Benefits and Roadblocks of Corporate Partnering for Startups

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Fifteen years ago, the expansion model of a startup was fairly linear: The first three years were dedicated to building the business domestically. Year four generally saw European expansion. And by year five, the company was starting to explore the Asian markets.

The emergence of the Web as a viable commerce vehicle, though, brought about a paradigm shift in the startup world that obliterated that model—and forced entrepreneurs to change their plans. Rather than ignoring the global marketplace, today’s smart startups need to think with an international perspective from Day One—and work quickly to expand their footprint.

Of course, becoming part of the global network during a company’s formative days (when budgets are tight and research and development is crucial) isn’t easy, even with the advances and inroads the Web has introduced. At Allegis Capital, where I am managing director, many of our portfolio companies have found that the surest path to becoming an international company is by partnering with large, multinational corporations.

It’s a strategy that might sound curious at first. Big business works at a different speed and with different priorities than the startup world. But the backing of a large corporation can not only supplement a startup’s bottom line; it can also open doors that might otherwise remain firmly shut.

Beyond that, this sort of strategic partnership can provide market analysis that is impossible for startups to gather on their own, acting—essentially—as the ultimate focus group.

Navigating Hurdles

Naturally, there are some challenges that accompany these relationships. A successful pairing takes plenty of foresight and planning. You’ll need to not only find the company that best suits your startup’s philosophies, but also determine how best to take advantage of it (and navigate the hierarchy of that company) once the deal is finalized.

Allegis portfolio company Axcient has been particularly adept at learning to make things run smoothly with its strategic partner. After striking a non-equity partnership with Hewlett Packard in July of 2010, Axcient CEO Justin Moore quickly noticed the differences in how the two companies ran their operations. To ensure that his company saw the greatest possible benefits from the relationship, Moore developed four strategies to ensure things ran smoothly on a consistent basis.

These have not only helped Axcient grow, they’ve carved a path for other startups that might be unsure of how to get the most from a big business partner. Here are summaries of the techniques Moore has shared with us while growing his company:

Triangulate—Larger organizations tend to have an overlap in reporting. They also tend to have management shuffles with relative frequency. As such, there are often multiple people whose responsibilities for different areas of the business overlap.

Rather than maintaining a single point of contact, it’s important to develop several relationships in the organization, as this allows small business owners to have multiple allies to help accomplish a specific goal. When your company works with a single individual and that person leaves the company or their position, it’s a blow to momentum, which can be deadly.

Be Adamant—No matter how solid a startup’s partnership with a larger company may be, the people running that startup are going to have to occasionally break down walls. The best way to do this is with dogged persistence.

The ugly truth is: Partnering with a startup is not going to be the biggest priority for the big corporation, but it’s certainly the biggest priority of the entrepreneur. Therefore, it’s the startup’s duty to … Next Page »

Bob Ackerman Jr. Ackerman is the founder and a managing director of Allegis Capital, an early-stage Silicon Valley venture capital firm that invests heavily in cybersecurity. Follow @allegiscapital

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  • http://web.mit.edu/tlo/ Chris Noble

    This is a good and timely article. I license MIT’s IP in the Energy space, and there has traditionally been a big divide between the VC-backed spinouts on one hand and big-company sponsored-research licenses on the other. We do lots of both, and are working hard to bring them together for mutual benefit. Partnering between startups and big companies can be a win-win, but it also requires VC investors who are supportive. Sounds like you are Bob! Good work.

  • http://www.allegiscapital.com Bob Ackerman

    Thanks for your comments Chris. When I started Allegis Capital 15 years ago, one of my goals was to build an entrepreneur-centric firm, based upon my own experiences as a start-up executive. The success of my first company had nothing to do with venture investors – “we don’t invest in many software companies – the assets all have legs and go home at night” was a common theme from venture investors. In fact, the success of the company – which had operations in the US, Europe and Asia, lay in three strategic corporate relationships – AT&T, Apple and Motorola.

    These relationships are not easy – there is a significant impedance mismatch between the culture of a corporation and a start-up. At the same, when the interests are aligned, the leverage is compelling. In my experience, the VC – Corporation – Start-up embrace is about active management of risk and generating better returns. Having worked with more than 35 corporations as active limited partners and dozens more in partnerships with our portfolio companies, I can tell you first hand – the value this there. But you have to work for it.

  • http://www.tomhalle.com Tom Halle

    Bob – spot on. Strategic alliances, particularly of the “David-Goliath” variety, are a powerful alternative to cash that allow a startup to accelerate product development, market intelligence & penetration, press & analyst visibility, competitive shutout, revenue ramp, and other objectives that would otherwise be out of reach.

    These alliances are of particular interest to the Goliaths in the life sciences, information & communications, finance & insurance, clean/green tech, and emerging consumer product segments as these companies seek to test new product/market adjacencies and reduce technology or market uncertainty without committing large R&D budgets.

    I believe there is also an emerging understanding – among both Davids and Goliaths – that forming a strategic alliance is in fact the first in a series of potential steps that may ultimately lead to acquisition. The savvy Goliath, rather than diving in with an acquisition while uncertainties remain high, will partner first, then incubate, then invest – learning along the way – and, once the product/market potential has been proven and the partner portfolio has been winnowed down to those with the best traction and fit, and those with the best cultural, strategic, and operational alignment – then acquire.

  • Bob Ackerman

    I could not agree more Tom. In fact, in structuring their corporate venture activities, corporations would be better served if they structured their programs to align: 1) deployment of capital, with 2) tolerance for risk, and 3) and ability to deliver and derived strategic value in a partnership. I sometimes describe this as the “rent” – “lease” – “own” model of strategic partnering. Frankly, it is often better for the corporate in terms of driving sustainable value and tends to do “Less” harm to the young strategic partner.

    Bob