When my partner and I founded our company, we wanted to ensure that our interests were aligned with that of our clients.  That drove several decisions in terms of our business model and fee structure.  On the one hand, we needed enough revenue to keep the lights on.  That’s in our clients’ interest and in ours. But, we intentionally kept our costs extremely low, taking the minimum office space that is necessary to operate the business and only spending money on those things absolutely  required to operate the business.   There’s no “flash” when you come to visit.  The chairs, the desks, the filing cabinets, and the computers have all been around the block more than once.   That allows us to keep our retainer fees comparitively low.  Again, that’s in our clients’ interest and in ours.  

On the other hand, we expect to be compensated fairly and proportionally, if we help our clients grow their revenue and increase the value of their businesses.  If we drive a million dollars in sales, we’ve increased revenue, but we’ve also increased the value of the business, and we expect to participate in that increased value.  That notion is difficult for some, who are used to a commission-only, a fee-for-service, or an hourly-rate model. 

In keeping with our aligned-interest model, if we work with one company, we don’t work with their direct competitors.  That might seem patently obvious to some, but probe a bit on the companies offering to make introductions or help promote your company, and you may be surprised at how many of those offering to work with you also work with your direct competitors. 

I spent part of this week writing a list of “questions to ask” for a retired couple that is interviewing financial planners and money managers.  One of the bits of advise I gave was to ask how the financial planner makes money.  Among the options are fee for advise, fee for trades, or a percentage of the portfolio under management.  My personal bias is towards financial planners and money managers that make more money for themselves, if they make more money for their clients.  As such a percentage-of-portfolio model works best, which is what I chose, when I chose my own advisor.  Our interests are 100% aligned, and the only negotiation is regarding his percent of participation in the success he helps generate.

After having countless conversations with startups over the last 20 years, I am convinced that whether picking investors, partners, customers, or advisors, one of the most important selection criteria is to determine if the potential relationship is one in which your interests will be aligned.  The notion of “picking customers” is an important one.  Don’t customers pick you?  The answer is, if you want a successful relationship, you will spend as much time picking customers as they spend picking you.  For a startup, customers have more value if they will:

  • Agree to be a reference
  • Are part of a network of like-minded individuals
  • Will work with you as an advisor to help you improve your product
  • Will allow you to make a profit on the deal

Partners have more value if they:

  • Provide cost recovery for partner-specific development and engineering change requests
  • Provide an interoperability testing environment to enhance product quality
  • Aid in product support
  • Provide direct access to their clients

Investors have more value if they:

  • Provide introductions into key accounts
  • Facilitate relationships with key partners
  • Provide introductions to additional sources of capital

In all of these cases, it’s a question of whether the funding source, the partner, and the customer are helping to build the company.  One of the most important decisions that any entrepreneur will make is when to walk on a relationship that is not in the long-term interest of building a viable company.  The entrepreneurial world is replete with examples of companies that have sold to the wrong customer, partnered with the wrong supplier, and taken money from the wrong investor.  Oh yes, and taken advise from the wrong adviser.