Innovate. Collaborate. Grow! E-Book

David Dessers

• Herausgeber: Die Keure Publishing
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 417

Veröffentlichungsjahr: 2020

Beschreibung

The past ten years are characterized by a strong growth in entrepreneurship and the accelerated creation of new businesses offering innovative products and services.
The focus of this book is on startups and scaleups intending to scale their business through collaboration with corporates, primarily in the capacity of client or venture partner.  No startup or scaleup can go-it-alone entirely and is required to collaborate with other partners to ensure growth.
It is crucial for startups and scaleups to think beyond (corporate) venture capital financings and actively use a vast spectrum of corporate partnering arrangements to scale their business.
This book thus takes an expansive approach and analyses corporate partnering transactions from a much broader perspective, covering several types of partnering models for collaboration between corporates and startups and scaleups, with a very strong focus on the perspective of the startups and scaleups while engaging in these types of transactions.

ABOUT THE AUTHOR

David Dessers, Co-founder and Managing Partner of Cresco, is one of the go-to lawyers of the Belgian venture capital scene.
David assists entrepreneurs and companies in the design and execution of their plans during all stages of the private company lifecycle, including seed and venture capital funding, acquisitions and dispositions, as well as equity incentive, contracting and intellectual property needs. He frequently represents venture capital funds and corporates in structuring, negotiating and closing investments and divestments in high-growth companies.
David furthermore advises clients regularly with respect to complex commercial transactions designed to protect and maximize the value of technology assets, including technology licenses and acquisitions, research and development collaborations, and corporate partnering transactions. 
He obtained his law degree at the universities of Antwerp and Leuven in Belgium. He also holds an LLM from the universities of Oxford, Hamburg and Rotterdam. David is recommended as leading lawyer by Chambers Global, Chambers Europe, Legal500 and IFLR1000 for Corporate and M&A, Banking, Finance and Capital Markets, and Information Technology.
David has given workshops and seminars at leading corporates on a wide variety of topics, including corporate venturing transactions and alliances. He is an active speaker at incubation and acceleration organizations, such as imec.ventures, B-Hive.eu, Watt Factory, Tech Tour, Level Up and Antwerp Management School. David is a founding partner of Cresco, a premier Belgian law firm for entrepreneurs, companies and investors with market-leading capabilities and thorough experience in private equity and venture capital, emerging and growth companies, mergers and acquisitions, technology and innovation counseling, and complex corporate alliances and commercial agreements.

Leseprobe

Couverture

Page de titre

SUMMARY

SUMMARY TABLE OF CONTENTS

FOREWORD

1.INTRODUCTION

2.CORPORATE PARTNERING

2.1PARTNERING OBJECTIVES

2.2PARTNERING COMPLEXITY

2.3PARTNERING SUCCESS AND RISK FACTORS

2.4HOW TO STRUCTURE AND NEGOTIATE CORPORATE PARTNERING ARRANGEMENTS

3.NON-EQUITY-BASED CORPORATE PARTNERING

3.1SHOULD WE INCUBATE AND ACCELERATE IN A CORPORATE INNOVATION LAB?

3.2HOW DO WE NAVIGATE PROCUREMENT AND SELL OUR PRODUCT TO A CORPORATE?

3.3CAN WE LEVERAGE OUR CLIENT AS A CHANNEL WITHOUT CONVERTING IT INTO A COMPETITOR?

3.4HOW DO WE MAKE OUR CUSTOMER FUND RESEARCH & DEVELOPMENT?

3.5CAN WE OPTIMALLY BENEFIT FROM TECH TRANSFERS BY RESEARCH INSTITUTIONS?

3.6HOW DO WE CO-CREATE ONE-TO-ONE?

3.7HOW DO WE CO-CREATE ONE-TO-MANY?

4.EQUITY-BASED CORPORATE PARTNERING

4.1HOW DO WE GET THE BEST AND AVOID THE WORST IN EQUITY FINANCINGS?

4.2CAN WE SAFEGUARD OUR LONG-TERM FREEDOM WHEN ENGAGING WITH A CORPORATE?

4.3SHOULD WE CO-CREATE BY JOINT VENTURING?

4.4HOW DO WE CO-CREATE IN A ONE-TO-MANY VENTURE?

4.5CAN WE MINIMIZE THE RISKS AND MAXIMIZE THE REWARDS IN A STRATEGIC SALE?

4.6SHOULD WE GROW BY BUYING & BUILDING?

5.CORPORATE PARTNERING THROUGH INSIDE-OUT CORPORATE VENTURING

5.1HOW DO WE CREATE A SPEEDBOAT WITHIN A LARGE SHIP?

5.2CAN WE LEVERAGE PLATFORMS AND PRESERVE OUR INDEPENDENCE?

ACKNOWLEDGEMENTS

FOREWORD

Open innovation has become popular these days. Chesbrough defined open innovation as “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively” Chesbrough (2003). The new imperative for innovating companies is that they can and should use external as well as internal ideas, and both internal and external paths to market, when they seek to maximize returns from their innovation activities.

Open innovation seems simple when it is summarized this way. Its simplicity is also one of the reasons for its success: the logic of open innovation is easy to grasp. By collaborating with partners, companies can share risks and costs of R&D; they can tap into large communities of competent specialists around the world; they can speed up innovation processes and they can improve product performance by integrating specific knowledge of other organizations, etc. However, open innovation is more difficult to manage than most managers expect. The potential benefits of open innovation may blind us to its risks and management challenges. One of the challenges is how to design collaborative agreements and manage intellectual property in open innovation, because a company has to share knowledge or has to open up its expertise to co-create knowledge with its partners. When a company is using external technology it may not be able to get the desired IP-rights to securely develop a product or capture value. Discussions about the access to background IP and the sharing of foreground IP are likely to put pressure on the partners when they co-create technology. Technology can be licensed out or it can be part of a spin-off deal leading to potentially damaging risks if not carefully managed. These are just a few examples of how open innovation can turn into a nightmare if management is not dealing with intellectual property in an appropriate way.

