For many mobile, software or Web app-based startups, the initial inspiration for the business stems from the discovery of something that’s missing in the marketplace. At first, their dogged pursuit of providing the optimal solution is enough to keep them going.
Over time, though, this passion just isn’t enough to keep the business running. And in a market where apps regularly retail for just a dollar or two, the funding needed to keep things growing may be hard to come by. Many entrepreneurs begin to seek financial investment, whether on the scale of a few thousand dollars via Kickstarter -- or a few million dollars from venture capitalists.
At some point, most startup entrepreneurs will toy with the possibility of white labeling the app to another company, who will slap their own branding on top of the product in order to make use of its existing architecture. These funding options may be lucrative, but are they right for your business?
The following are a few things you’ll want to consider before pursuing or accepting any type of white label licensing proposals:
1. Your first white labeling offer might not be your best offer.
Suppose you build a grocery shopping app that helps consumers watch for sale prices on certain items. Your app gains momentum in the marketplace and catches the eye of a local grocery chain, who’s interested in white labeling the program to deliver their coupons to their shoppers. At the time, the offer might sound appealing (especially to cash-strapped entrepreneurs!), but what if holding out for a few months meant receiving a similar – and much more lucrative – offer from Walmart?
If you do decide to seek white label funding, be careful to analyze all deals to determine whether or not they’re a good fit for you, for the company and for your long-term business objectives.
2. White labeling may kill your future customer base.
Now, let’s take this same grocery app and suppose that you’ve accepted a deal with Walmart, who will brand your app and make it available to all their customers for free. If you were selling your proprietary app for even $.99, future customers may dry up when they realize that the same program is available for free from one of the stores they frequent.
Obviously, you can add different elements to your app in order to differentiate it within the marketplace. But it will be important to estimate the amount of coding, editing and marketing work needed to do this.
3. White labeling may provide a good exit strategy.
On the other hand, consider that many app developers are the types of “idea” people whose heads are so full of new possibilities that they dislike being tied down to any one thing for too long. In these cases, traditional capitalization strategies don’t necessarily provide the exit strategy business owners who are ready to move on to the next thing desire. In fact, seeking funding in this way to recoup expenses already invested in the business only ties them down further.
White label licensing may provide a viable alternative to this situation. By taking the time to find the right white label partner, the business owner receives a payoff amount and ensures that his work will live on – without the ongoing investment needed to sustain it as a startup entrepreneur.
As with any type of funding strategy, it’s important that you do your due diligence in order to determine exactly what you’ll be giving up when you accept different types of capital infusions. White labeling isn’t right for every business, but it’s still a valuable option for entrepreneurs to consider.
AJ Kumar is the co-founder of Single Grain, a digital marketing agency based in San Francisco. Single Grain specializes in helping startups and larger companies with search engine optimization, pay-per-click, social media and various other marketing strategies.
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.