Bsusiness Lawyers Toronto Barrie

Corporate Partnerships and Joint Ventures

1. Introduction

Strategic partnerships can greatly benefit large and small companies alike. If you are an entrepreneur running a startup company, where do you begin? After all, corporate partnering means very different things to different organizations. In a general sense, it involves a variety of collaborative opportunities - technology and/or manufacturing collaborations; co-marketing and distribution; mergers and acquisitions (“M&A”); direct investment; preferred vendor arrangements; and/or sharing of “soft resources” (which may include market data, product stewardship guidance, informal business advice, etc.). If you are running a startup company, an equally important issue is how to avoid being taken advantage of while still delivering value to your partner.

2. Why to Partner?

Technology commercialization is a risky proposition any way you slice it. Many technology companies outside software sector involve long-term propositions that do not fit the traditional five-year exit window required by a typical angel investor or a venture capitalist. The good news is that several multinational companies now have Corporate Venture Capital (“CVC”) groups, which are not solely driven by a financial return, but also by strategic alignment with a startup. For a large organization, partnering early and often is a great way to reduce the risk of developing and/or accessing promising business opportunities.

The startup company may choose to partner for one or more of the following reasons: (1) Financial support with the relatively long-term perspective of a corporate partner and/or investor; (2) Vast industry knowledge; (3) Access to key markets and customers; (4) Instant legitimacy and recognition; and perhaps most importantly, (5) Acceleration of a product's time-to-market.

The downside of partnering should also be considered carefully; though, with careful planning and creative thinking, the downside can often be managed. Considerations might include the following: (1) Existing and future Intellectual Property rights should be addressed VERY carefully; (2) Corporate partners will likely want exclusivity in certain markets, for some defined period of time; (3) Large corporations typically move slowly, and big company dynamics almost always result in big bureaucracy; (4) Startups may become dependent on the partner's continued involvement which can result in additional pressure around predetermined milestones; (5) Loss of the startup's autonomy and control of its own destiny, if the company misses its milestones or gives up too much during the negotiation process; and perhaps most importantly; (6) Risk of losing or seriously diluting the startup's financial windfall in the event of a successful exit.

3. What is in it for Large Companies?

The entrepreneurs and early investors have assumed a great risk and will expect to be compensated accordingly when this transition occurs. One way to extend the reach of a multinational corporation is by working with small, nimble startups for the following reasons: (1) Savings on R&D, coupled with shortened development timeframes via the reduction of overhead and internal controls; (2) R&D and product synergies with existing product lines, which can expand market reach and Intellectual Property estates; (3) New revenue via royalty streams, contract manufacturing, direct sales and/or appreciation of equity; (4) Access to high-growth markets may provide a first-mover advantage; and (5) New business relationships. The downside for a large corporation is somewhat different and must be managed in an entirely different manner.

This includes the following: (1) Potential culture clash with a startup company's employees and management; (2) Capital, brand and personal reputation are at risk; (3) Opportunity cost of deploying capital to an external R&D effort; (4) “NIH” or “Not Invented Here” Syndrome which results from employees' desires to value internal developments over external technology acquisitions, making startup technology collaborations difficult to integrate; and (5) Conflicts of interest with existing product lines and their management, existing partners and/or portfolio companies. This is often further amplified by the frequent “turf battles” that occur in a large organization.

4. The Process

How does one initiate a corporate partnership? There are several ways of accomplishing such, and the process will vary from company to company; but the following method has to work for most startups:

Step 1 - Make a List of Ideal Partners

Assemble an internal team with technical and business talent. Having a great networker as a co-lead for your partnership team can accelerate the process. Start by looking for prospects with a track record of working with startup companies. Many large organizations have internal CVC funds, suggesting that they are generally well equipped to work with startup companies. Look for complementary product lines that might benefit from collaborating with your company. Oftentimes this is a sub-system manufacturer, rather than the Original Equipment Manufacturer (“OEM”). By way of example, if you are selling automotive paint additives, approach paint manufacturers rather than Ford or GM. Research the prospect companies by reading press releases and articles, and learn about their stated growth objectives. These may be financial, technical, geographic or otherwise. Align your pitch with those objectives, and be sure to contact multiple partnership candidates in each product segment. You might want to advise your prospect that you're also talking to their competition, but do so in a very subtle manner, and only after they have shown initial interest.

Step 2 - Identify and Contact Technical and Business Leaders at the Target Organization

In large corporations, the quickest route to a partnership is often via a referral from internal R&D or business personnel. This may occur when a need has already been identified for your unique capabilities or technology. If you can't find an internal contact directly, the next best alternative is to ask a colleague for a referral, and/or cultivate relationships by attending related industry conferences. Seek out titles such as Research Fellow, Business or Corporate Development Manager, Technology Assessment Manager, Extramural or External R&D Advisor or R&D Manager. The most difficult method is to contact the company directly without a referral, which is sometimes referred to as “cold-calling.” Locate the proper technical or business contact via news articles, peer-reviewed scientific journals or by using the company's website. If you can't obtain a phone number or email address via Google, simply call the company switchboard during normal business hours and ask. This technique works even with companies that have 100,000+ employees. If your idea is compelling, they will listen.

