Teaming up with customers

Recently, I discussed identifying and teaming up with strategic partners, focusing on equity partners or stockholders (e.g., angel and venture capitalists). Equity partners are not the only source of early funding or of strategic partners. An alternate approach is to team with potential customers.

In some cases, future customers may be willing to provide advances or guarantees against orders.

For this to be successful, your company will most likely give up a lot of flexibility on which they sell products. If a customer is going to assist you in the development of your product or service, it will not want you to share that economic advantage with its competition.

When teaming with a customer, the biggest risk is upside growth. If the customer will be unable to grow its sales as fast as your company is growing its production capability, you may be stuck. Still, it is one option that should be considered if the marketplace is correct and you are able to team with one of the principal companies in it.

Governments are very good advance order customers, especially when the project in question has lots of technical risk. Many times, they are the only source of funding beyond family and friends. In the United States, the Small Business Innovative Research (SBIR) program is one of the best-kept secrets in government funding.

If used properly, this program not only can give your company the critical funding it needs, but can provide you with a guaranteed customer once the product is commercialized. Because governments are more interested in economic development than in obtaining an economic advantage, they are willing to take certain economic risks where companies are unwilling to do so.

In general, governments want economic development more than they want products, so you must be able to convince the governmental entity that you are able to use the money more effectively than someone else. Your presentation or proposal must convince them that you understand all the risks and hazards to be faced, and your company has a plan that will be successful if properly funded. There is a strange balancing act between being a risky endeavor and demonstrating that it is a guaranteed success story only governments can afford to fund.

Not all partners provide direct financial support. There are also companies, universities, governmental entities, and nonprofit groups willing and able to provide services in kind. This may be in the form of low-cost facilities, testing capabilities that a small company cannot afford on its own.

The vendors that your company already works with are definite candidates for this type of strategic partnering arrangement. The company I work for has several vendors that are, in essence, strategic partners, because they are giving us inexpensive access to technology we need in exchange for becoming an integral part of the devices that we will eventually sell. Their products are just unique enough to make it advantageous for us to work together to develop the technology further.

— Niel Leon
Committee on Engineering
Entrepreneurship
leonn@asme.org

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