As an early stage investor, I meet MANY startups. Very often when I am talking to them about business model, growth plans, etc – they bring up white labeling. For many reasons, I think this is a bad idea for startups.
Other than a few select startups that start out with the sole intention of building a white label business (Cakemail has done this for email marketing software as one example), the vast majority of startups don’t think of white label on day one. They think about it when things are not going as well as planned in their core business and/ or they are approach and react to inbound interest vs looking for white label partners.
As a young startup, its tough to build market share and leveraging someone else’s customer base is tempting. But before wasting a bunch of time pursuing this strategy consider these points:
Likelihood of generating real revenue: If you’re a tiny startup with an unproven product and little cash in the bank, do you really think an established company is going to put their brand and reputation on the line and market your product?
It’s highly unlikely in my experience. You will get interest from less established companies or companies that have no technology expertise in house or other startups who like you have no customers. All of these scenarios are pretty much time sucks.
A layer between you and your users: When the customer or end user belongs to someone else it becomes really hard to make your product better. Will you get the feedback you need?
Custom requests: Every partner will have their customizations they want you to make. You don’t want this.
Exit complexity: This is a big one for me as an investor. Again, excluding pure white label businesses, if you run white label as one part of your business, it can really mess things up when it comes time to sell your business. Your direct customer relationships are easy for a buyer to understand and may be in fact what they are buying you for.
But if you have a bunch of custom white label deals, each with their own branches of software and service level agreements to maintain that can create a lot of friction for a buyer. In the worst case it can kill the deal if the buyer does not want to take on the obligations. At the least, you won’t get full value in the exit price from this business as they will likely be buying you for your direct business.
Also, what if your potential buyer competes with one of your white label partners?
There are only three scenarios for me where white labeling makes sense:
Pure white label – this is your business. Period.
Necessity – you are bootstrapping, with no intention to sell your business, no investors to manage, so you’re free to do whatever deals make sense (just remember the above caveats still apply).
To take advantage of markets that you will never enter directly. If you will never enter the Chinese market as an example, then having a partner white label your software there may be ok. You will still have issues to deal with in terms of distraction, custom requests and exit complexities.
If you’re struggling to generate revenues for your startup, please consider these points before going down the white label path.