This article is part of a series on advice for engineering entrepreneurs.
THE INSTITUTE Because of the fast pace of innovation, many of today’s large companies form partnerships with startups that have the technology or know-how they need.
In theory, the partnerships should be great for the smaller company because the more-established organization has the financial resources, name recognition, and market access the startup needs. IEEE Fellow Chenyang Xu cautions, however, that such relationships can be double-edge swords.
“There are many bright sides but many dark sides too,” Xu says. “Startups dream about these relationships, so they often overlook the downsides.”
Xu has advised hundreds of tech entrepreneurs and investors during the past two decades. He also has worked on the corporate side with global technology startups when he was general manager of the Siemens Technology-to-Business Center, in Berkeley, Calif., where he led a team of venture technologists who invested in and partnered with more than 50 promising disruptive-technology startups.
“To extract the full value out of these relationships, startups need to know how to successfully maneuver through them,” he says. “When done properly, not only can a startup benefit from the partnership but it can also minimize the negative aspects.”
Xu offers five things startups should consider to ensure the relationship works for them.
MAKE SURE IT’S MUTUALLY BENEFICIAL
Don’t partner with a company just for its name recognition or its financial assistance, but for how the relationship can help your startup grow.
The collaboration has to bring value to both parties, Xu says. The startup should have a clear understanding of such exchange values, as Xu calls them, and not just fuzzy, high-level objectives. The exchange values need to be clearly defined and understood from the beginning. For example, the value of the relationship to the startup might be access to established markets, larger distribution channels, product support, or validation of its brand. For the large company, the value could be acquiring new technology, filling product portfolio gaps, entering new markets, offering new services, or attracting new customers.
“If there is no mutual exchange value,” Xu says, “the partnership will not last or be successful no matter how much effort is spent on it.”
DO YOUR HOMEWORK
Vet the company before you partner with it. Make sure it’s the right fit. Read news releases, financial documents, and reports from business analysts. Connect with contacts who can provide useful information about the company. Such homework can reveal valuable insight into the company, Xu says.
Also, check the company’s track record on working with startups. Not every large organization has experience with them.
Xu says it’s just as important to keep tabs on the company during the partnership to know, say, if it is planning to relocate, reorganize, or merge with another company, or if it is the target of a takeover.
“You don’t want to rest your company’s future on this one big company and then be exposed to risk,” he says.
THINK CAREFULLY ABOUT EXCLUSIVITY
It’s no surprise that since the large firm is investing time and money, it wants exclusive rights to the goods or services being developed by the startup. But agreeing to an exclusivity agreement is not always in the best interest of the startup, which might want the opportunity to work with other companies in the same market.
The best practice for startups is to try to negotiate a nonexclusivity agreement to make such an arrangement explicit, Xu says. If that’s not possible, he says, it’s best to limit the exclusivity to a specific product, say, or a market segment and geographic location.
“Bind the agreement with an expiration date,” he says.
“Discussions about exclusivity cause a lot of contention during contract negotiations,” he says. “Often neither side handles it well. But if a startup can limit exclusivity to one mutually acceptable focused area, both sides will come away happy.”
WORK WITH THE RIGHT PEOPLE
Large companies with layers of bureaucracy move slowly. Some projects take years to complete. Startups need to develop a trusted relationship with knowledgeable and committed employees and managers who are motivated to make the partnership succeed.
Xu cautions against working with just one person in the company. If that individual leaves, it could jeopardize the project. Instead, try to work with a team. And make sure there’s a senior-level person on it as the champion of the partnership. If the project stalls, that leader could help remove obstacles and get the ball rolling again.
Increasingly, large companies are setting up innovation centers and corporate venture capital offices around the world to serve as bridges between startups and the company’s business units.
Those units are good ways to build partnership, as well as get help with fundraising, Xu says.
KNOW WHEN TO LEAVE
If negotiations become too fraught, the relationship becomes uncomfortable, things get bogged down in bureaucracy, or the timing doesn’t feel right, don’t be afraid to terminate the partnership, Xu says.
“Sometimes the best strategy is to part ways,” he says. “Founders need to be decisive because time and resources are their most precious assets. It’s important to know when to cut your losses.”
Politely terminate the relationship and be open to reconnecting with the company in the future.
“The beauty,” he says, “is that by moving your startup forward, you are likely to be happier.”
Kathy Pretz is editor in chief for The Institute, which covers all aspects of IEEE, its members, and the technology they're involved in. She has a bachelor's degree in applied communication from Rider University, in Lawrenceville, N.J., and holds a master's degree in corporate and public communication from Monmouth University, in West Long Branch, N.J.