Partnering: The 'Shining Path' for Industrial AI (1/3)

Incumbent players in industrial tech will perceive start-ups engaged in sales partnerships as "terrorists" against their scheme to colonize the recently discovered territory by the name of "Industrial AI"

Dec 2022
Julian von Hassell

The 'Shining Path'  

The Sendero Luminoso was an extreme-left Peruvian terrorist organization founded in the 1960s by philosophy professor Abimael Guzmán. Since the early 1980s, it had waged a guerrilla war against Peruvian institutions and the population, especially in rural areas. Young men and women, were often forced to join in. Since then, around 80,000 Peruvians have fallen victim to the Shining Path and and its successor organization. However, many have also died in the struggle of the more or less civilian Peruvian governments against this terror organization. Whole villages and areas were wiped out by one side or the other because they were forced to place themselves under the curatorship of one side or the other. Among the direct victims of the terrorist organization are especially many communist and left-wing, even extreme left-wing representatives of the predominantly indigenous rural population who had not submitted to the command of the Sendero.

In this respect, the Shining Path's actions resemble those of today’s Islamic State (IS), which, after all, also considers any other Islamist organization an enemy.

The Shining Path failed. Guzmán, sentenced to life in prison after a three-day military trial, died a good year ago at the age of 86 in a maximum-security prison, Peru's Alcatraz, off the Pacific coast close to the Peruvian capital Lima.

Industrial Tech Incumbents aim at colonizing Industrial AI - will they succed?

What the Shining Path did not fail to do, however, was to ensure that the miserable lives of Peru's rural population entered the consciousness of Peru's elites and middle class. Guzmán's strategy created awareness, albeit perversely, of the terrible living conditions of this large populace and thus made it possible that - albeit only until this very day - a representative of precisely this group, Pedro Castillo, could lead Peru as legitimate president.

Now: What on earth does the Sendero Luminoso have to do with Artificial Intelligence and what - of all things - with partnering?

No Industrial AI without Hardware: Is this an Unsurmountable Hurdle?

It is our thesis that large incumbent industrial players aim at colonizinig the recently discovered new territory be the name of "Industrial AI". From their angle it is not for small, young and inexperienced start-ups to engage in "their" fields. To this day though, they, the ruling class in industrial tech, are not particularly nerved by those start-ups, because the market has not really formed as yet and they seemingly possess a longer and better lever: "Shopfloor AI" can't do without hardware.

Hardware is always a stumbling block for start-ups. It does not scale. But the story has not yet begun. And partnering strategies might precisely be the start-up lever, IIoT industry leaders and industry 4.0 players might learn to fear.

The good thing is, that partnering is by definition a peacful move. There is no aggression and no blood flowing from the agents. But partnering is not innocent. It may in the end cost the lives of those, who did not want to partner or of those who were not able to do so. Let us begin our series of three blogposts by discussing the concept of sales partnerships in general.


What is Partnering?

By"partnering" we basically mean the formation of strategic (long-term) or tactical (short-term/project-based) alliances between providers of products and services.

Alliances can make sense in different areas: In purchasing you may arrive at purchasing discounts by forming alliances with partners because jointly you will buy higher quantities exercising "power shopping"; in R+D joint efforts will render very high costs manageable for individual players. In production and logistics partnering may achieve a more rewarding machine or vehicle utilization.... Since we are only concerned with sales alliances in this blog post, we do not deal with alliances for other purposes here.

Partnering stratagems are building blocks of indirect sales activities. What is the foremost motive to engage in them? Sales is expensive, staff intensive and it usually requires a viable pre-existing market access.


Partnering: Especially Popular among Start-ups, less so with Investors

So, it's no wonder that strategic alliances with sales intent are very often formed by start-ups, if more by necessity than by choice, namely for budget reasons. Sales partnerships basically offer the benefit of saving personnel resources while expanding market access and market surface via their partners. Start-ups either engage in partnerships with other start-ups or they partner with established market players. In both cases, from a start-up perspective, budget is the decisive factor to partner in the first place. In the case of a partnership between a start-up and incumbent players, the incumbent’s easier market access is a second added value.


Sales Partners are not Distributors

Partners in the above sense are to be distinguished from agents, distributors, wholesalers, resellers and other indirect sales channels. This is because the declared core or ancillary business of such sales organizations is to organize the sale of their customers' products and services and to earn money from this.

Sales partnering, on the other hand, aims to take advantage of the fact that the respective partner(s) maintain relationships with their own customers and potential customers who may also be of interest to the partner without getting in their way as competitors. Plus: My partner should not directly earn money with his or her sales activities for my product. Rather, he or she should benefit from the corresponding efforts of my own sales activities.


Despite its Popularity among Start-ups, Partnering has a Predominantly Bad Reputation – and Rightly so

In the start-up context, however, partnering is predominantly maligned, especially among investors. Why? Because partnering is generally of little use. Start-ups, especially early-stage ones, must primarily worry about the effectiveness of their funds. In the end, what counts in terms of sales is the fastest route to the worthiest customers.

