Strategic Partnerships are often Neither
Strategic Partnerships are a polite way of saying “we don’t own the most important parts of our business.”
Every founder loves to brag about their “strategic partnerships.” The name sounds impressive, but hides a glaring truth:
We don’t own the most important parts of our business.
Strategic partnerships are not a strategy. They are liabilities. And when it comes time to raise capital or sell the company, it can destroy your valuation.
The Valuation Disconnect
I looked at a startup recently chasing a $25 million post-money valuation. On paper, their pitch looked good: patents filed, a product in the works (allegedly), and three “strategic partnerships” with much larger companies. The “strategic partnerships” included a manufacturer, a distributor, and a supplier that produced a key component for their product.
The problem? Everything that mattered was in the partner’s hands — production, distribution, even elements of the core technology. The startup’s actual contribution was a fraction of the final product’s value.
When you do the math, a company raising at a $25M post-money valuation needs to exit at $250M for angel/venture investors. How will this company ever create $250M of value when much of the value is provided by “strategic partners?”
The company might have projections of selling, let’s say $100M of product. But when the company’s value comes from “strategic partners,” we need to severely discount the startup’s contribution to that $100M in revenue.
In other words, if the company’s contribution is merely 10% of the total, we give them credit for $10M in revenue (not the full $100M), and for the $250M exit (assuming a 10:1 value to revenue ratio), they would be required to have revenue of $2.5B to exit. All that without raising any more money.
All the “strategic partnerships” looked like a bold admission that the company lacked competency in all these areas – and refused to build that competency from their fund raise.
Dependency vs. Control
Valuation comes from control. If you own the technology, the IP, the supply chain, and the customer relationships, you control the value.
If your “partner” owns key technology, manufactures or distributes the product, then you are just a coordinator. You don’t control the levers that matter, and that means you do not control the value.
Outsourcing distribution, for example, means that our startup cannot get sales themselves (using their own marketing and hard work). It means that someone else – with their own agenda – may or may not put effort into trying to sell the product.
I have seen it countless times, where the startup has a distribution agreement with a Big Company, but the Big Company slips their own product in front of the startup’s – and pushes out the schedule. Or where the Big Company does not promote the startup’s product sufficiently like they implied during the early meetings.
Outsourcing manufacturing means that you are competing for the manufacturer’s attention between all their other customers. Being a small fish on the manufacturer’s customer list means you have little leverage when it comes to pricing, delivery schedule, support, etc. Will the manufacturer devote their best engineering resources to solve your production problems or work on their biggest customer’s urgent request? You are lucky to get their attention.
From an investor’s standpoint, having a “strategic partnership” means you are betting on someone else’s willingness to keep you in the game. That is a bet investors should never take.
Why These Partnerships Kill Competitive Bidding at Exit
Acquisitions work best when multiple buyers want what you have. But if your business depends on one partner for critical functions, no one else will bid.
This point is crucial – a good exit always requires multiple bidders to buy the company. The only way to get an exit is often to convince a buyer that someone else will buy you. When nobody else is bidding because you are tied up with a “strategic partner,” they do not need to act.
Your “strategic partner” already knows how your business runs. If they want it, they can sit on the sidelines and wait you out. In other words, they can let you go bankrupt and buy you for pennies on the dollar – if they need to buy anything at all.
I have seen leverage, however, when a strategic partnership comes to an end. One of my investment companies was at the end of a distribution agreement, so they started working very hard to launch at the partner’s competitor’s stores. That threat was enough to convince the strategic partner to buy them.
However, most of the time a strategic partnership is one way to effectively give your best potential acquirer a permanent discount. Every time I see a “strategic partnership,” I want to know how that is going to give the entrepreneur leverage. If they do not have a good answer, do not invest.
IP Ownership and Inventorship Traps
Joint development with a partner almost always creates IP headaches. If your teams work together on new inventions, you may have joint inventorship — which means both companies have rights to the patents.
Without well-thought out agreements, you could end up with:
- Disputes over who owns the rights
- An inability to enforce patents without your partner’s permission
- Weak protection that scares off future buyers
One of the most important concepts in these types of IP engagements is whether or not one of the parties can “patent around” the other party, thereby keeping them from being able to practice the original invention.
Most of the business managers (and business attorneys) who craft these agreements breeze over IP ownership issues. They do not think through the nefarious ways that each party can cause havoc through the IP, such as blackmail via patents.
Investor Due Diligence Reality
Experienced investors can spot hollow partnerships in minutes. They’ll look for:
- Independent control of manufacturing and distribution
- Clear IP ownership
- Multiple suppliers or partners (no single point of failure)
- Actual leverage over the partner, not dependence on them
If the only reason you can operate is because your “strategic partner” lets you, everything is at risk and outside your control. Not a good investment.
What Founders Should Do Instead
If you want to justify a premium valuation:
- Own the core — technology, IP, supply chain, and customer relationships.
- Structure partnerships for optionality — so you can walk away without losing your business.
- Avoid single-point dependencies — no one partner should control your future.
- Keep your IP clean — no joint ownership unless it’s fully documented and controlled.