Many entrepreneurs, during their startup phase, are not able to obtain critical customers or vendors. Some of the failure are attributed to mistakes that are avoidable.
When junior entrepreneurs negotiate deals, they like to seek “fair deal”, or “fair treatment”. This is probably the biggest philosophical mistake to begin with.
First of all, they attempts to define “fair” in egocentric ways. For example, a list-management company may use a third-party company’s email database to generate revenue through some marketing campaigns. They usually offer to split revenue 50/50 with the third-party company. The 50/50 number, though naturally “fair”, are critically biased toward favoring themselves, because they purposefully ignored the cost of acquiring such email addresses. If they do consider that factor, a 70/30 revenue split sounds more like “fair”. Their disguised “fair principle”, which attempts to take advantage of other side in a hidden way, usually backfires and cost them the opportunity of getting a customer or a partner.
Secondly, their “fair deal proposals” usually challenge larger companies’ ego, and get themselves emotional resentment. Imagine a 2-people shop trying to ask for a 50/50 revenue share deal from a established multi-million dollar company. The first reaction of the larger company would be “Who are you? What qualifies you to ask for 50% of my revenue?” What is even worse, due to courtesy, the larger company won’t say anything. From the startup’s perspective, what they receive is pure silence. The silence will not help stop the startup from making the same mistakes again.
So, if “fair deal” is not the right principle, what should we do? First of all, startup should understand that pricing of deals are set by market mechanism, or the so-called demand-and-supply balance. In short summary, startup should chase after “market rate”, not “fair deal”. Obviously, obtaining a couple of initial customers or vendors are critical to startups, but such deals are usually trivial to established companies. Of course, both sides understand this imbalance of bargaining power, so the best strategy for startups is to avoid a battle. Once the larger company begin to defend on pricing, that mindset will turmoil the young relationship, planting a bad seed in future collaboration.
On the contrary, if a startup offer a partner 100/0 revenue share, it also backfires. Although this completely favors the larger company, it makes them feel like a scam.
My suggested strategy is along the lines of offering 80/20 revenue split, or ask for a low fixed cost. Startups should also explain their own cost structure, and tell the larger company that “we are looking for a modest profit”. Why? It assures the larger company that this deal could be sustainable, and doesn’t make them look like a daemon. The biggest merit of this strategy is to offer a signal to the larger company that “we respect you.” Such a weak-positioning may bring many favors from the larger partner in the future days to come.
I hope the explanation above make sense. Of course, with the right strategy, the chance that a startup could obtain a large customer or partner is still low. But at least, avoiding mistakes will help preserving the small chance of success.