Wednesday March 1, 2017 0 comments
FORT COLLINS #FCSW17-- Startup entrepreneurs dream of connecting with a big established company that can buy their intellectual property and give them an early exit.
But while that is the goal of many startups, there can be many potential hazards to watch out for along the way toward that exit.
Mike Freeman, CEO of Fort Collins-based Innosphere, cautioned a mostly startup audience Tuesday of the possible pitfalls of hooking up with a big company before they are truly ready to take that step.
“How do you engage as a small company with a big company – it’s complicated,” said Freeman during a session called “Open Innovation and Corporate Mergers and Acquisitions” on Day Two of Fort Collins Startup Week, which started Monday and continues through Friday.
Freeman noted that startup owners must first know exactly why they want to be involved with a big company before approaching them.
“Why would you want to work with a big company? There has to be some sort of fundamental reason for doing it,” he said.
That reason is usually financial, as startup owners seek funding to further develop their intellectual property, push their product into the marketplace and eventually sell their company.
From the corporate entity’s perspective, partnering with a small company with an innovative product is a shift away from the “closed innovation model” of the past where big established companies did their own internal R&D to an “open innovation” model that relies more on small companies doing the innovation.
“That’s what’s happening today, which is great for startups,” said Freeman. “The whole idea of how big companies innovate has changed dramatically.
“Big companies are now looking at universities, (startup) incubators and accelerators as sources of innovation. That’s a pretty fundamental shift that’s taken place.”
Freeman said corporate acquisition “has been pretty dramatic over the last few years” but he noted that the amount of time to achieve an acquisition has increased.
“The time frame is increasing, which is not a good thing for investors or (startup) founders,” he said.
“You’re probably on a four-to-eight-year ride with a VC.”
Mark Newhouse, a successful entrepreneur and founder of Corning Optical Networking Devices, put a sharp focus on the challenge of “Building Corporate Partnerships” in a follow-up session at Innosphere.
Newhouse said startup CEOs should have a firm grasp on exactly what they would be seeking through a corporate partnership, which could range from seeing their technology deployed in the marketplace, to finding a home for their company to maximizing shareholder value.
Newhouse said whatever the reason, it’s been shown that gaining investment from a big company is far better than just from a venture capitalist.
“If you have an investment from a corporate, you’re three times more likely to be acquired than if you only have VC funding,” he said.
Newhouse said big companies seek strategic acquisitions with startups because “they want to invest in something in the ecosystem that’s going to help their company” and doing so gets them “closer to the innovation” they’re interested in.
But Newhouse noted that striking up relationships with big companies – which can take a minimum of a year -- has its risks, including the big company trying to take control of the smaller partner.
“This is a very asymmetric situation,” he said. “Be sure you have good legal assistance and pay them well.”
Newhouse said a startup’s intellectual property (IP) – usually the core of its business asset – is something that must be looked at with a critical eye.
“Most IP is useless and valueless,” he said. “It has to be that one bottleneck to getting to a product.”
And, Newhouse said, getting an IP deal with a big company can have a serious downside.
“When you get an IP deal done, it will change your company’s valuation from a fuzzy valuation into a precise one.”
And that can put the brakes on a startup’s chances for future investor interest.
“A bad IP deal can constrain future valuation and funding.”