However, picturing the IP-challenges in this way is not really fair. There is also a bright side. Open innovation has challenged universities, R&D-labs, companies and startups to be highly innovative in dealing with the question of how firms can use IP, in a way that all parties involved could benefit. In the context of open innovation, intellectual property plays a new role which no longer reflects the usual defensive mechanisms adopted by companies. A decade ago, most companies used their patents to block competitors and to freely operate on the market. However, companies increasingly understand that smart IP-agreements allow them to maximize the commercialization potential of their technical solutions and enable them to safely enter into R&D collaborations, with limited risks of having their intangible assets being misappropriated by their partner. In other words; smart IP-management is crucial for open innovation and IP rights are extremely important for the innovative process since they protect and disclose at the same time.

How smart IP-agreements can support success in open innovation has been explored by Chesbrough (2003). Other authors such as Alexy et al. (2009), Arora et al. (2001), Laursen and Salter (2014), Phelps et al. (2009) and Rivette et al. (2000) also have been linking IP management to open innovation strategy and practices. However, the academic world hasn’t yet developed a practical guideline for managing IP as part of a company’s open innovation strategy. In this book, David Dessers, Managing Partner at the business law firm Cresco, has developed such a guideline based on his boundless experience in designing contracts and IP agreements for collaborating organizations. Smart design of IP agreements in collaborative innovation projects proves to be crucial for success. Given his experience, David is extremely well placed to write about this topic. Given the growing prominence of open innovation and collaboration in R&D, it is surprising that we have been waiting so long before strategic and practical guidelines were published. David has been writing this book to provide strategic and practical guidance to entrepreneurs, innovation experts and transaction professionals when they intend to collaborate with other organizations. Few entrepreneurs and professionals have experience beyond the structuring of traditional transactions, and through this guideline he shares his expertise in designing systems to support continuous interdependent relationships and seamlessly integrating various transactional elements.

The book is a practical guideline for a broad variety of collaboration types. However, I advise not to dive immediately into a specific form or modus of collaboration you are interested in. First read the introduction and Chapter 2 which explains the objectives, the complexity and benefits and risks of partnering. This chapter describes the context in which the following chapters can be used. The rest of the book is split into inbound open innovation (Chapters 3 and 4) and outbound open innovation (Chapter 5). The inbound part is in its turn, split into non-equity (Chapter 3) and equity-based (Chapter 4) partnering. Within each chapter, there is an overview of the different collaboration modes. Each mode is introduced by the questions: why a company should (not) use this specific type of collaboration; what are the objectives different partners should target with this specific mode; what are the best practices; and how to deal with IP ownership. David illustrates the different IP and collaboration arrangements with interesting examples of organizations he has been consulting in the last decade.

This book is in my opinion the first attempt to provide a practical guideline to managers who want to team up with external partners for their innovation journey. Academics have shown the importance of IP in dealing effectively in collaborative innovation, but it takes the practical experience and practice-based understanding of an experienced business lawyer with a strong focus on the technology sector such as David to educate managers about good practices in open innovation.

I was fortunate to have the opportunity to exchange ideas with David in panel discussions and conversations. It’s a real pleasure to meet someone who truly understands collaborative innovation, how to strategically design collaboration and IP agreements, and how to clarify to managers of partnering organizations how their collaboration should be structured, leading to a situation where everyone can win.

Prof dr. Wim Vanhaverbeke Professor of Digital Innovation and Entrepreneurship Surrey Business School Visiting Professor ESADE Business School

References

Alexy, O., Criscuolo, P., and Salter, A. (2009). Does IP Strategy Have to Cripple Open Innovation?, MIT Sloan Management Review, 51 (7), 71-77.

Arora, Ashish, Andrea Fosfuri, and Alfonso Gambardella. (2001). Markets for Technology. Cambridge, MA: MIT Press.

Chesbrough, H. (2003). Open Innovation: The new imperative for creating and profiting from technology. Boston: Harvard Business School Press.

European IPR Desk (2015): Fact Sheet: Intellectual property management in open innovation. Luxembourg.

Laursen, K., and Salter, A. (2014). The paradox of openness: Appropriability, external search and collaboration, Research Policy, 43 (5), 867-878.

Phelps, Marshall, and David Kline. (2009). Burning the Ships: Intellectual Property and the Transformation of Microsoft. Hoboken, NJ: John Wiley and Sons, Inc.

Rivette, Kevin G., and David Kline. (2000). Rembrandts in the Attic. Unlocking the Hidden Value of Patents. Boston: Harvard Business School Press.

I. INTRODUCTION

The past ten years are characterized by an accelerated growth of entrepreneurship and the creation of new businesses offering innovative products and services.

It is imperative for businesses to not only develop innovative ideas internally, but to also use external ideas through collaboration with partners. Companies can share risks and costs of R&D, obtain access to valuable intellectuel property assets and thus speed up innovation processes and performance.

The focus of this book is on the perspective of the startups and scaleups intending to scale their business through collaboration with corporates, research institutions and investors. No startup or scaleup can go-it-alone entirely and is required to collaborate with other partners to ensure growth.

In this book a large variety of potential collaboration models are grouped under the term “corporate partnering transactions” in order to stress the different manners in which startups and scaleups can use collaborative transactions to scale their business to the next level.

Corporate partnering transactions are often reduced to “corporate venture capital” investments (CVC), which can be defined as a corporate taking equity stakes in startups or scaleups to gain insight into novel technologies and markets, to influence the decisions of such companies and potentially purchase them.

In our experience it is crucial for startups and scaleups to think beyond (corporate) venture capital financings and actively use a vast spectrum of corporate partnering arrangements to scale their business. An expansive approach and analysis of corporate partnering transactions requires a broad perspective, covering several types of partnering models for collaboration between corporates, research institutions and investors on the one hand and startups and scaleups on the other hand.

