6 Rules for Deal-Making
The most important external variable to the success of your business is whether or not you had great parents. But you can’t do anything about that. The next most important? Having the right deals in place, at the right times. No one has the team, the resources and the reach to succeed by themselves. Well-constructed partnerships, carefully-structured joint ventures, and timely endorsements help a start-up build its brand, credibility, momentum and customer base.
These basic filters will help you identify the realistic prospects and the wastes of time. I’ve always used three buckets to describe any business and to screen deal-making opportunities.
Early The business is emerging. The deal objectives are:
- Help to build and expand the customer base
- Prove the underlying technology
Ongoing The business is developing. Deal objectives are:
- Manage and deepen relationships to “own” your customers
- Control and expand your platform
- Promote and encourage product and service expansion
Late The business is maturing. Deal objectives are:
- Expand and integrate third-party offerings and services
- Win with scale
- Attack or eliminate competitors and potential new entrants
Having done more deals in more businesses than I can count, I’ve got a few simple rules that have saved me tons of money, helped me dodge more than a few bullets, and added a few years to my life.
- Never deal with the monkey when the organ grinder is in the room. If the guy who can say “yes” and/or sign the check isn’t part of the discussion, you’re wasting your time. Too many little monkeys and paper pushers can say “no”, but only the real decision-makers get to say yes.
- When you settle for less than you deserve, you get less than you settled for. By and large, deals don’t get better or sweeter over time. If you don’t like something about the deal at the outset, or you’re uncomfortable with the people or the process, it’s only going to get worse over time.
- The easier the deal is to get done, the harder it will be to implement. When you’re negotiating the deal, don’t confuse silence or good manners with acceptance or agreement. It’s better to bag the deal now than it is to bury fundamental issues or differences and leave them to blow up later. Only the lawyers and their litigators benefit from leaving critical questions unanswered.
- Short term deals make much more sense for start-ups. Long-term deals are very seductive and very dangerous. They’re too easy to enter and very hard to escape. Always leave yourself an exit plan and an “out,” even if it’s expensive. It’s better to be soaked at a later date than to be stuck in a bad deal for what can seem like a lifetime.
- Don’t chase a deal that takes too long to get done. Be prepared to walk away. And don’t kill the messenger if a deal doesn’t get done-;you want your people to keep looking and to keep bringing in opportunities. Instead, think of deals that fall through as mini-R&D projects. Sometimes, losing the deal is the best result for everybody.
- Do small deals on a regular and recurring basis. Go for singles, not home runs. You want small, quick, additive or incremental deals that don’t burn up critical management time or resources and that reach a “go” or “no go” point quickly.
- Endorsements are a great example of small but very effective deals which can make a huge difference to the prospects of a young company. Very few people truly appreciate the value of endorsements until they don’t have them and their competition does. This is especially true in brand-centric markets.
When I was just starting my computer game development company and wanted to create some educational children’s games, I knew that some product differentiation was going to be essential. I went after the Where’s Waldo name because I thought it straddled the lines between entertainment and education. And Waldo was a very meaningful icon for parents, who were my real customers.
Plus, I got to say that I actually did know where Waldo was.
HOWARD TULLMAN | Columnist
Howard Tullman is the CEO of 1871 in Chicago where, at the moment, 260 digital startups are building their businesses every day. He is also the general managing partner of G2T3V, LLC and Chicago High Tech Investors – both early-stage venture funds; a member of Mayor Emanuel’s ChicagoNEXT Innovation Council; and Governor Quinn’s Illinois Innovation Council. He is an adviser to many technology businesses and an adjunct professor at the Kellogg Graduate School of Management. @tullman