The Benefits of Strategic Partnerships to Startups ... and When to Walk Away

Sabrina Kiefer's writes for The Next Women on entrepreneurship: 

What are the benefits to startups of forming strategic partnerships and when could the potential costs be too high?

Partnerships may offer a source of capital, as well as other potential benefits, and can take various forms. Defined broadly, a strategic partner could be another firm or organisation – large or small – that sees some benefit in collaborating with your venture, perhaps because of a similar interest in a technology or market.

The partner’s viewpoint. Academic research and common wisdom concur that small firms are generally better at producing innovative ideas and products than large companies or institutions.

Small firms are nimble and informal; their small, multi-skilled teams discuss problems and opportunities on a daily basis and adopt new solutions rapidly.

Large organisations are set up to preserve the continuity of their existing business structure without disruption, through set procedures, structured reporting lines, established product families and business units, and long decision-making processes.

The difference in the speed of their response to change resembles that between turning a large ocean liner or a small dinghy.

So, in a fast-changing world, large established firms seek partnerships with small firms that can give them access to new ideas, technologies and business opportunities of possible benefit. But small firms may also seek partnerships with other small firms, for mutual benefit.

Some large companies have dedicated ‘corporate venturing’ units, subsidiaries or divisions structured in a similar way to VC funds, with the fund’s money provided by the parent company. Examples include energy group BP’s AE Ventures in the UK, which invests in alternative energy technologies, and Germany’s Robert Bosch Venture Capital, a division of the Bosch industrial group.

When considering a strategic partnership or innovation project, large companies like to deal with start-ups that have registered IP rights. Registered rights clearly define what is owned by whom at the start of the partnership, making it easier to draw up agreements with respect to further intellectual property that might be produced during the collaboration and avoid disputes at a later date.

The entrepreneur’s viewpoint. A partnership with a prestigious company or research organisation can give a big boost to a start-up’s legitimacy and credibility in the eyes of investors, customers and other potential partners. Corporate partners also tend to demand less ownership for their money than VCs, because their goals aren’t purely financial, and may provide access to powerful distribution channels for the start-up.

At the same time, an entrepreneur should carefully analyse the other party’s priorities and purpose in pursuing a partnership, and determine whether these are sufficiently aligned with the entrepreneur’s own interests.

For instance, a large firm may expect a partnership to boost sales of its own products, perhaps with some kind of exclusive agreement or a pledge to use the large firm’s components and not deal with competitors. Such an arrangement may not always be advantageous for the start-up.

Types of partnership. A partnership between a start-up and another organisation may take a number of forms, including:

  • Co-operation on R&D with the larger partner contributing both money and other resources (knowledge, people, premises and equipment). In these cases, the partner may be interested in a share of resulting intellectual property rights.
  • Projects to co-develop a product (again, contributing cash and other resources, perhaps manufacturing expertise). This is especially likely if the partner is interested in using the product itself. Lead users may become strategic partners.
  • Joint ventures (a third company part-owned by each partner). These may give the partner access to a novel technology or product, and the entrepreneur access to the partner’s marketing and distribution networks.
  • Buying shares in the start-up, either directly or through a corporate venturing unit. Corporate shareholders may cut simpler investment deals with an entrepreneur than a VC fund, as they can tolerate lower financial returns and are often more interested in new technology, skills and markets (hence the term strategic partners) than in strictly financial outcomes. Venture capitalists often like to bring a minority strategic partner into a start-up’s investor pool because corporate investors tend to demand softer terms than other financial investors. However, a corporate investor may restrict your exit possibilities – your corporate shareholder may be interested in buying your company at a future date if all goes well, but might also block it being sold to a competitor, even one that might offer a higher price.

A partnership agreement should be negotiated carefully so as not to prevent your venture from taking advantage of important growth opportunities outside the partnership. If a partnership offer is too If a partnership offer is too restrictive, it may be best declined.

This is an excerpt from Sabrina Kiefer's book, The Smart Entrepreneur, which she co-authored with Prof. Bart Clarysse.

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