Corporate partnering transactions are incredibly wide in scope, making it complicated to ascribe a single set of defining characteristics for all types of transactions.

Villeneuve, Gunderson and Kaufman1 have provided a useful definition by attributing the following unique, common characteristics to such transactions:

• Continuous collaboration: the collaboration “lives” over a defined or undefined period of time, with continuous interaction between the partners for the duration of the transaction, requiring the rights and obligations of the partners to be fulfilled over time with appropriate governance mechanisms to allow for flexibility within the relationship.

• Inter-linked transactions: corporate partnering transactions typically consist of a combination of various types of transactions. The typical transactional approach per type of transaction is insufficient as all transactional elements need to be combined in a unified, workable and consistent business relationship.

For example, an R&D joint venture combines the transfer and/or licensing of intellectual property by partners to the joint venture with R&D and distribution arrangements involving the joint venture, its partners and potentially third parties, together with sophisticated funding, governance and dispute resolution arrangements.

A corporate partnering arrangement is thus a system and an ongoing interdependent relationship, which is considerably more difficult to understand and structure than more traditional relationships. The art of structuring successful corporate partnering arrangements requires the design of the components comprising the arrangement, as well as the system that defines the relationship between these components.

The tech industry in particular has been very active and adept in designing and using corporate partnering transactions to ensure growth. The arrangements generally combine the contribution by the startup or scaleup of technology assets, other resources and R&D activities with a contribution by the corporate of an investment in the further development, through R&D and/or equity/ debt funding arrangements. In general partners are also required to agree upon the attribution of ownership, manufacturing and distribution rights to the outcome of the arrangement.

A non-exhaustive summary of potential corporate partnering transactions between startups and corporates is set forth below:

• Corporate incubation and acceleration labs, which enable startups and scaleups to pitch a broad variety of new business ideas in their business fields to the corporates setting up or participating in incubation and acceleration labs, and provide them facilities, resources, expertise, mentoring and potentially equity to develop promising ideas or speed product development and time to market;

• Licensing, which enables startups to monetize their intellectual property assets by licensing to corporates, and apply them to new markets, industry sectors, and customer segments;

• Value added licensing, which enables customers to integrate innovations developed by startups into their products and services;

• Co-creation arrangements, which are arrangements for the co-creation of products and services, in a bilateral or multi-party context;

• Research institution spin-off arrangements, which are collaborations between startups and research institutions for putting promising research & development findings and results at the disposal of the startup;

• Venture capital investments, which are financial minority investments by venture capital funds and other purely financially driven types of investors;

• Corporate venture capital investments, which are strategic minority investments of corporates in startups and scaleups, by the corporate itself or a dedicated venture fund, sourced from within their incubation and acceleration labs or externally;

• Joint venture partnerships, which are alliances by corporates and startups and scaleups creating a joint entity to develop solutions and bring them to market, in a bilateral or multi-party context;

• Acquisitions and acqui-hires, which are acquisitions of young companies and their commercial-ready products by corporates in order to secure human capital and/or access new technologies, skills, expertise or markets, or young companies pursuing buy & build strategies themselves.

The book sets forth transactional and IP strategies for designing and creating corporate partnering transactions, making a distinction between non-equity (Section 3) and equity (Section 4) based transactions.

The distinction between both types is to a certain extent artificial, as all corporate partnering arrangements share the continuous nature of interaction between the parties, with various types of transactions being inter-linked. However, since the use of equity requires complicated institutionalized arrangements, it was deemed appropriate to treat them in a separate chapter.

Except for the chapters on spin-off licensing and investments by venture capital funds, all models primarily relate to the business relationships between startups and scaleups on the one hand and corporates on the other hand, in a bilateral or multilateral context.

Inside-out corporate venturing models as means to originate startups and scaleups or scale them in collaboration with corporates are described briefly in Section 5.

This book has been born from practice. Over the course of many years we had the privilege of working with hundreds of entrepreneurs and companies from a variety of sectors and industries, helping them to scale their businesses. Thinking about, analyzing, designing, negotiating and implementing an incredible broad range of corporate partnering transactions has been enormously satisfactory. The analysis of the projected and actual performance of many transactions has allowed us to distill the elements required for the design and implement successful corporate partnering strategies and best practices.

It is our hope that our expertise in designing and structuring corporate partnering transactions provides entrepreneurs, executives, innovation experts and transaction professionals with much needed strategic and practical guidance to scale businesses to the next level by using and leveraging the vast scope of potential collaboration opportunities.

David Dessers Managing Partner Cresco

1 Villeneuve, T., Gunderson, R. and Kaufman, D. (1997), Corporate Partnering: Structuring & Negotiating Domestic & International Strategic Alliances, Prentice Hall Law & Business, Chapter 1.

