In 1983 a venture capitalist introduced Hagan to Malmberg. At the time, McKesson was already involved in the bottled-water business through its Alhambra subsidiary in northern California and its Sparkletts subsidiary in southern California. Clearly, Hagan's seltzer concept fit in. "The venture people couldn't understand anything that didn't have a microprocessor," Malmberg says, "but when I took the idea to our water people, they said, 'Gee, this is great.' They thought the product had a lot of potential."
Hagan and McKesson's representatives sat down to negotiate a partnership. As they talked, Hagan began to realize that he might want more from McKesson than he had thought. Not only did the company possess a huge distribution network; it could also afford to build the manufacturing facilities needed to commercialize Hagan's breakthrough. (Some of the plastic molds for the process cost $250,000 each.) "I came to the realization that all this was beyond my capabilities," Hagan says. "I knew my limitations. That's a problem for a lot of entrepreneurs, but there comes a point where you have to give to get."
So Hagan decided to sell the patent for his technology to McKesson, which provided him with a lucrative consulting contract and a royalty. Even so, he views the deal as a kind of partnership. "Although I get paid through a large corporation, I still feel like an entrepreneur," says Hagan, who heads up the technical part of the effort. He points with pride to the new state-of-the-art Bay Area factory just built by McKesson for the national rollout of his seltzer product. "They are fulfilling my dream, after all -- which is to see that product on the shelf."
Hagan is not alone in finding that big-company partners often provide more assistance to a start-up than traditional venture investors. Nor does the younger company have to be acquired to get it. By the very nature of the deal, Finis Conner says, such alliances force a start-up to concentrate its efforts in a more realistic and more businesslike way.
That's because new companies usually develop a product first and then scurry around looking for customers. All too often it turns out that the product -- no matter how elegant in design -- never had a market in the real world. An alliance turns the process around. "When you build the product with a customer, it's a totally different experience," Conner says. "You don't build for your own fancy, but for a real need. It greatly reduces all your risks."
Compaq's real needs certainly helped determine the initial product design for Conner Peripherals. The two companies worked closely on developing the new disk drive for almost 10 months. Along the way, Conner Peripherals changed the drive's interface. Instead of a product oriented to high-end workstations, the company ended up making one geared to the IBM-AT standard preferred by Compaq and other IBM-compatible makers. In addition, Compaq's engineers helped guide the manufacturing process, alerting their counterparts at Conner Peripherals to the problems that had plagued other drives Compaq had purchased, and making sure that the problems were solved. "Usually, you just keep walking down a road until you fall into a ditch," says John Squires, executive vice-president of research and development at Conner Peripherals. "The Compaq people told us where the ditches were and helped us avoid them. It wasn't just a matter of building a good drive, but of building one that would work in the real world for a real customer."
By the same token, the partnership also provided Conner Peripherals with instant credibility in the marketplace. "It made us very visible," Conner says. "It showed that we were at the cutting edge. Normally, it's hard to convince companies, particularly large ones, to go along with a new company. The Compaq connection eased the way for us." It did indeed. Today Compaq accounts for 47% of all Conner Peripherals's sales, with the balance coming from such major corporations as Toshiba, Zenith, NEC, and Olivetti. Some of these have also established special relationships with Conner Peripherals, whereby the larger company's engineers work with Conner's people to design customized products.
All this has, of course, produced enormous financial benefits for Conner Peripherals. According to senior vice-president and chief financial officer Carl Neun, its marketing costs are 2% of sales, less than half the industry average. By going with an IBM-AT interface, the company avoided making a substantial investment in the wrong kind of tooling and inventory, and it was able to cut other manufacturing costs as well. As a result, every $1 invested in its factories in San Jose, Singapore, and Italy can generate about $25 in revenue, according to Neun. By comparison, other companies typically make $5 to $10 in revenues per $1 of plant and equipment.
"Partnerships allow you to become very focused in your work," says Neun. "When you're working with your customer, rather than merely selling him, you know where you want to go. It gives you a predictability of demand -- something that usually doesn't happen to a new company."
The obvious benefits are not enough to ensure the success of a partnership. Besides having complementary interests, the two organizations must be able to work closely, avoiding conflicts over corporate culture or strategy. That proved relatively easy for Conner Peripherals and Compaq, both of which are entrepreneurial companies controlled by product-oriented engineers. Perhaps more important, the CEOs were longtime acquaintances with deep mutual respect. "We are as different as night and day," Conner says of Canion. "He's calm and secure, and I kind of do my thing by sheer energy. But Rod and I understand each other."
A partnership can succeed without such a bond between the CEOs, but it is essential that the key people on both sides have a common commitment. Just ask Arthur Lacerte, founder and CEO of Basic Computer Systems Inc., a $2-million software company in Anaheim, Calif.
