Innovate. Collaborate. Grow!: Strategies and Best Practices for Corporate Partnering

By David Dessers

The past ten years are characterized by a strong growth in entrepreneurship and the accelerated creation of new businesses offering innovative products and services.
The focus of this book is on startups and scaleups intending to scale their business through collaboration with corporates, primarily in the capacity of client or venture partner.  No startup or scaleup can go-it-alone entirely and is required to collaborate with other partners to ensure growth.
It is crucial for startups and scaleups to think beyond (corporate) venture capital financings and actively use a vast spectrum of corporate partnering arrangements to scale their business.
This book thus takes an expansive approach and analyses corporate partnering transactions from a much broader perspective, covering several types of partnering models for collaboration between corporates and startups and scaleups, with a very strong focus on the perspective of the startups and scaleups while engaging in these types of transactions.

ABOUT THE AUTHOR

David Dessers, Co-founder and Managing Partner of Cresco, is one of the go-to lawyers of the Belgian venture capital scene.
David assists entrepreneurs and companies in the design and execution of their plans during all stages of the private company lifecycle, including seed and venture capital funding, acquisitions and dispositions, as well as equity incentive, contracting and intellectual property needs. He frequently represents venture capital funds and corporates in structuring, negotiating and closing investments and divestments in high-growth companies.
David furthermore advises clients regularly with respect to complex commercial transactions designed to protect and maximize the value of technology assets, including technology licenses and acquisitions, research and development collaborations, and corporate partnering transactions. 
He obtained his law degree at the universities of Antwerp and Leuven in Belgium. He also holds an LLM from the universities of Oxford, Hamburg and Rotterdam. David is recommended as leading lawyer by Chambers Global, Chambers Europe, Legal500 and IFLR1000 for Corporate and M&A, Banking, Finance and Capital Markets, and Information Technology.
David has given workshops and seminars at leading corporates on a wide variety of topics, including corporate venturing transactions and alliances. He is an active speaker at incubation and acceleration organizations, such as imec.ventures, B-Hive.eu, Watt Factory, Tech Tour, Level Up and Antwerp Management School. David is a founding partner of Cresco, a premier Belgian law firm for entrepreneurs, companies and investors with market-leading capabilities and thorough experience in private equity and venture capital, emerging and growth companies, mergers and acquisitions, technology and innovation counseling, and complex corporate alliances and commercial agreements.

• Language: English
• Publisher: Die Keure Publishing
• Release date: Mar 5, 2020
• ISBN: 9789048636907

Book preview

SUMMARY TABLE OF CONTENTS

FOREWORD

1.INTRODUCTION

2.CORPORATE PARTNERING

2.1PARTNERING OBJECTIVES

2.2PARTNERING COMPLEXITY

2.3PARTNERING SUCCESS AND RISK FACTORS

2.4HOW TO STRUCTURE AND NEGOTIATE CORPORATE PARTNERING ARRANGEMENTS

3.NON-EQUITY-BASED CORPORATE PARTNERING

3.1SHOULD WE INCUBATE AND ACCELERATE IN A CORPORATE INNOVATION LAB?

3.2HOW DO WE NAVIGATE PROCUREMENT AND SELL OUR PRODUCT TO A CORPORATE?

3.3CAN WE LEVERAGE OUR CLIENT AS A CHANNEL WITHOUT CONVERTING IT INTO A COMPETITOR?

3.4HOW DO WE MAKE OUR CUSTOMER FUND RESEARCH & DEVELOPMENT?

3.5CAN WE OPTIMALLY BENEFIT FROM TECH TRANSFERS BY RESEARCH INSTITUTIONS?

3.6HOW DO WE CO-CREATE ONE-TO-ONE?

3.7HOW DO WE CO-CREATE ONE-TO-MANY?

4.EQUITY-BASED CORPORATE PARTNERING

4.1HOW DO WE GET THE BEST AND AVOID THE WORST IN EQUITY FINANCINGS?

4.2CAN WE SAFEGUARD OUR LONG-TERM FREEDOM WHEN ENGAGING WITH A CORPORATE?

4.3SHOULD WE CO-CREATE BY JOINT VENTURING?

4.4HOW DO WE CO-CREATE IN A ONE-TO-MANY VENTURE?

4.5CAN WE MINIMIZE THE RISKS AND MAXIMIZE THE REWARDS IN A STRATEGIC SALE?

4.6SHOULD WE GROW BY BUYING & BUILDING?

5.CORPORATE PARTNERING THROUGH INSIDE-OUT CORPORATE VENTURING

5.1HOW DO WE CREATE A SPEEDBOAT WITHIN A LARGE SHIP?

5.2CAN WE LEVERAGE PLATFORMS AND PRESERVE OUR INDEPENDENCE?

ACKNOWLEDGEMENTS

FOREWORD

Open innovation has become popular these days. Chesbrough defined open innovation as the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively Chesbrough (2003). The new imperative for innovating companies is that they can and should use external as well as internal ideas, and both internal and external paths to market, when they seek to maximize returns from their innovation activities.