2. CORPORATE PARTNERING

OBJECTIVES, COMPLEXITY, BENEFITS AND RISKS

2CORPORATE PARTNERING - OBJECTIVES, COMPLEXITY, BENEFITS AND RISKS

2.1PARTNERING OBJECTIVES

2.2PARTNERING COMPLEXITY

2.3PARTNERING SUCCESS AND RISK FACTORS

Strategic Success and Risk Factors

Shared or Diverging/Conlicting Objectives

Clearly Defined or Unclear or Expansive Collaboration Scope

Freedom to Operate or Restricted Freedom to Operate

Risk Sharing or Lack Thereof

Worst Case Planning or Lack of Exit Scenarios

Senior Executive Support or Lack Thereof

Business Success and Risk Factors

(No) Business Value Proposition

Due Diligence or Lack Thereof

Optimal or Sub-optimal Legal/Business Structure

Appropriate Partnering Metrics vs Wrong or Absent Metrics

Rewards or Penalties vs Wrong or Absent Rewards or Penalties

Operational Success and Risk Factors

Decision-making Processes

(Poor) Management and/or Communication

Change Management vs Faulty or Absent Change Management

Issue Escalation Mechanisms vs Poor or No Escalation Mechanism

Cultural Success and Risk Factors

Collaborative vs Conflictual Mindset

Dedicated vs No or Rapidly Changing Alliance Managers

Joint Decision-making vs Non-aligned Processes

Appropriate vs Faulty or Wrong Incentives

Startup or Scaleup Specific Risk Factors

Allocation and Overuse of Scarce Resources

Failed Growth Transactions

2.4HOW TO STRUCTURE AND NEGOTIATE CORPORATE PARTNERING ARRANGEMENTS

Partnering Decisions

Design, Structuring and Negotiation Chronology

2 CORPORATE PARTNERING – OBJECTIVES, COMPLEXITY, BENEFITS AND RISKS

2.1 PARTNERING OBJECTIVES

No company can go-it-alone entirely and thus will be required to collaborate with other partners to enhance and ensure the realization of its objectives.

Corporate partnering transactions can be vertically established between a company and a commercial counterpart such as a supplier or client. Such arrangements are, by their very nature, collaborative or cooperative relationships. In other cases horizontal relationships are established between two competitors.

The focus of this book is on startups and scaleups intending to scale their business through collaboration with corporates, primarily in the capacity of client or venture partner. In our experience it is crucial for startups and scaleups to think beyond venture capital financings (with all consequences such financings entail) and actively use a vast spectrum of corporate partnering arrangements to scale their business.

To ensure the success of any corporate partnering transaction, it is crucial for the startup or scaleup to first determine the objectives it intends to realize in such transactions, but also to anticipate on the objectives of suppliers, clients, investors and other potential commercial counterparts. While this book is clearly written from the perspective of the startup or scaleup, we will also elaborate on the objectives of such counterparts.

In our experience transactions can only be successful if partners have carefully thought through their respective objectives, and such objectives are taken into account in the design, structuring and implementation of mutually fair and balanced transactions.

A number of general objectives of entrepreneurs who envisage such transactions are set forth in the table below:

Strategic

Product

Commercial

Finance

Take advantage of the expertise of the corporate in various markets and countries

Develop solution suite by adding capabilities and modules in collaboration with corporate

Increase market reach for the products and services of the startup

Navigate burdensome procurement policies

Achieve a workable collaboration with the corporate as a hierarchal organization

Have clients fund the development of capabilities and modules

Obtain a corporate as reputable (launch) client

Negotiate acceptable licensing, support and maintenance terms

Retain intellectual property rights on developed products

Safeguard product roadmap and retain all intellectual property rights to maintain freedom to operate

Increase revenue streams through fees (subscription, license, maintenance and support)

Obtain additional equity capital funding from a reputable fund

Collaborate to share risk and generate new intellectual property

Access to unique intellectual property of research institutions

Develop, pilot and test the marketability of innovative solutions

Leverage the VC’s network to attract key people and increase market reach

Retain the flexibility to raise capital from financial investors and other corporates

Pool strengths to develop and exploit a particular product or service

Increase market reach and benefit from risk sharing and support through joint venturing

Obtain equity capital funding from a well-capitalized corporate

Obtain the highest price in an M&A transaction

Maintain intellectual property rights on co-developed products for monetization purposes

Increase market reach and benefit from risk sharing and support through a consortium

Increase revenue while expanding and/or diversifying product lines

Remain independent while contributing towards a common goal

Collaborate to share risk and generate new intellectual property rights (in separate legal entity)

Pool strengths to develop and exploit a particular product or service

Create liquidity for shareholders

Create liquidity for shareholders while maximizing long-term upside potential

Develop and implement technology on a larger scale

Geographic and sectoral expansion

Tap into a large network of corporate resources while preserving business autonomy

A number of specific objectives of entrepreneurs who envisage such transactions are elaborated upon below:

1. Financing Growth

Many entrepreneurs are very concerned about financing their growth through equity, certainly at the earlier stages of development. Valuations tend to be low at such early stages, with venture capital financings resulting in significant dilution of the entrepreneurs.

Corporate partnering transactions with corporates can provide much needed sources of financing (e.g. through R&D funding) to startups and scaleups without diluting the equity stakes of the entrepreneurs.

From the startup’s point of view, entering into a customer agreement with the corporate who funds the product development also has the advantage of generating revenues, which is crucial for the stability and reputation of the startup.

A corporate on the other hand may be hesitant to fund product development through a commercial arrangement, and might insist on (partial) equity funding. Any equity funding by a corporate is fraught with pitfalls and needs careful consideration (as described further on in this book).

2. Risk Allocation and Sharing

The startup or scaleup is able to share the cost of its product development through R&D funding. The corporate can also leverage the innovative services and products of the startup or scaleup as a means to reduce its own research efforts and the associated development risks.

Prime examples of such arrangements can be found in the biotech industry, where biotech companies develop innovative products and are approached by large life sciences companies for commercial, investment and acquisition purposes.

3. Product Validation and Traction

For startups and scaleups having a reputed corporate as a (launch) customer is absolutely key. It is assumed that the identity of its potential corporate partner will lend it credibility with third partners. In general, this is true when such corporate is the end customer, but startups and scaleups should be more suspicious when establishing distribution channels through the corporate.

Ensuring that there is sufficient publicity given to the relationship and senior level buy-in within the corporate, will be crucial to make the relationship a success. Often these relationships end in disappointment because there are insufficient incentives within the corporate to make the relationship work.

4. Access to Technology and Expertise

Startups and scaleups should use to their advantage the fact that large corporates are currently very active in sourcing and obtaining access to innovative technology solutions.

Bureaucracy and inertia regularly make it difficult for corporates to think out of the box and develop such innovative solutions in-house. At the same time, the startup or scaleup can effectively exploit its innovative solution and reduce the development costs and risks of the corporate.

