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| Home - Industry Article - Jul 04 Issue |
Partnerships Become As Important As Cash For Today's Technology Startups
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Some of the more typical unfavorable terms and conditions partners might impose include rights of first refusal and ownership of intellectual property. The right of first refusal would give strategic partners the right to match any potential offers to buy the business -- effectively discouraging any other potential suitors for the business. Intellectual property restrictions can be even more detrimental in that such conditions would allow strategic partners to own access to the startup's core technology in the event of an acquisition. In essence, this would allow them to "buy" the company without paying for it. Newly formed companies should never be intimidated into accepting unfavorable and restrictive terms and conditions simply because the strategic partner is larger and has significant resources and experiences.
To avoid many of the pitfalls, early stage companies should make sure, in advance, that there is a clear definition and understanding of the real goals of each of the parties involved and that expectations are set accordingly. Startups that do not take these steps up front can be in for a shock further down the line when they find out that the benefits of the relationship are greatly weighted in favor of the strategic partner. To ensure an equitable agreement that will be mutually satisfying, early stage companies should sit down in advance and carefully think through the factors that would constitute a fair deal for both parties. They then should role-play with their venture investors who can provide valuable insights into how larger companies might approach the issues. This process can give startups the ability to clearly articulate a high level of understanding of the opportunity when the partnership meeting takes place. In this way, the startup will be able to communicate clearly the key requirements they have for the deal (i.e. commitment on distribution or access to technology) and demonstrate that any potential entanglements (i.e. first right of refusal) have been carefully thought out in advance. A good basic rule for startups to remember when establishing strategic partnerships is that any terms and conditions that limit the upside for the newly formed company should be viewed as a deal breaker.
There is no doubt that there is much to be gained from partnerships. But to realize all of the benefits, startups must not lose sight of the fact that partnerships are ongoing relationships and, as such, must be managed properly if they are to be effective. All too often, startups mistakenly assume that once the deal is signed and everyone has champagne, the work is over. In reality, that is the point where the real work begins. Unless startups focus on managing the relationship throughout its lifecycle, it will not be successful. There must be accountable (or even dedicated) resources for managing the relationship including lines of communication in place, defined processes for moving toward goals, and clear milestones (and the means to measure them) established.
As startups attempt to secure partnerships, experienced VCs can help them think through the process, understand potential pitfalls and how to avoid them, and manage the relationships as they move forward. More importantly, these VCs also can provide access to their own networks of relevant business and technology partner resources. In fact, the partnerships VCs can bring to the equation are becoming as important as the cash they can provide. For this reason, startups need to carefully consider which VCs to approach. Entrepreneurs should select VCs in much the same way VCs select them -- that is, by establishing criteria up front to determine which ones can best help them reach their business goals. One of the most effective ways of obtaining useful background information on the principals at the VC firm and the kinds of partnerships they can bring to the table is talking with limited partners from one of the firm's investment funds or team members at current portfolio companies. Investors that are a part of the fabric of the industry in this way have the kinds far reaching partner networks that can give startups an advantage right out of the gate. They are "industry insiders" who know the technologies inside and out, know all the key players, belong to the right groups, and understand the changing market and competitive dynamics. In securing top-tier partnerships and signing notable customers -- the importance of this kind of industry depth and breadth cannot be understated.
With less funding available today and the high price of capital, startups clearly can no longer rely on cash alone to succeed. So it is not surprising that strategic partnerships are emerging as an excellent way to gain key resources. The backing of experienced VCs can be invaluable for startups, not only in establishing the best partnerships but also in learning how to develop, manage and make the most of these critical relationships.
Elliot Katzman is a General Partner at Kodiak Venture Partners, in Waltham, MA, a seed and early-stage venture capital firm focusing on communications/IT, semiconductor and software investments. Katzman focuses on software investments. He can be reached at elliot@kodiakvp.com.
 
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