Partnerships between corporates and startups are not new, but there has been in shift in what makes them successful in delivering a business impact. Partnerships today need to be fast and open to the rapidly changing landscape. The structure of the partnership is the key here. Properly structuring a corporate-startup partnership will enable more effective and adaptive partnerships that lead to success for both parties.
Key components in a successful partnership encompasses alignment across product, business model, and business operations. Furthermore, proper capital structure is critical to ensure a win-win relationship between corporates and startups to enable future rounds of investments to scale business and fully realize the potential.
At RocketSpace, we consult with Fortune 1000 companies through our Startup Engagement Practice to help corporate innovation teams identify the right startups to partner with and determine how to make those partnerships work.
We guide clients through the following four-phase process and get them to a point where they're ready to move forward with a partnership that is well-tailored:
- Learn: Determine the corporation's optimal product innovation strategy by finding the opportunity white space.
- Discover: Identify the right set of potential startup partners, narrowing the search from hundreds of short-listed partner options to the top-fit startup partner(s).
- Experiment: Pilot a prototype product to validate assumptions.
- Partner: Structure the partnership for success and traction.
In this post, I'll focus on the fourth stage: Structuring the actual partnership.
Below is a breakdown of the four key areas of alignment essential for successful partnerships between corporates and startups.
Assuming the experimental pilot goes well, the two partners should move on to consider product alignment, and then the business model, business operations, and capital structure.
With most partnerships — whether they be structured as an investment, acquisition, joint venture or under some other structure — the two companies don't end up being stand-alone entities. They are often integrating at least some aspect of their products with one another. The startup brings something to the table — oftentimes an innovative way of doing things. And the corporate brings a set of different strengths to the table — usually a large customer base or ample resources, both helpful for scaling the startup's venture.
Within the product fit analysis, corporates should assess whether the product specifications and specific resources necessary to customize and integrate the two partners' products together are synergistic. For example, if a startup is going to partner with a corporate through the larger entity's API, the plan and roadmap for making that possible should be laid out to make sure a smooth transition is possible.
Home electronics and smart home technologies company Schneider Electric (a RocketSpace client), for example, partnered last year with startup Ohmconnect via a pilot program called Wiser Home, which equips pilot users with smart home technologies and pays them to use energy wiser. Schneider Electric brought its home-energy management devices — Wi-Fi-connected thermostats, smart plugs, remote-controlled pool pumps, and even smart electric-vehicle chargers — to the table, and Ohmconnect brought its energy demand response software. In other words, Ohmconnect enables connectivity to the energy grid, while Schneider brings the hardware. A product partnership made in heaven.
2. Business Model
Even if there is product fit between two potential partners, the next step in analyzing a full partnership fit is looking at business model alignment.
If your corporation has a one-time, perpetual licensing model, where customers pay up front for your software, and the startup runs under a subscription-based or software-as-a-service (SaaS) model, something has to give. One of the two companies is going to have to transition to the model that wins out. Or, you could structure the two business model offerings as separate tiers for different customer groups, based on customer preferences.
Business model disruption for corporates is a reality, though. Salesforce, for example, transformed the entire customer relationship management (CRM) industry by bringing a SaaS model to the sandbox when everyone else was selling licenses. Today, you'll be hard pressed to find a CRM company that isn't a SaaS company. That means a lot of old-timer CRM companies had to make the transition. Your corporation might be next, so it's worth strategizing before inking a deal.
In all partnership agreements, consider if business models differ and, if so, how those business models will be managed or transitioned. It's very likely that some sort of phase-in or complete overhaul is going to have to happen.
3. Business Operations
Regardless of the partnership structure, in the end all business is about people. When two companies join forces, they need to align their people and put the right incentives and systems in place for collaboration.
Post-partnership, the typical setup is that a corporation has just brought a startup aboard to add a new component or offering to the corporate's product mix. The startup, then, is ecstatic to leverage the corporate's team and/or client base to scale its business. The only roadblock is what I like to call "the army of people" — the corporate's sales force or business development team who guards all of the existing relationships with customers.
That "army of people" prior to the partnership had no reason to sell the startup's wares, but now that it's a partner, it's advantageous for the startup and corporate that operations align to sell the new offerings to clients. Salespeople must be properly aligned and incentivized to want to collaborate with the new crew and position the company's products to existing corporate customers.
For startup founders, this often means winning the hearts and minds of the salespeople. Nothing is worse than sealing the deal on an agreement that took two years to finalize and then to only see little to no traction. By thinking through the business operations that will be necessary to make the deal a success, partners are much better off from day one.
When the corporation stands to make its current clients even more happy and loyal than they already are, it's a pretty easy sell to get operations colleagues aboard. It takes a plan, though.
4. Capital Structure
Finally, as a corporation, if you're interested in investing in a startup, it is crucial that your team makes sure that the round of investment is structured in a way that helps the startup expand and grow their opportunities. Focus on startup-friendly terms and be strategic with the investors you're bringing to the table. Don't try to bind startups into exclusivity contracts or ridiculous terms.
It's also necessary that the funding round be structured in a way that future investors will find it attractive. Onerous terms that are one-sided will scare away good investors and limit the potential of the startup, and thus your investment.
Secondly, if you're co-investing, don't make the mistake of bringing solely financial investors in on early rounds. Strategic investors bring industry expertise along with their investment, enabling a startup to grow from their leadership and participation. Financial investors are more hands-off and may not contribute to the strategic future of the startup.
It takes a lot to make a corporate-startup partnership work. If you do your due diligence, test the concept, and structure a partnership for success with ample consideration of the four alignment needs above, though, your company should be on the right track for a winning innovation strategy.
Images courtesy of Ohmconnect, Poets & Quants
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