If carefully designed and structured, both partners to the corporate partnering transaction can come out winning.

5. Customer Base and Distribution Channels

Any entrepreneur will tell you that having reputed corporates as customers is crucial for reputation and future growth. Each new reputed customer serves as a building block to further grow the business. Fantastic solutions with no customers ultimately are useless and imperil the long-term future of any business.

Corporates can also serve as a distribution channel for startups and scaleups for further distribution of the innnovative solution on a stand-alone basis or integrated into a broader product or service offering of the corporate.

In particular selling to end customers in countries where the small company has no activities is difficult, making the corporate distribution channel very valuable. Entrepreneurs should, however, also take into account that the corporate will be wary on becoming dependent on the innovative service offering of the startup or scaleup, and is going to strive for continuity and access to the existing product suite but also future products and services.

6. Preventing Competition

For the startup or scaleup it will be key to ensure it does not turn its corporate partner into a competitor through the collaboration. As it will be difficult, if not impossible to force the corporate to agree to explicit non-compete undertakings, it will be crucial to ensure that the usage rights of the corporate are tailored in such manner that the corporate cannot directly or indirectly compete with the smaller company.

Likewise, the startup or scaleup should resist any exclusivity or non-compete arrangement with the corporate. Exclusivity or non-competition obligations should only be granted if such obligations are tied to strict revenue commitments or expire in the event certain targets are not achieved.

2.2 PARTNERING COMPLEXITY

If carefully designed and thought through, corporate partnering transactions can be very supportive to ensure future growth. Structuring such transactions is fraught with complexity, requiring the startup or scaleup to spend much attention to the design, structuring, negotation and implementation of its collaboration with partners. A badly structured corporate partnering transaction has a value-destroying effect which is likely to imperil the future of young companies.

The bulk of this book is dedicated to describing best practices in designing and structuring one or more complicated corporate partnering transactions, in combination with one or more relevant use case or cases and a summary of model structuring recommendations.

The expertise and tools included in this book should provide the readers with the means necessary to develop a comprehensive Corporate partnering strategy, which is aligned to the strategies, objectives and business needs of startups and scaleups.

2.3 PARTNERING SUCCESS AND RISK FACTORS

In view of the many different reasons why corporate partnering arrangements succeed or fail, it is difficult to provide an exhaustive list of success and risk factors. The most crucial success and risk factors from a strategic, business, operational and cultural perspective are set forth in the table below.

These success and risk factors are useful to determine appropriate strategies for designing and structuring such arrangements.

Strategic

Business

Operational

Cultural

Success Factors

Shared objectives

Business Value proposition

Decision-making processes

Collaborative mindset

Clearly defined collaboration scope

Due diligence

Communication

Dedicated collaboration managers

Freedom to operate

Optimal legal/business structure

Quality checkpoints and review

Joint decision-making processes

Risk sharing

Partnering metrics

Change management

Appropriate incentives

Worst case planning

Rewards/ penalties

Issue escalation mechanisms

Senior Executive support

Risk Factors

Diverging or conflicting objectives

No Business Value proposition

Faulty or non-existing decision-making processes

Conflictual mindset

Unclear or expansive collaboration scope

Lack of due diligence

Poor communication

No (or rapidly changing) alliance managers

Restricted freedom to operate

Faulty legal/ business structure

Lack of or faulty quality review system

Non-aligned decision-making processes

Lack of risk sharing

Absence of or wrong metrics

Lack of or faulty change management

Faulty or wrong incentives

Lack of exit scenarios

Lack of or wrong rewards/penalties

Poor or no issue escalation mechanisms

No Senior Executive support

Thinking about, analyzing, designing, negotiating and closing an incredible broad range of corporate partnering transactions in a large variety of industries and sectors has been enormously satisfactory, and has allowed us to distill a number of crucial success and risk factors.

To a large extent the success and risk factors are mirror images. Hence, they are described jointly below.

Strategic Success and Risk Factors

Shared or Diverging/Conlicting Objectives

Doing a proper due diligence on the business approach and objectives of any contractual counterpart, and making sure they can become mutual or at least compatible objectives, is of crucial importance. Having common strategic objectives promotes continuous alignment between the partners and ensures that (temporary) difficulties can be surmounted.

Stepping into any corporate partnering arrangement without in-depth knowledge of the counterpart exposes the smaller partner to significant risk. In particular corporates may have various, potentially conflicting objectives, which are likely to lead to issues in the long term.

Clearly Defined or Unclear or Expansive Collaboration Scope

One of the biggest mistakes that many partners to a corporate partnering arrangement make is to not clearly define the scope of their collaboration. Without a clearly defined scope, it becomes difficult or even impossible to precisely define and delineate the rights and obligations of each party.

Furthermore, an unclear scope can lead to important misunderstandings at a later stage, or even signficant delivery problems for the startup or scaleup in the event the counterpart is of the view that the collaboration scope is much broader (and entails non-budgeted obligations). The more clear the scope, the easier it becomes to carefully delineate the rights and obligations of the partners and provide inflexible governance arrangements to deal with unexpected circumstances.

Freedom to Operate or Restricted Freedom to Operate

The primary consideration for startups and scaleups is to decide whether to go it alone completely, and develop itself into a full-fledged company with R&D, manufacturing and sales capabilities.

Taking into account the long-term perspective, it is crucial for a startup or scaleup to retain as much freedom as possible; which requires the retention of as many (intellectual property) rights as possible, in particular but not limited to the licensing and manufacturing of products, and the freedom to develop future products as it sees fit. The more developed the company’s products and services are when it engages in corporate partnering transactions, the more bargaining power it will have to negotiate the best possible transaction.

