Ask the CEO of any startup and you will find that venture capital is hard to come by these days.
The heyday of 1999 and early 2000 are gone, and while there is plenty of money in the VC coffers, getting a startup funded is infinitely more difficult today than it was one or two years ago.
There is a bright spot: Corporate investment is one area of funding that continues to increase, despite the downturn in venture funding in general. As a result, strategic alliances have become an important way of doing business.
Forming strategic alliances with industry partners can be an important step on the path to funding the startup company.
Large established corporations invest in startup and emerging companies for various reasons. In many cases, the rationale is efficiency.
It is more efficient for most businesses to focus on what they do best and outsource other activities to outside companies. It is often less expensive to purchase or license technology or new products than it is to develop these in-house.
Large companies also may want to establish a “toehold” in a market or niche by forming a strategic alliance. This is especially true in high-technology businesses, which are in industries that are rapidly changing.
By establishing an alliance with a firm in an evolving niche, the company will have a head start if the market or technology evolves in that direction.
Most corporate investment is targeted at firms with which the corporation has a pre-existing strategic alliance. For want of a better definition, a strategic alliance is any mutually beneficial arrangement between two companies, and these alliances have always been important building blocks of any business.
All companies, large or small, technology or basic industry, have strategic alliances with other companies. Alliances are more important today than at any time in the past due to the changes in the world economy that require the highest level of efficiency from successful companies, which is a principal force in driving the trend in cooperation and alliance between otherwise fierce competitors.
– Research Is First Priority
Successful alliances start with careful planning and research. The first step is to find out all you can about the prospective alliance partner. The importance of this step cannot be overemphasized. The research task is an ongoing process, and will continue throughout the formation and into the existence of the alliance.
If the prospective partner is a publicly traded company, it is required to file periodic reports with the Securities and Exchange Commission. These reports can provide detailed information about the company’s business and properties. SEC filings are available at (http://www.sec.gov).
Other sources of information can include the Internet, trade publications and the prospective partner’s own literature.
Don’t overlook the suppliers and customers of a company as a source of information. These sources can be particularly useful when they are mutual contacts with your company.
It goes without saying that you need to use good judgment when talking to other companies about your prospective alliance.
– Handling The Deal
The structure of the alliance depends on the respective benefits the companies hope to obtain, the ultimate goals of the companies and other considerations. Of course, the companies involved need to meet with counsel to review the status of protection of intellectual property rights before disclosing any confidential information or ideas.
Potential partners need to define mutual benefits and contributions. What will each company contribute to the alliance? What is my company selling in this alliance agreement, and what are we buying from the other company?
The respective benefits and contributions that each company obtains and makes to the alliance are determinative of the structure. For the alliance to be successful, each company must obtain benefits. Any payments should be commensurate with benefits obtained.
Partners also need to identify internal stakeholders and possible champions. What departments, divisions, persons, suppliers, vendors and others will have stakes in this alliance?
By identifying the stakeholders, you are able to determine whose support is required to form the alliance. You will need to find one or more persons in the other company who will function as champions to promote and “sell” the alliance internally.
The champions will need to have sufficient influence in the company to win approval for the alliance. Generally, the higher level the champion, the more likely the success in selling the alliance.
Setting goals for the alliance from your company’s perspective is perhaps one of the most important steps in the process. How long will it take to accomplish your goals? Some alliances are only needed to meet goals that are short term, while others are long term.
Each company needs to develop a “wish list” of everything it wants from the relationship, prioritize the wish list and set a timeline for accomplishing the necessary tasks.
Before beginning negotiations, each company needs to identify relationships, contracts and other alliances that may present potential conflicts of interest. If possible conflicts are identified early, the company may be able to resolve them. In some situations, conflicts with a third company can be restructured as a three-party alliance.
Strategic alliances may be as simple as in formal arrangements with vendors or complex licensing arrangements with competitors. For some startups and emerging companies, an alliance with a larger industry partner may ultimately lead to an investment, merger or acquisition.
Following are some of the many forms that strategic alliances may take:
o Joint Marketing Agreement. The companies agree to cooperate in the marketing of their products.
o License. One company agrees to permit the other to use its intellectual property.
o Consulting Agreement. One company provides consulting services to the other.
o Joint E-Commerce Initiative. Especially prevalent between older established companies that do not have Internet marketing capabilities and companies that have proven e-commerce technology.
o Joint Venture. An agreement whereby the two companies agree to jointly pursue or cooperate on a specific project.
o Equity Investment. May accompany any form of alliance, or an alliance may start with an equity investment.
o Merger or Acquisition. Often begins with an alliance. Microsoft’s $1.1 billion acquisition of Great Plains software started with a simple strategic alliance.
o Formation of New Entity. The alliance partners may decide to jointly form a new company to develop a new technology or to target a new market.
The form your alliance will take depends on the planning process described throughout this column. Take your time and don’t rush into an agreement without considering all of the factors. Also, remember that the final step is to develop and execute agreements between the alliance partners.
The nature and complexity of the agreement will vary according to the type of alliance and the structure. In more complex alliances, it is sometimes helpful to start with a letter of intent, memorandum of understanding or term sheet that sets forth the essential terms of the alliance. This is then followed by a definitive agreement.
The changing economy doesn’t need to mean fewer startups. Broadening your perspective will provide opportunities for funding. Strategic alliances are growing in importance and offer a flexible tool for building critical relationships with other companies.
Jones is an attorney at Higgs, Fletcher & Mack LLP, Jones was a securities examiner and financial analyst.