Open innovation seems simple when it is summarized this way. Its simplicity is also one of the reasons for its success: the logic of open innovation is easy to grasp. By collaborating with partners, companies can share risks and costs of R&D; they can tap into large communities of competent specialists around the world; they can speed up innovation processes and they can improve product performance by integrating specific knowledge of other organizations, etc. However, open innovation is more difficult to manage than most managers expect. The potential benefits of open innovation may blind us to its risks and management challenges. One of the challenges is how to design collaborative agreements and manage intellectual property in open innovation, because a company has to share knowledge or has to open up its expertise to co-create knowledge with its partners. When a company is using external technology it may not be able to get the desired IP-rights to securely develop a product or capture value. Discussions about the access to background IP and the sharing of foreground IP are likely to put pressure on the partners when they co-create technology. Technology can be licensed out or it can be part of a spin-off deal leading to potentially damaging risks if not carefully managed. These are just a few examples of how open innovation can turn into a nightmare if management is not dealing with intellectual property in an appropriate way.

However, picturing the IP-challenges in this way is not really fair. There is also a bright side. Open innovation has challenged universities, R&D-labs, companies and startups to be highly innovative in dealing with the question of how firms can use IP, in a way that all parties involved could benefit. In the context of open innovation, intellectual property plays a new role which no longer reflects the usual defensive mechanisms adopted by companies. A decade ago, most companies used their patents to block competitors and to freely operate on the market. However, companies increasingly understand that smart IP-agreements allow them to maximize the commercialization potential of their technical solutions and enable them to safely enter into R&D collaborations, with limited risks of having their intangible assets being misappropriated by their partner. In other words; smart IP-management is crucial for open innovation and IP rights are extremely important for the innovative process since they protect and disclose at the same time.

How smart IP-agreements can support success in open innovation has been explored by Chesbrough (2003). Other authors such as Alexy et al. (2009), Arora et al. (2001), Laursen and Salter (2014), Phelps et al. (2009) and Rivette et al. (2000) also have been linking IP management to open innovation strategy and practices. However, the academic world hasn’t yet developed a practical guideline for managing IP as part of a company’s open innovation strategy. In this book, David Dessers, Managing Partner at the business law firm Cresco, has developed such a guideline based on his boundless experience in designing contracts and IP agreements for collaborating organizations. Smart design of IP agreements in collaborative innovation projects proves to be crucial for success. Given his experience, David is extremely well placed to write about this topic. Given the growing prominence of open innovation and collaboration in R&D, it is surprising that we have been waiting so long before strategic and practical guidelines were published. David has been writing this book to provide strategic and practical guidance to entrepreneurs, innovation experts and transaction professionals when they intend to collaborate with other organizations. Few entrepreneurs and professionals have experience beyond the structuring of traditional transactions, and through this guideline he shares his expertise in designing systems to support continuous interdependent relationships and seamlessly integrating various transactional elements.

The book is a practical guideline for a broad variety of collaboration types. However, I advise not to dive immediately into a specific form or modus of collaboration you are interested in. First read the introduction and Chapter 2 which explains the objectives, the complexity and benefits and risks of partnering. This chapter describes the context in which the following chapters can be used. The rest of the book is split into inbound open innovation (Chapters 3 and 4) and outbound open innovation (Chapter 5). The inbound part is in its turn, split into non-equity (Chapter 3) and equity-based (Chapter 4) partnering. Within each chapter, there is an overview of the different collaboration modes. Each mode is introduced by the questions: why a company should (not) use this specific type of collaboration; what are the objectives different partners should target with this specific mode; what are the best practices; and how to deal with IP ownership. David illustrates the different IP and collaboration arrangements with interesting examples of organizations he has been consulting in the last decade.

This book is in my opinion the first attempt to provide a practical guideline to managers who want to team up with external partners for their innovation journey. Academics have shown the importance of IP in dealing effectively in collaborative innovation, but it takes the practical experience and practice-based understanding of an experienced business lawyer with a strong focus on the technology sector such as David to educate managers about good practices in open innovation.

I was fortunate to have the opportunity to exchange ideas with David in panel discussions and conversations. It’s a real pleasure to meet someone who truly understands collaborative innovation, how to strategically design collaboration and IP agreements, and how to clarify to managers of partnering organizations how their collaboration should be structured, leading to a situation where everyone can win.

Prof dr. Wim Vanhaverbeke

Professor of Digital Innovation and Entrepreneurship Surrey Business School

Visiting Professor ESADE Business School

References

Alexy, O., Criscuolo, P., and Salter, A. (2009). Does IP Strategy Have to Cripple Open Innovation?, MIT Sloan Management Review, 51 (7), 71-77.

Arora, Ashish, Andrea Fosfuri, and Alfonso Gambardella. (2001). Markets for Technology. Cambridge, MA: MIT Press.