One of the biggest risks of tight corporate partnering transactions with corporates would be a loss of freedom to operate. The terms of the corporate partnering arrangement need to be carefully defined. In the event the scope of the collaboration is broad and/or (semi) exclusive, it becomes difficult to realize the full potential. If the corporate believes the solution to be unique and crucial to complete its own product portfolio, it will have a strong tendency to push for a broad or (semi) exclusive scope.

In general one should take into account that a close collaboration with a single corporate will by its very nature deter competitors of such corporate, making the freedom to operate all the more crucial not to lose business opportunities.

Risk Sharing or Lack Thereof

The partners need to identify the risks inherent in their collaborative relationship. It is surprising how few organizations actually take the time to appropriately identify such risks, and once identified, to ensure that partners share risk in a partnering arrangement.

For example, having a startup mobilize many resources for a customer engagement which the corporate could terminate for convenience at any time without significant penalties being due to the startup, would put most of the risk and burden of the partnership on the startup. Partnering transactions need to be fair and balanced, which requires each partner to share the risk of the collaboration with the other partner(s).

Worst Case Planning or Lack of Exit Scenarios

It might sound like a cliché, but it is of crucial importance to negotiate the prenuptial agreement prior to consummating the marriage. The intention to collaborate is a positive element, and in general persons do not like to discuss or contemplate the possibility of such collaboration ending early or badly.

Nevertheless, thinking through appropriate termination and transition arrangements is a crucial part of any arrangement. The partners need to consider at least the following elements: (a) party or parties entitled to terminate, (b) circumstances entitling to terminate, and (c) the consequences of termination in each circumstance (e.g. what rights, licenses, and obligations cease, survive or arise upon termination; one-size-fits-all termination provisions generally are not sufficient).

Senior Executive Support or Lack Thereof

Within startups and scaleups resources are scarce and senior management is often intimately involved in the design, structuring and implementation of corporate partnering arrangements.

For the corporate this often is not the case. Many startups and scaleups discuss potential collaborations for months on end to finally come to the unpleasant conclusion that their counterpart has no decision making power. It is thus crucial to ensure that senior management of the corporate fully supports the corporate partnering arrangement and instructs all levels within their organization to make such collaboration a success.

Business Success and Risk Factors

(No) Business Value Proposition

It is crucial for any entrepreneur to maintain a razor-sharp focus on his or her long-term strategy and to ensure that a corporate partnering arrangement supports such long-term strategy and certainly does not makes it more difficult or impossible to achieve. At the same time partners should be flexible when negotiating the fineprint of any arrangement underpinning the business value proposition and change approach to the extent that such changed approach does not imperil the achievement of the long-term strategy. The most important aspect is to achieve a mutually beneficial collaboration and in many cases it is possible to achieve such collaboration in a variety of ways.

Due Diligence or Lack Thereof

Firstly, a startup or scaleup should spend significant time in exploring the range of potential partners and doing an appropriate due diligence on such partners.

Secondly, the parties to an arrangement need to understand and assess how they will collaborate. In order to do so, not only commercial factors and the technical compatibility of products and services, but also the long-term strategic plans and company culture of each partner must be thoroughly examined.

In view of the importance of such transactions for entrepreneurs, it is crucial to have detailed knowledge on how the chosen partner co-operates from a strategic and operational perspective.

Optimal or Sub-optimal Legal/Business Structure

Many partners make the mistake to only focus on the start and end of a corporate partnering arrangement, not sufficiently taking into account that the collaboration lives over a defined or undefined period of time and needs to be organized in a flexible manner.

To the extent possible, partners should think through different scenarios, but should at the same time acknowledge that the future is inherently uncertain and subject to change.

Accordingly, the partners should not attempt to foresee each potential scenario in their arrangements, but include appropriate governance mechanisms that allow the contract partners to take into account modified circumstances and amend their arrangements accordingly.

Getting to pre-agreements through the negotiation and execution of memorandums of understanding or term sheets is a really good way for parties to think through and determine the appropriate legal/business structure.

Appropriate Partnering Metrics vs Wrong or Absent Metrics

A balanced set of partnering metrics is key to select the right partner and partnering model on the one hand, but also to measure the success of a relationship.

Such metrics should cover the relevant success and risk factors set forth in this book, but also any other metric that is of critical importance to the partners involved, taking into account the nature of the business and the industries in which they operate.

Rewards or Penalties vs Wrong or Absent Rewards or Penalties

It is important for any corporate partnering transaction to be structured in a mutually beneficial manner, which requires proper motivational mechanisms to ensure success during the lifetime of the collaboration.

Positive incentives such as milestone based payments and success fees in the event of overachievement are good motivators, but need to be determined in a realistic and achievable manner. Setting unachievable targets is bound to lead to frustration, both with respect to the party who does not achieve the targets as well as the party which is disappointed that certain targets are not achieved. In the event the corporate partnering arrangement consists of or includes the creation of a distribution channel, appropriate incentives need to be provided to the sales staff of the distributor to ensure sufficient sales focus on the products and services of the startup.

Negative incentives such as penalty provisions in the event targets are not achieved by the startup or scaleup, or the loss of exclusivity or other restrictive undertakings in the event the corporate does not fulfill its end of the bargain, are also useful tools to ensure alignment, if properly designed.

In general we are of the view that positive incentives are much better motivational mechanisms than penalty arrangements, where often a discussion emerges between the parties on the fairness of applying a penalty, certainly if e.g. unachieved performance is also partly due to the counterpart. This is quite common in view of the collaborative nature requiring both parties to perform certain interlinked tasks and responsibilities.

Operational Success and Risk Factors

Decision-making Processes

Certain rights and obligations clearly lie with one or more of the contract partners, but in some cases both partners will clearly need to agree on the best way forward for a continuously evolving arrangement.

Hence, the importance of an effective and flexible decision making process to ensure alignment and deal with potential deadlocks.

