnership with womenCONNECT.com, it was low effort for both of us. What kind of planning do you do, and what kind of planning do you recommend, for making your companies able to partner quickly and with low effort?

Mr. LaFever: Homefair.com is a good example of a company that pitched to us the right way—why this would be good for our clientele, since our audience is often relocating. I didn't hear word one about the technology. I'm assuming it works. Let me just compliment them on the way they presented it, which is the right way: help me to help you.

This is a space where you learn as you go. I know it's simple, but come up with your acronym. Try it every time you have an opportunity. How does it fit each of your criteria? How would you number it on those scales? Also, look for people on your team who have key skill sets that may not be in their official line of responsibility. Have them come in as kind of a SWAT team to evaluate the opportunity. Ultimately, the CEO or the management team has to make the decision, but, if you set up the right kind of environment, people will feel comfortable saying, "I think this is a good idea," or, "I think it may not be." Assess the team's barometer; if they have an experience set, apply it against your acronym and go from there.

Ms. Dorchak: Adding to what Gary just said, have people focused on it. It was a big decision for us, in a company that was only about 150 people at the time, to put Jennifer and a team of 10 people in place to develop and run an affiliate partnering business unit for us. If you are going to be in the partnering business, as we are, you have to put people on it. You have to take time and make it a serious part of your business. Otherwise, it doesn't happen or it happens in a way that doesn't fulfill anybody's objectives. The effort has to have people focused on it as a primary part of your business, not a secondary part. It's helped us because we recognize that, when we partner with affiliates, it's on us to make it easier for them to do business with us. As our scale grows, it's easier for us to do that and we become more complicated to do business with. Look for companies that have dedicated the resources to making the partnerships move more effectively.

 

Mr. Maloy: I'm Timothy Maloy, a technology journalist. To quote Glenda, "We have chosen to partner instead of to build." That seems a very adept business model for the current state of the Internet economy, but things are turning so quickly in terms of bandwidth and the penetration of the Internet into the average home. Where do you think both of your companies will be relative to partnership and business strategy five years from now? Cutting to the chase—what will keep your partners from disintermediating you and going directly to the consumers.

Ms. Dorchak: Going forward, the first thing that is so very important is my point about core competencies. Value America doesn't look at every component of its business and then go to outsource it. We very clearly have our own core competencies, and among those is marketing. We have an in-house agency. All the marketing you see is done in-house and it's done extremely efficiently. Our relationships with brands is also a core competency. We have made a significant investment in people who are specialized as buyers in brand relationship management. What I'll call "E-fulfillment," managing the complexity of E-distribution, is the most difficult aspect of our model. Therefore, the information technology infrastructure that we put in place is something we don't consider outsourceable and we never would.

As we go forward in the long term, multi-years from now, the partnerships we form will have less to do with outsourcing parts of our model, as it was in the Ambra days, and more to do with extending our reach. If you think of the boundlessness of the Internet, there is a seamlessness that goes with its reach which means you become "all virtual." Everybody, every site on the Internet, begins to become homogeneous in a way. Going forward five years from now, I expect that we will be connected to every site of any substance in terms of traffic that exists on the Internet. The thing that's so critical and so exciting about it is that the Internet is the final frontier for people to get exactly what they want. People's needs will drive E-commerce companies, content companies and where manufacturers put things. We are moving and shifting in this 24-month period. The year 2000 is when the consumer—whether a small business owner, a corporation or an individual consumer—truly takes control based on their needs. All business, all commerce will align itself to those needs. In my view, partnerships will grow, but they will take on a different means. You will have to coexist to be able to exist on the Internet.

Mr. LaFever: Over that period, my acronym will become BRET, leading with Brand. Our objective is to unequivocally establish womenCONNECT.com as the single largest point of contact to women in business. When a businesswoman or a company wanting to reach businesswomen has a question, it will be, "Who do I call after I call womenCONNECT.com?" If we can establish ourselves in that space by implementing multimedia and multidisciplinary means through partnering, because that's how you can do it fast, we become the AARP, as it were, of the women's space. Most people who are members of AARP (American Association of Retired Persons) (http://www.aarp.org) probably have no clue who they are buying their life insurance from. They think it's from AARP. When that renewal contract comes up between the manufacturer and AARP, AARP is the one that says, "You want to do business? What are the terms?"

The way that we will establish ourselves in five to 10 years, is that we will continue to partner with people who have and hold the same ideals, thoughts and values that we do, and we will continue to do business with them because we are helping one another. If we are successful in establishing our brand in the way we want to, they are more at risk than we are of the relationship not continuing.

