Navigating Strategic Partnerships: Unveiling the Dynamics Between Corporations and Small Businesses
At first glance, one could assume that engagement between large corporations and smaller new businesses derive from the smaller companies’ needs and motivation. However, from a wider perspective, it is clear that large corporations have their vested interests when engaging in such transactions. Below we will focus on some of those interests and their effect.
Like starlight, which originated years before reaching our eyes, many of the giants’ products and roadmaps reflect the market as it existed a couple of years ago. The everlasting need to follow the market’s changing needs and new trends is challenging for a large company. At any given moment, new trends and needs emerge, technology changes and competitive solutions are offered to existing market needs. Large companies work in a structured manner and have large hierarchical teams. The time and efforts necessary to implement the required change are substantial, and accordingly, larger organizations will hesitate to execute frequent changes of focus due to the implementation of entirely new technology or vague forecasts of new trends. In addition, attracting young talents may be a challenge for larger companies as younger people often look to be part of a dynamic-innovative environment. In contrast, large corporations are not perceived as such. From the perspective of large companies, a safer way to future trends and solutions would be a strategic asset.
Small companies normally represent the opposite. They are led by only a few, their employees have equal status regardless of their title and they normally have more intimate working relationships allowing an efficient, quick exchange of views and feedback and decision-making. Many times smaller companies look at the industry from a different, fresh angle, and they do not have a traditional way of doing business. Such an attitude encourages creativity and novelty. Naturally, young companies’ way of doing business has their own tow. Transforming technology, even if exciting and promising, into useful products and bringing those to the market requires funding and experience which many of the young companies don’t have.
The combination of a larger company and a small business may be advantageous to both parties. The most common practices for such combination are co-development agreement/joint venture, an investment by the larger company in consideration for the smaller company’s equity accompanied by certain additional commercial understandings, or a merger of the smaller company into the larger company. The big companies get young blood, creativity, and a quicker way to the market while becoming more appealing to younger employees; the smaller companies get stability, recognition, funding, and the ability to lean on big companies’ aggregate experience. While funding and mergers are recognized as high-profile irrevocable transactions with everlasting implications and, accordingly, are usually conducted with the assistance of overall professional support, co-development agreements/joint ventures are many times a desired common solution, which at young companies are perceived as mainly commercial deals, and hence, do not always get the appropriate support and attention of experienced advisors.
We, therefore, chose to focus on some of the highlights that are, in our view, important to remember prior to and while in the process of engaging with a strategic partner. When considering approaching a strategic partner, keep in mind that you are in for a long, sometimes tedious ride. The chances of a project to be selected by a large corporation depend on many components. Large companies’ decision-making normally requires approval from several office holders, usually of different disciplines. While you are focused on engaging the strategic partner, your initiative will probably be only one of many tasks handled by the relevant teams at the larger companies. Getting the relevant people to sit at the table may, in itself, require an effort. Each team will review the project from a different angle and you may only have one chance to convince those teams and be able to move to the next level of decision-makers. Accordingly, when deciding to approach a strategic partner, you must come prepared and try to cover as many angles as possible in advance. Expect a long process the result of which is uncertain. Do not start the process when at the end of your resources; make sure you have enough funding to allow taking it through. Have backup plans which can be used if the main plan was not successful, such as indirect cooperation with the strategic investor through its existing partners. Assign a key person on your behalf that can focus and invest the time and effort to see this through. Consider in advance how many potential partners can you deal with simultaneously and do not approach more people than you can handle at a time. Have backup plans in case the strategic partnership does not consummate. During the process, anything from a change of personnel to a change of corporate structure and budget allocation could happen, so try to move as quickly as possible but not at the price of looking desperate or rude.
If you successfully convinced the potential strategic partner to cooperate, congratulations! At this point review the arrangement offered to you from the long-run perspective. Try to allocate a larger portion of future payments to the beginning of the process to allow your own funding. Your partner is likely to do the opposite and allocate a bigger portion of the consideration to a later, lower-risk point in time, following actual sales. Do not agree to exclusivity, irrevocable arrangements or special rights such as right of first refusal unless you have a clear way out, such as a minimum quota or predetermined objective milestones aligned with your expectations for the project, structured into the original understandings. Protect your assets – premature disclosure of information may be problematic. Remember that your partners may be looking for solutions to the exact same problem, independently or with other potential partners while discussing the potential solution with you. Use gradual disclosure processes and if possible, disclose to only a few specific individuals within the large corporation. Avoid contamination of your intellectual property by creating mutual ownership, granting irrevocable rights to your intellectual property or by leaving intellectual property rights vague. Try to avoid terms such as guaranteeing your partner information on critical matters, whether or not technological, that may deter other potential strategic partners from getting into business with you in the future. If possible, allow termination of agreements upon a change of control.
Being aware and cautious does not mean being fixed. Acknowledge the challenge and, as always, keep moving forward.