(Poor) Management and/or Communication

One of the most common mistakes made in setting up corporate partnering arrangements is to only focus on high-level strategic objectives, without properly planning for the day-to-day execution.

Detailed planning at all management and operational levels needed to make the collaboration a success, will be crucial. In the absence of such planning, relationships can quickly go sour in the event the project does not evolve as desired.

Change Management vs Faulty or Absent Change Management

Appropriate change management procedures must be agreed between the partners with escalation possibilities in the event the persons directly involved in the collaborative effort are unable to reach a satisfactory agreement.

It is detrimental for any ongoing collaboration to immediately resort to formal dispute resolution through litigation or arbitration in the event partners fail to reach agreement.

Issue Escalation Mechanisms vs Poor or No Escalation Mechanism

By virtue of their nature, corporate partnering arrangements require an issue escalation mechanism. Their continuous and inter-linked characteristics make it inevitable that small or big problems arise along the collaboration, making flexible governance mechanisms of utmost importance.

Issue escalation should clearly be an integral part of the governance mechanisms.

Such escalation mechanism needs to take account of the issues being tackled, with technical issues dealt with by technical staff, commercial issues by the business sponsors and strategic relationship issues passed on to strategic alliance managers and/or dedicated senior executives of the partners.

Cultural Success and Risk Factors

Collaborative vs Conflictual Mindset

Whether a partner has a collaborative or dedicated mindset is difficult to determine at the outset of partnering discussions. Performing a proper due diligence on the manner in which a (large) corporate approaches corporate partnering transactions is crucial. Certain organizations approach such collaborations in a purely opportunistic manner, which does not bode well for the long-term success.

In addition, the contractual and governance arrangements applied to a collaborative partnering transaction need to provide proper mechanisms and incentives to promote a collaborative mindset.

Dedicated vs No or Rapidly Changing Alliance Managers

One often underestimated factor of importance is rapidly rotating personnel within (large) corporates, implying that the persons who have negotiated a corporate partnering arrangement and know all its intimate details, might not be in charge or even around when certain decisions are to be made or issues arise.

This requires a startup or scaleup to build strong interpersonal ties at all relevant levels of each organisation, from senior management, to R&D, marketing and sales, in order to ensure stability and continuity in the arrangement.

It should be noted that it is not uncommon for promising arrangements to fail because of active obstruction by persons who have not fully bought into the partnership objectives and rationale.

Joint Decision-making vs Non-aligned Processes

“Joint” decision-making does not refer to the need to collectively make a decision, but rather that each partner should be able to take a decision pertaining to the collaboration within the same timeframe.

Entrepreneurs are used to quickly making decisions alone or within a small group consisting of other executives and representatives of investors, while large multinational corporates are required to pass different management layers to obtain the approval of certain important decisions.

Both partners should be clear from the outset on the pace and depth of consensus that is needed in their respective organizations to make a successful decision.

Appropriate vs Faulty or Wrong Incentives

When setting up a collaborative scaling transaction which assumes that a partner will sell a product or service of the other party, whether through an integrated licensing arrangement, co-ownership arrangement or joint venture, an entrepreneur needs to ensure that the incentives for sales staff within the other organization are properly designed and supportive of the collaborative transaction.

Sales staff which is incentivized through commission arrangements on the sale of proprietary products, without proper incentives being put in place to ensure that the products and services of the partner to the corporate partnering transaction are actively promoted, is unlikely to put in the required time and effort to make the collaboration a success.

Startup or Scaleup Specific Risk Factors

In addition to the common success and risk factors elaborated upon above, two other risk factors are extremely important for entrepreneurs to take into account:

Allocation and Overuse of Scarce Resources

Each startup or scaleup needs to consider how many of its scarce resources it dedicates to a corporate partnering transaction. Demands of corporates can be so extensive and cumbersome that it ultimately results in a strong dependence.

For example, the deliverables demanded by a corporate can stretch such resources to the limit. The scope of licenses can be drafted so broadly that it becomes difficult or nearly impossible to develop a product and service offering in respect of other customers. Rights of first offer or refusal in the event of M&A transactions or in respect of future products can imperil the freedom to operate, both from a business and strategic perspective.

Failed Growth Transactions

Another typical risk would be for the startup to put all its eggs in one basket and simply assume that the transaction will turn into a success. In fact, it is difficult to design and structure successful corporate partnering transactions that pass the test of time. Many such transactions fail, in which case the startup would bear the heaviest burden of such failed transaction.

If such transaction would be publicized at the time of its creation, the reputational damage of the dissolution of such transaction for the startup is likely to be large. The company might also have overleveraged itself in terms of staff, equipment and other resources, for which it no longer has funding available after the corporate pulls out.

2.4 HOW TO STRUCTURE AND NEGOTIATE CORPORATE PARTNERING ARRANGEMENTS

Partnering Decisions

Taking into account the success factors and risks associated to corporate partnering arrangements it is evident that how and whether to engage in such arrangements is of crucial importance for any startup or scaleup.

One of the most important roles of an entrepreneur is to ensure that any arrangement fits perfectly into the long-term strategic plans and objectives of the startup or scaleup. In general, using such arrangements as a short-term fix for an immediate problem (e.g. lack of distribution channels) is likely not to fulfill expectations, and will thus lead to disappointment. Taking into account the risks described above, a botched or failed corporate partnering arrangement can have detrimental consequences and should thus be avoided as much as possible.

Any decision maker needs to carefully consider the purpose of any arrangement, taking into account the long-term plans and objectives, weigh the pros and cons of collaboration and perform an in-depth analysis of the plans and objectives of the commercial counterparts.

Harvard University Professor Badaracco2 offers a useful list of conditions that any corporate partnering arrangement needs to fulfill prior to making any commitment:

1.Entrepreneurs must have a clear, strategic understanding of their company’s current capabilities and the capabilities it will need in the future.

2.Entrepreneurs must consider a wide range of possible arrangements.

