Relationship Companies vs. Product Companies

Tim Romero

This is a guest post by Tim Romero. Tim is a Tokyo-based entrepreneur, podcaster and author who has started four companies and led Japan market entry for others since coming to Japan more than 20 years ago. Tim hosts the Disrupting Japan podcast and is deeply involved in Japan’s startup community as an investor, founder and mentor.

The Japanese translation of this article is available here.

Image credit: bakelyt / 123RF

There is a common misunderstanding among Japanese startups that is causing many of the to go out of business just as they should be hitting their rapid growth phase. Correcting this misunderstanding would do more to promote the success of Japanese startups than all of government startup programs and academic accelerators combined.

the difference between a relationship based company and a product based company is important, often not obvious at first. All famous consumer brands are product companies, Facebook, Nike, Honda, Apple, Seiko, Google. Customers are attracted to them, because of the product they make. On average customers feel a greater loyalty to those companies than those companies do to their customers.

Sure, all of these companies developed a brand that acts as a kind of halo, that lets them charge a premium price and sell a greater range of products than their competitors. But, in the end, it’s all about the products they make. Product based companies can scale globally. But, just because you make a product, doesn’t mean you’re a product based company.

These relationships were more important back then

Image credit: ponsulak / 123RF

In fact, most Japanese companies with products are not actually product based companies at all. They’re relationship companies. This is slowly starting to change, but the cultural importance of relationships has a long history here. When I started my first Japanese company back in 1998, the goal of almost every startup was to become part of a large company supply chain. Having that kind of relationship guaranteed a steady, if low margin, stream of business.

These relationships were more important back then, because although the keiretsu were starting to crumble under their own weight, most companies still preferred to business within their own corporate groups. And, small to medium enterprises had very little independent buying power. In fact, these captive, protected keiretsu micro-markets, is one of the big reasons Japan did not develop a globally competitive software market in the ‘80s and ‘90s.

At the time an independent Japanese company that would sell its products across multiple keiretsu groups, was a rare and powerful beast indeed. For the most part, the way to survive was to build what your client, very often your only client, to build what they told you to build.

Things have improved a lot in the last 20 years, but still a huge number of Japanese startups are really firms that have one major client and no hope of scaling. They have a relationship that guarantees a certain level of orders, but they have no product that can stand on its own in the marketplace.

Don’t get me wrong, although way too much importance is placed on relationships in Japan, it’s great to have those relationships. Knowing the right people can give you a huge head start in getting your first customers and in getting distribution. But, your product has to be more important than any single customer you have or things are going to break down eventually.

Relationship Companies vs. Product Companies

Image credit: petunyia / 123RF

Now, it can be hard to tell if a company is truly a product company or if it’s a relationship company in the early stages. And, nearly all companies with a product will insist that they are product companies. But, a few giveaways are:

  1. If you are still, or if you are planning on doing custom development work after you receive funding, then you’re almost certainly a relationship company.
  2. If your product requires extensive customization and you’re the only company doing that customization, than you’re probably a relationship company.
  3. If your product started out as a project you did for one customer and then you decided to turn it into a mass market product, then you are most likely a relationship company.
  4. If losing your two biggest clients would put you out of business, then you are certainly a relationship company.

There’s nothing intrinsically wrong with relationship companies of course. In fact, in the early stages, relationship companies often see traction sooner and grow faster than product companies. But, relationships don’t scale and growth will eventually be limited by the strength of the CEO’s industry connections. Of course, relationship companies can still make a lot of money. And, powerful, well connected CEOs can even take a relationship company public, but they can never scale to be a global player.

Actually, relationship companies are fine, if you have strong relationships and want to leverage those into a company, do that. More power to you. The real problem is that this relationship thinking is holding back Japan’s startup community.

The tendency to value relationships over products, is probably the single largest obstacle preventing Japan from really developing a pay it forward startup culture. I see it constantly. Far too many people view their connections and their network as something to be jealously guarded, as some kind of competitive advantage. And, people who think along these lines are unlikely to make introductions without trying to extract value from them.

Advice for Japanese startup founders

Image credit: pixelsaway / 123RF

Of course, there are plenty of Japanese who have, or at least try to, embrace the idea of open networks and paying it forward. But, we’re in the minority. At least, for now. But, we’re going to change that. So, advice number one for Japanese startup founders comes in two parts.

Part A, never pay for an introduction of any kind. Never agree to let an organization take a percentage of financing that might result from an introduction to a VC or from coaching you on how to present to them. Most of these people are trying to scam you anyway. Likewise, never give someone a percentage of a deal that might result from introducing you to a potential customer. Of course, affiliate programs and reseller programs are powerful tools. Use them when appropriate. But, as a startup founder, if someone ever tells you that they know a prospect that you should approach, but will only make that introduction if they get a percentage of the deal, politely walk away. You’re dealing with a gatekeeper or a parasite and their opinion is probably not highly valued by the person that they are promising to introduce you to.

Part B, let’s all start making a conscious effort to pay it forward. Promise yourself that at least once a week, no matter what, you’ll introduce two people who would benefit from knowing each other. Or, recommend another startups product to a potential customer. Now, I’ll warn you in advance, if you do this right, it will feel unfair. You’ll feel like you’re making five times as many introductions and ten times as many recommendations as you receive. But, that’s fine. It means you’re doing it right and you’ll greatly benefit from this in the long run. I promise.

And, best of all, if all of us commit to this, open networks will win and we can put the gatekeepers and the parasites out of business.

Now, I sometimes get accused of being a cheerleader for Japan and it’s true. I’m quite optimistic about the future of Japan in general, and Japanese startups in particular. I suppose part of the reason it looks that way is because so many people, including the Japanese themselves, are often hesitant to point out all the things that are going right in Japan. People also tend to ask me about top down ways of improving things for startups in Japan, but top down things are going pretty well. The trends are all moving the right direction and there’s only so much you can do top down anyway.

The real power for change in startups is and will always be bottom up.