Step 3 - Demonstrate value to the prospect

Contact your champion, briefly introduce your technology to generate interest, and send your literature and a sample. After the initial call, your goals are (1) to have them evaluate your sample quickly; (2) to assemble a deal team with the 4-5 people that can assess the importance of collaborating with your company; and (3) to arrange a meeting, as below. At this point, their deal team will consist mostly of technical personnel; though, try to insist on one or two businesspeople, which will accelerate a consensus. Remember that you are fighting two battles; one in the lab (technical viability) and one in the boardroom (economic viability). Without the prospect's technical and business talent working together, your deal will be very politely put on the shelf with all of the other great ideas. Where you see a vast business opportunity, your prospect may only see a bolt-on addition to their product line. ALWAYS ask for a two-way confidentiality agreement at this point, with a term of at least five years. You may also want to include provisions for sample evaluation in that agreement, or ask for a separate Materials Transfer Agreement. These set guidelines for evaluation, arrangements for disposal and handling and often provide some protection against reverse-engineering of your product.

Step 4 - Visit Them in Person

Once you've demonstrated some initial technical and economic value to the prospect, push for a meeting at their location or yours. If at their location, try to include the prospect's entire deal team, as described above. This is where you begin the hard sell, i.e., how you will make money together. A few ways to accomplish this in order of increasing difficulty include the following: (1) New Revenue Opportunities - especially where product synergies exist; (2) Cost Savings - cost-cutting initiatives that may significantly impact existing product lines; (3) Other - providing environmental, safety, marketing, or other secondary benefits. It is absolutely crucial that you “dollarize” the benefit of your product or service. By way of example, imagine that you are selling carbon fiber, and that your prospect currently uses carbon black to dissipate 10 units of heat per minute. If your $10/lb carbon tubes dissipate 10 units of heat per minute, and they are currently buying a $2 carbon black to dissipate 1 unit of heat per minute, their effective cost is $20. You've just saved the prospect $10 per widget. If you are a few years away from a product, show them your timeline for achieving the $10 cost basis. Equally important, you must propose a few options for working together. Are you looking for sponsored research funding (sometimes referred to as Non-Recoverable Engineering or “NRE” funding)? Direct investment? Joint development? Preferential pricing? Ask them how they would prefer to work together, and do your best to be flexible. If there is a quick and easy deal to be made (even if you have to accept a small portion of what you were seeking), start simple and close the easy deal first. You can always press for more collaboration later. Agree on a few action items with due dates, then strive to complete yours as quickly as possible. One caveat – never talk about a deal before it is done. Entrepreneurs are typically headstrong and like to advertise the fact that they are working with Company X on a joint development deal. Resist the urge to discuss your pending collaboration with outside investors, colleagues, the media or anyone else. Negotiations can fall apart at any time, especially in high-risk technology deals. If the prospect learns of your indiscretion, your deal is in jeopardy. Honour your confidentiality agreement, and you will preserve your reputation if things don't work out. In many instances, my companies were turned down several times before we were able to close a deal with a particular company. If you play your cards right, you should be able to contact them at a later time.

Step 5 - Brazen it Through

Now is the time to iron out terms and push for a contract, noting that nobody was ever fired for saying “no” to a new project. Remember that a big company is often laden with big bureaucracy, so be patient.. Involve a lawyer as early as you can and certainly before the basic ground rules for your collaboration have been agreed to. Try to clamp down on excessive “lawyering” on both sides, which slows everyone down. However, be very cautious with your Intellectual Property arrangement. How long will the entire process take? If the prospect has already identified a need for your product, deals can close very rapidly. Depending on the complexity of your deal, it might take 1-3 months from initial contact to closing. More often, the process will take 6-12 months; so again, be patient. Another caveat - never let a deal die by failing to pay attention to it. Send a friendly reminder if you don't hear from them after a few weeks.

Step 6: Manage the partnership

I won't spend much time on this topic, as it warrants another article in its own right. Hopefully, you have developed a win-win arrangement with your partner, and both parties will benefit greatly from the collaboration. Don't worry if both parties aren't entirely happy with the deal – this is often a good sign. Communicate the obligations of your contract to all pertinent employees, and make them accountable for their portion of the deal. Try to secure early wins by meeting your agreed-upon milestones ahead of schedule. Remember that your partner is not your friend, and your champions have their own people to answer to internally.