Growing Via Strategic Alliances
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Strategic alliances with larger companies are also an excellent source of growth capi¬tal for young companies. A strategic alliance is defined as "a close collaborative rela¬tionship between two or more firms with the intent of accomplishing mutually compatible goals that would be difficult for each to accomplish alone.'"7 Sometimes the partnership results in major financial and equity investments in the growing ven¬ture. Such was the case for United Parcel Service of America, which acquired Mail Boxes Etc. (MBE) for $191 million in 2001 after that company had become the industry leader. Growing companies that link with established companies usually get a better deal than they would have gotten from a venture capitalist. In addition, they derive some associated benefits that give them more credibility in the marketplace.
Recent research suggests that in a global economy a significant portion of entrepre¬neurial success is the result of the ability to access formal and informal business networks.18 In particular, ventures with new inventions but no expertise in commer¬cialization and no social capital are more inclined to seek out partnerships, particu¬larly for manufacturing and distribution.19 Furthermore, where the environment is characterized by high levels of uncertainty, small businesses use a network of part¬ners as a hedge against the risks associated with this type of environment.20 The large investing partner is looking for a return of the cost of capital and, in general, for a return of at least 10 percent on the investment.
Strategic alliances are every bit as tricky as partnerships, so the potential partner must be evaluated carefully, and due diligence must be conducted on the company to make sure that it is everything it claims to be. The entrepreneur should examine the potential partner's business practices, talk to its customers and value chain mem¬bers, and make sure that this company will make the entrepreneur's company look good. It is also crucial not to focus on one potential partner but, instead, to consider several before making a final decision. It probably is wise not to form a partnership that makes one of the partners (usually the smaller company) too heavily dependent on the other for a substantial portion of its revenue-generating capability. This is a dangerous position to be in and can spell disaster if the partnership dissolves for any reason. For the partnership to work best, the benefits should flow in both directions;
that is, both partners should derive cost savings and/or revenue enhancement from the relationship. Strategic partnerships are a natural offshoot of a global economy
that has been flattened by the Internet. Entrepreneurs should view these partner¬ships as one effective alternative to grow their ventures.