3.Before committing their company to a corporate partnering arrangement, entrepreneurs must scrutinize the values, commitment, and capabilities of prospective partners.

4.Entrepreneurs must understand the risks of opportunism, knowledge leaks, and obsolescence.

5.Avoid undue dependence on alliances.

6.A company’s corporate partnering arrangements must be structured and managed like separate businesses.

7.The partners must come to trust each other.

8.Entrepreneurs must change their core operations and traditional organizations so that they will be open to learning from corporate partnering arrangement.

9.Corporate partnering arrangements must be led, not just managed.

Another important consideration is the timing for entering into a corporate partnering arrangement. Typically, a startup which is still in the development stage of its products and relies on corporates for a form of funding future development, will by definition have a less strong bargaining position than growth companies who enter into such arrangements with a fully developed product and client base. On the other hand, time will be of the essence and a window of opportunity available at an early stage of development may have already passed once the products are fully developed and de-risked.

There are many reasons why corporate partnering arrangements may fail, such as:

• Misaligned objectives of the partners

• Modifying objectives of the partners, in particular the corporate

• Overleverage of resources of the smaller partner

• Poorly designed parameters of the collaboration arrangement

In general, it is highly recommended to learn from someone else’s and your own mistakes and make sure you do not fall in the same trap as so many predecessors.

It is worthwhile to repeat the unique, common characteristics of such arrangements:

• Continuous collaboration: the collaboration “lives” over a defined or undefined period of time, with continuous interaction between the partners for the duration of the transaction, requiring the rights and obligations of the partners to be fulfilled over time with appropriate governance mechanisms to allow for flexibility within the relationship.

• Inter-linked transactions: corporate partnering transactions typically consist of a combination of various types of transactions. For example, a software license to be combined with an R&D Agreement and distribution arrangements, potentially in combination with an equity investment by a corporate in a startup. The typical transactional approach per type of transaction is insufficient as all transactional elements need to be combined in a unified, workable and consistent business relationship.

Many partners make the mistake to only focus on the start and end of a corporate partnering arrangement, not sufficiently taking into account that the collaboration lives over a defined or undefined period of time and needs to be organized in a flexible manner. To the extent possible, partners should think through different scenarios, but should at the same time acknowledge that the future is inherently uncertain and subject to change. Accordingly, the partners should not attempt to foresee each potential scenario in their contractual arrangements, but include appropriate governance mechanisms that allow the contract partners to take into account modified circumstances and amend their arrangements accordingly.

Design, Structuring and Negotiation Chronology

Each corporate partnering arrangement is different, but the approach to be taken is broadly similar in all arrangements.

1. Determination of Objectives

The startup or scaleup first needs to determine its long-term objectives and the steps it plans to take in order to achieve such objectives. This exercise forms part of the long-term planning exercise that each company needs to undertake from the outset and needs to revisit on a periodical basis.

Setting such clear objectives and planning to achieve the objectives will make it much easier to evaluate whether the structure and terms of a specific corporate partnering arrangement meets the objectives, or on the other hand makes it difficult or impossible to achieve such objectives.

It is also important to take into account the objectives of any potential counterpart, hereby taking into account the specifics of a potential arrangement. There are a number of elements such as business continuity that are crucial for any large counterpart and should thus pro-actively be factored into the proposed terms of the arrangement.

2. Identification of Potential Partners

If the decision has been made to negotiate a corporate partnering arrangement as part of the overall long-term strategy, the startup or scaleup needs to identify and evaluate potential counterparts. A common mistake is to focus on only one potential counterpart, missing the entire universe of other potential partners.

Sectoral trade shows or publications, personal contacts, databases and other sources of information should be checked to identify and map a list of potential partners. Each of those partners then needs to be evaluated with respect to a range of factors, including their corporate culture, financial position, competitive strategy, positioning and reputation in the market place.

Entrepreneurs should use all introduction means at their disposal to get into contact with the right person at the pre-selected potential partners, whether through their business contacts, investors or board members. It is of crucial importance to engage in discussions at the right decision-making level of the potential counterpart.

3. Execution of Non-disclosure Agreement

Once the appropriate introduction is made and high-level discussions have been held showing that there is a mutual interest in exploring a corporate partnering arrangement, it is appropriate for the partners to enter into a mutual non-diclosure agreement.

The corporate will only disclose confidential information to the extent it is sure that such information is protected. At the same time, the startup or scaleup will need assurance that disclosure of confidential and proprietary information concerning the company and its products and services is covered by binding non-disclosure obligation. Above all it requires some level of certainty that the corporate, disposing of much larger means than the smaller company, does not simply misappropriate the confidential information or attempts to reverse engineer and build a competing product on the basis of information provided.

4. Negotiation of Term Sheet or Memorandum of Understanding

The extensive use of term sheets or memoranda of understanding for structuring and conducting the intial negotiations is strongly recommended.

A term sheet summarizes the major business and legal terms of the proposed corporate partnering arrangement and is a great tool to focus attention during negotiations and ensure that the most important transaction elements are agreed between the partners prior to entering into detailed negotiations.

It is much better to spend sufficient time discussing the main transaction terms and agreeing them upfront, prior to entering into detailed negotiations on a definitive agreement or set of agreements. A term sheet is also a manageable and relatively short document which allows for easier alignment of your objectives with the specific deal terms at hand.

It is recommended to use experienced lawyers in putting together and negotiating this term sheet, as the term sheet does have legal implications. In addition, a lawyer with experience and a proven track record in these types of transactions in the relevant sectors, can greatly contribute to address potential issues that the partners may not have thought of themselves.

Although one should not exagerate the usefulness of applying good cop, bad cop routines in negotiations, lawyers can also be used to negotiate unpleasant and difficult items prior to escalating any remaining issues to their clients, hence allowing the parties to preserve their human and business relationships to the maximum extent possible.

5. Negotiation of Definitive Agreements