For Early-Stage Start-ups Velocity and Effectiveness Count more than Efficiency

Notwithstanding the hype around sales metrics such as Customer Acquisition Cost (CAC), Lifetime Value (LV) and the like, what really counts for early-stage start-ups is not so much how cost-effectively customers can be acquired. After all, the "journey" to the customer is usually not yet paid for with their "own" hard-earned cash, but with that of their investors. What does count is to impress investors by arriving at customers who generate not one-time, but recurring revenues, and to do so fast. And “fast” is not achieved very well by engaging in sales partnerships. Partner start-ups, usually only start thinking of the sales interests of their partners, if they are in one way or other really dependant on them. Direct channels, those which I as a founder can control myself, are usually more effective and better plannable. The efficiency of sales – arriving at a given output by minimal input –  (key performance indicator: CAC) can and will be dealt with later-on. CAC is a metric, which most start-ups like to define as part of a forecast scenario and not so much as part of their current sales. It usually doesn't look very impressive. So, what really matters “now” is that others, my competitors, are not faster than myself.

As a General Rule: Partner Strategies are too Slow for Early Stage Start-ups

For good reason therefore, the focus of a start-up's sales restes in finding the fastest tracks, the most direct paths to customers' honeypots. In this regard, seasoned investors, smart founders and funding partners are fundamentally in agreement: the path via partners is simply not fast enough, at least not normally. Indirect sales strategies which include partner sales are therefore – usually – at best complementary strategies. A second- or third-tier supplement. The fact that they are nevertheless sought by start-ups bears semblance to a performative contradiction. It is simply the effect of a charged relationship between start-up-typical small budgets and their generally more lofty goals. In early stages, effectiveness always wins over efficiency: the high goal needs be achieved one way or other, cost-optimization, the achievement of this object on a predefined budget is a secondary consideration.


Poison for Partnerships: Too Similar or too Different Business Goals

The author of these lines still thinks with pain about a sales partneship he had entered years ago with a Swiss university institute for one of his start-ups. On paper, everything looked grand. The partnership was intended to set up a joint approach to develop and sell 3-D scanners. The idea was to not only save on sales, but also on R+D: a top Swiss university should be "top" in research, should it not? Perhaps not in sales, at least not that top. One would simply have to complement each other synergistically. "Synergies" – yet another (pseudo)-strategic evergreen.

The strategic "double whammy" mutated into a double failure. First, everything was far too complicated. But evem worse, second: was the Swiss university institute – really – interested in partnering with one 'obscure' start-up from Berlin?

Plus: Would we founders really be interested in the sales power of some Swiss academic councils? The whole thing brought us literally nothing. Only the lawyers were very pleased.


Partnering should Cost (almost) Nothing, and it should Palpably Satisfy Key Interests of all Partners

We have seen that partnering within the start-up environment is not a very successful strategy if the immediate interests of the partners are so far apart that the effort to pursue the goals of the respective partners is primarily associated with high cost and inconvenience: as a general rule, partnering should cost us partners almost nothing, unless we can use such a partnership for marketing purposes, for example in the context of an equity story. And secondly, my commitment to my partner should serve my immediate interests so significantly that I shall be happy, very happy, to take my partner's or my partners' sales interests at heart. Those are very high hurdles.


In "Red Oceans", Partnering among competitors is either nonsensical or illegal

No explanation is required to understand that partnering is nonsensical, if my business goals are identical or so similar to those of my partners, that I must consider them as competitors. Sure, competitors now and then illegally liase with each other. But this always occurs to the detriment of their customers.
“Always” – really?

There is one exception. Partnering can make perfect sense wherever markets are nascient have not yet fully developed. W. Chan Kim and Renée Mauborgne call these markets Blue Oceans to distinguish them from the bloody Red Oceans, where only the fittest fish can survive.


Partnering in Blue Oceans

Wherever markets are nascent, it may (but need not) make sense indeed for “fish” swimming in such a Blue Ocean to partner with others. For: be wary, it is not only  early-stage start-ups that want to swim unhindered in such Oceans. Established players, incumbents from established neighbouring markets are also pushing their way there. They like to displace start-ups or acquire them before they grow and thus might get a chance to become dangerous to them. One, if not the exemplary Blue Ocean is the still slumbering market of Shopfloor AI, or Industrial AI. So, there partnering may indeed be a useful stratagem. For whom and why, we'll shed light on in the next episode. Then we'll also bring you the solution to our "Shining Path" riddle.


For today: let's summarize:


1.      Partnering is different companies working together in defined fields for identical or nearly identical particular goals, e.g. sales goals. Distributors, agents, resellers etc. are not sales partners in this sense. Competitors cannot be sales partners, although they obviously share a common interest.


2.      Partnering can make sense, provided the partnered companies have a sufficiently strong common interest in their partnership to actually fill the partnership with life. This is very rarely the case.


3.      Partnering is often carried out between start-ups or between a start-up and established entities. Budgetary reasons are – usually – the decisive motive from the start-up’s point of view to engage in such sales parterships. Better market access via established companies can be an additional benefit. From the point of view of the established companies, the decisive factor for joining such a partnership is usually (only) the sought-after access to new technology.


4.      Such partnerships therefore usually have a bad reputation within the start-up eco system. The goals are not even approximately identical in partnerships between incumbents and start-ups, and in partnerships between two or more start-ups they are not sufficiently prioritized by either side.


5.      Our thesis, asserted so far only as an unproven hypothesis, is that entering sales partnerships can make sense, if the partnered companies are operating in very young markets that have not yet been fully constituted by the respective agents. More specifically, we claim that Industrial AI serves as an exemplary market to prove our case. The hypothesis however does not aim at being fit to apply to any type of company or any type of new tech market. More on this in the next blogpost from PANDA.

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