5 Ways to Tell if a Deal is Bad

To do the deal or not to do the deal: that is the question asked of many young startups. These five tips will help ensure you make the right decision.
May 08, 2013

At an early-stage company, there are many unknowns when it comes to deciding on business deals intended to drive adoption or revenue. Is the product ready for distribution? Will this deal live up to expectations? What if the partner does something that delays a launch? How much should we charge? Should we charge? Is it the right thing to do right now?

The deals you don't do are just as important as the deals you do. A bad deal can consume and distract important resources, waste valuable time, cost money and, in some cases, take a company completely off the rails. These five tips can help you decide which deals you do and which you don't do.

1. Assess opportunities and make decisions quickly. Set up a team discussion for analyzing the pros and cons of each potential deal. Don’t make this complicated. The matrix below shows how to plot opportunities to lead a discussion that produces clear next steps. The numbers are straightforward: growth, users, revenue, page views, etc. Qualifying what is "strategic" can be a bit fuzzier, but in most cases, teams can agree on the high-level attributes. Keeping this framework simple, short and actionable is a must. Set a direction, lay out next steps and, of course, check in along the way

matrix for deals

2. Understand the difference between money and revenue. Now, before you thank me for crystallizing the obvious, let me explain what this means in the context of a startup. Revenue deals are tied to a company’s core assets and talents and to becoming a repeatable and scalable business. This involves an understanding of the different pieces that need to come together and how they come together in your operating plan, such as whether you'll need to make additional hires, buy servers, pay commissions, etc.

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3. Money deals distract your company. Why? Because they don't play to the skills and vision of the company or leverage the core assets and talents. These deals typically happen when someone approaches the company and offers money in exchange for what amounts to customized development or when a company is struggling and trying to reduce cash burn, find a business model or simply build momentum. Sometimes the right deal can take the company out of its comfort zone and lead to bigger and better opportunities, but that's more of the exception than the rule.

Revenue deals include:

  • Leverage core technology
  • Plays to team’s strengths
  • Scales efficiently
  • Good for users/good for company/good for partner
  • “Feels” right

Money deals include:

  • “One-off” project
  • Often priced on estimated effort
  • Opportunity cost is a factor
  • Strong internal hesitation
  • Need to generate cash flow is a primary factor

4. Debate the assumptions, not the partners. We all have our opinions of company X versus company Z, so it's important to discuss a potential deal in the context of the value it brings to your company. Productive conversations focus on the assumptions such as conversion rate or channel reach of one partner versus another. If there are serious differences of opinion, you may want take a step back before moving ahead with any deal and make sure the team is aligned on where you're going.

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5. You cannot always measure the big opportunity. Strategic deals and revenue deals can overlap—hopefully they do. However, there may be instances where the path to revenue is not immediate or measurable. This is a great time to get advice from your board, advisors and key management. Perhaps write out a short list of the benefits for both sides and refine the list to a point where you are comfortable with the reasoning and in discussing the points with others. Putting the points onto paper (or screen) forces clearer thinking, and talking it through with someone almost always leads to greater insight.

Making decisions that impact resource allocation is not easy, especially when smart, passionate people have strong and often reasonably informed opinions. Hopefully these tips will help you focus on building a great product that can drive revenue and avoid “money” deals.

Read more articles on small business finances.

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