I have said many times before that with respect to doing deals that saying No is as important as saying Yes. Let me elaborate. A portfolio company has recently been in trials with a potential strategic partner about a reseller relationship. We got in first, set the criteria for success to leverage our technical and business advantages, and were selected as the winner. We had the most customers, the best product, and best customer support. There was one huge caveat-one of our competitors who came in second place was willing to do the deal at a 50% discount. The strategic partner asked us to do the deal at that price if we wanted the win.
Of course, there was much deliberation on our side and as we ran the numbers over and over again there was no way we could understand how this competitor could ever make money on the strategic partnership. From our calculations, it would take a couple of years to breakeven off the deal under the very best circumstances. Trying to make the deal work for both sides, we went back to the potential partner and asked them to give us an NRE (non-recoverable engineering expense) and to handle level I customer support. At the very least, if the partner handled the first tier of customer support, we could be marginally profitable. The potential partner said no, and we walked away from the deal. Trust me, it was a tough decision, and we tried to rationalize why it made sense. However, when the deal is not a win-win situation it is very hard to make it work successfully.
From my perspective, one of the huge problems is that there is tons of VC money out there and lots of me-too deals as Brad Feld elaborated in a post recently. A space gets hot, lots of venture money pours in, and only a few companies survive while the rest vaporize. We do live in a competitive world and taking market share and killing your competition is part and parcel with being in a startup in a large market. That being said, what killed many companies during the bubble was pursuing market share at all costs. I feel like that mentality is coming back in the market. In my mind, losing money on every new customer signed up is not a long-term winning strategy unless you think you can get financed to infinity (yes, many did during the bubble). At some point in time, to be a real business you have to generate cash flow from internal operations. Having done enough deals, I am of the opinion that if it is extremely one-sided and never makes economic sense, it is a recipe for disaster. To that end, I wish my competitor the best of luck because I can see the train wreck around the corner. We will stay close to the strategic partner and when the time comes reopen the dialogue.