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Corporate partnerships: a smart move for financing?

July 25, 2016

 

Startups always need funding.  While waiting for market re-stabilization, where should UK startups go to secure investment?

 

"What does a small startup have to offer? A brilliant idea, a young, passionate executive team and the ability to innovate and grow quickly. - Dan Wagner

 

KPMG’s quarterly Venture Pulse report shows a 40% decrease of investment in tech startups post-Brexit. However, I believe that to be a short-term reaction from venture capitalists – and very short-sighted.

 

Partnering with corporations?

 

In the mean time, where should tech startups look for finance? One thought is that the opportunity might lie in partnering with corporations.

 

I saw a recent study from MassChallenge which showed 67% of surveyed corporates are turning to startups to explore “new technologies and business models” (The study conducted interviews with more than 100 corporates in Europe). Similar phenomenon has been observed among the tech scene in the US, where tech giants prefer acquiring early startups to pushing for in-house innovation.

 

It could be a win-win strategy. Large corporates have the financial capacity, an established brand name and proven access to market – exactly what an infant startup would die for! A corporate/startup relationship in the early stages of a new businesses development also helps entrepreneurs gain a wider understanding of business management whilst still maintaining their entrepreneurial drive and enthusiasm.

 

What does a small startup have to offer? A brilliant idea, a young, passionate executive team and the ability to innovate and grow quickly.

 

A word of warning

 

But there could also be a dangerous downside. This sort of partnership is exactly the same as dating. A bad match could result in an ugly aftermath. Such a relationship could stunt the start-up’s growth.  Unless everything is very clear from the get-go there could be problems.

 

One solution that I would advocate is to be sure that the start-up has a virtually autonomous status within the corporation.  A sort of “Skunk Works” status which means it should be given a high degree of freedom within the organization, unhampered by bureaucracy.  It should have a clear start-up budget and a commitment to supply working capital down the road.  Also an agreement as to what should happen if the budget is exceeded and/or the project takes longer to reach fulfilment than was originally envisaged.

 

I think that a joint venture, funded by the corporation, could be another option although in that case both parties have to subscribe to clear deadlines to ensure the project is not frustrated by one or other party failing to meet their commitments.  Anyway it is likely the corporate would want to acquire the balance of the shares down the road – in which case a formula should be agreed up front that is fair to both parties.

 

 

 

 

 

 

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