 

Mr. Simon: I'm John Simon with TechnologyNet.com (http://www.technologynet.com). Could you speak further about exclusivity, especially when you are down the food chain? We are having some negotiations now with alliance partners that have a lot of traffic. Some of them want to lock out some of the other people we are talking to. What criteria did you use if you had to make those choices?

Mr. LaFever: It's a trick I learned in law called "the sleeves of your vest." The best concession you make is when you give the other side the sleeves of your vest. Figure out how long it would take you to negotiate the competing deal—60 days, 90 days? Then, if you have to do it, basically say, "I'll give you exclusivity for a period of X days. It will continue thereafter if the following milestones are met." The reality is, if it's a real winning partnership, you won't mind giving up exclusivity, so you condition it with break points for performance milestones, and it may maintain itself after that. Or you go to them and say, "Okay, I'll give you six-month exclusivity." In my view a 90-day exclusivity period during which time I can talk to your competitor and get ready to do business with them is easier for me to agree to than a six-month exclusivity period during which time I can't talk to your competitor. So, lead with the 90 day if you can. In the "early days" its hard to always successfully resist requests for exclusivity. Believe me, early on we were there, and it was not that long ago that we were the little tiny plankton that the amoeba was eating. We had to agree to exclusivity with IBM. You do it sometimes, but, if you can, try to put markers in place that protect you.

 

Mr. Fredrick: I'm Steve Fredrick with Novak Biddle Venture Partners (http://www.novakbiddle.com). I'm curious how your own financial standing may have impacted your ability to partner—when you were in bootstrap mode, after you received your venture funding, and, in the case of Value America, after you went public. Did it affect your ability to partner or your attractiveness to potential partners?

Ms. Dorchak: Good question. It changes. During the time I have been with Value America, we have gone through probably three phases —the challenge of having a great business proposition and no money, to the environment of actually having money prior to the IPO, then there's what happens when you are in post IPO with a significant sum of money and making other business decisions. Your circumstances do change.

In the early days—and I wasn't at Value America in the really early days, so some of the experience Gary has is more relevant—you have to look at everything with the same fundamental values your partnership is based on. I believe in building it for a longer period of time than a lesser one, because you have to visualize that it is going to be successful as you are going forward; otherwise, it won't happen. Having breakpoints is critical, but there are things in the early days you have to accept, such as exclusivity, that become tradeoffs to getting a business started. We were very fortunate. We had no exclusivity agreements associated with our first $50-$80 million of funding. Most likely, that was a very, very unique proposition. It's important for both parties to understand that they must coexist in their own big fish ponds down the road.

Mr. LaFever: I love the question. If nothing else, it gives me the ability to tell one of the better stories of womenCONNECT.com.

Perception is everything, and the Web is a master of perception. I have to tell you, put your money in your business cards and your stationery. Put your money into your Web site and ask potential partners to come meet you. If you have investors, or if you have a decent accounting firm or law firm, meet in their offices. When IBM came to meet with us, we were working out of the back of Susan's house on end tables and whatever else was handy. The night before they came, we ran out and bought folding tables. We bought chairs which looked good, but if you sat in them for more than an hour, you would be in pain. We bought a whole slew of phones. Susan had, I think, eight lines coming in. It looked like the central station of the Pentagon with these phone lines coming into her house. We bought all of these phones and set them all up. So, we are sitting there talking with the IBM people when the phone rang. Well, we didn't realize that all these phones had volume adjustments that we hadn't turned down. We all jumped straight out of our chairs because there were eight phones on full volume. We even borrowed computers from friends so that we had all these work stations set up...

Ms. Dorchak: This is my partner. Isn't this great?

Mr. LaFever: The one computer we couldn't get was from Susan's daughter Gina because she didn't trust us. Of course, we didn't think to get all IBMs.

Fundamentally, you do business based on credibility and character, but that first perception is everything. Do what you can. Use strategic partners. Having them come to you says something; that you're not afraid to do that. Of course, you don't have to have them come to your backyard or back room.

 

Ms. Smith: This has been a great session. The partnership between Glenda from Charlottesville and Gary from McLean adds an overlay of reality to it. No matter how theoretical we get or how much we speculate, reality always wins. Thank you again for a truly great morning.

 

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Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The transcript is provided "as is" and your use is at your own risk.  

Copyright 2002 Morino Institute. All rights reserved. Edited for length and clarity.  


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