I have talked about the cycle for moving from early exploration of business models to testing to scaling. Each stage a critical step in building your startup. There are a variety of models to explore and see what works best with your product but it is important to ensure that resources are aligned around one model as you scale the company and this is where a white label deal can become a problem as you grow the business.
White label deals are tempting in the early stage when money is tight and a big partner with a strong brand shows interest. Check out my other post regarding revenue vs money – a white label deal can often be a textbook example of the main point of this post.
A typical white label deal puts the customers brand on your product and gives them influence or control of the feature set. These deals are a temptress for a company starved for cash and can become a viable business model but it is important to understand the longer term implications of a white label deal before you sign the agreement and start work.
1) White label deals put your company in the service business. The partner is lending their valuable brand name and distribution channel, they may like the innovation your team brings to the table but ultimately they decide what goes in front of the customer. The “other golden rule” goes like this, “the one with the gold makes the rules” so once you deposit that check, the rules change. That feature they love and you know is silly? It may very well be part of the next release.
2) Scaling two businesses is a tightrope few can walk. You have a vision for your product and limited time and resources to execute. Balancing those resources against the partner demands stretches the team and leads to stretching resources too far, falling behind on the product vision or failing to meet partner expectations. In most cases, resources and momentum follow the money, for better or worse.
3) Unwinding white label deals is difficult. This is where BD needs to be trough and negotiate terms around the wind down as part of the deal. Neither party goes into the relationship thinking it will fail but legal agreements are not written for all that goes right in a deal. How long you support a product, what happens to source code if the deal ends, who owns the custom data, what gets communicated to end customers etc. are all key terms that should be in your agreement.
White label deals are not bad deals if this is the model that works for your business. You can absolutely build a business around white labeling products and may be worth exploring.
The danger is signing a white label deal thinking it brings in temporary revenue while you sort out your “ real business model”
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