Chesbrough, H. (2003). Open Innovation: The new imperative for creating and profiting from technology. Boston: Harvard Business School Press.

European IPR Desk (2015): Fact Sheet: Intellectual property management in open innovation. Luxembourg.

Laursen, K., and Salter, A. (2014). The paradox of openness: Appropriability, external search and collaboration, Research Policy, 43 (5), 867-878.

Phelps, Marshall, and David Kline. (2009). Burning the Ships: Intellectual Property and the Transformation of Microsoft. Hoboken, NJ: John Wiley and Sons, Inc.

Rivette, Kevin G., and David Kline. (2000). Rembrandts in the Attic. Unlocking the Hidden Value of Patents. Boston: Harvard Business School Press.

I. INTRODUCTION

The past ten years are characterized by an accelerated growth of entrepreneurship and the creation of new businesses offering innovative products and services.

It is imperative for businesses to not only develop innovative ideas internally, but to also use external ideas through collaboration with partners. Companies can share risks and costs of R&D, obtain access to valuable intellectuel property assets and thus speed up innovation processes and performance.

The focus of this book is on the perspective of the startups and scaleups intending to scale their business through collaboration with corporates, research institutions and investors. No startup or scaleup can go-it-alone entirely and is required to collaborate with other partners to ensure growth.

In this book a large variety of potential collaboration models are grouped under the term corporate partnering transactions in order to stress the different manners in which startups and scaleups can use collaborative transactions to scale their business to the next level.

Corporate partnering transactions are often reduced to corporate venture capital investments (CVC), which can be defined as a corporate taking equity stakes in startups or scaleups to gain insight into novel technologies and markets, to influence the decisions of such companies and potentially purchase them.

In our experience it is crucial for startups and scaleups to think beyond (corporate) venture capital financings and actively use a vast spectrum of corporate partnering arrangements to scale their business. An expansive approach and analysis of corporate partnering transactions requires a broad perspective, covering several types of partnering models for collaboration between corporates, research institutions and investors on the one hand and startups and scaleups on the other hand.

Corporate partnering transactions are incredibly wide in scope, making it complicated to ascribe a single set of defining characteristics for all types of transactions.

Villeneuve, Gunderson and Kaufman¹ have provided a useful definition by attributing the following unique, common characteristics to such transactions:

• Continuous collaboration: the collaboration lives over a defined or undefined period of time, with continuous interaction between the partners for the duration of the transaction, requiring the rights and obligations of the partners to be fulfilled over time with appropriate governance mechanisms to allow for flexibility within the relationship.

• Inter-linked transactions: corporate partnering transactions typically consist of a combination of various types of transactions. The typical transactional approach per type of transaction is insufficient as all transactional elements need to be combined in a unified, workable and consistent business relationship.

For example, an R&D joint venture combines the transfer and/or licensing of intellectual property by partners to the joint venture with R&D and distribution arrangements involving the joint venture, its partners and potentially third parties, together with sophisticated funding, governance and dispute resolution arrangements.

A corporate partnering arrangement is thus a system and an ongoing interdependent relationship, which is considerably more difficult to understand and structure than more traditional relationships. The art of structuring successful corporate partnering arrangements requires the design of the components comprising the arrangement, as well as the system that defines the relationship between these components.

The tech industry in particular has been very active and adept in designing and using corporate partnering transactions to ensure growth. The arrangements generally combine the contribution by the startup or scaleup of technology assets, other resources and R&D activities with a contribution by the corporate of an investment in the further development, through R&D and/or equity/ debt funding arrangements. In general partners are also required to agree upon the attribution of ownership, manufacturing and distribution rights to the outcome of the arrangement.

A non-exhaustive summary of potential corporate partnering transactions between startups and corporates is set forth below:

• Corporate incubation and acceleration labs, which enable startups and scaleups to pitch a broad variety of new business ideas in their business fields to the corporates setting up or participating in incubation and acceleration labs, and provide them facilities, resources, expertise, mentoring and potentially equity to develop promising ideas or speed product development and time to market;

• Licensing, which enables startups to monetize their intellectual property assets by licensing to corporates, and apply them to new markets, industry sectors, and customer segments;

• Value added licensing, which enables customers to integrate innovations developed by startups into their products and services;

• Co-creation arrangements, which are arrangements for the co-creation of products and services, in a bilateral or multi-party context;

• Research institution spin-off arrangements, which are collaborations between startups and research institutions for putting promising research & development findings and results at the disposal of the startup;

• Venture capital investments, which are financial minority investments by venture capital funds and other purely financially driven types of investors;

• Corporate venture capital investments, which are strategic minority investments of corporates in startups and scaleups, by the corporate itself or a dedicated venture fund, sourced from within their incubation and acceleration labs or externally;

• Joint venture partnerships, which are alliances by corporates and startups and scaleups creating a joint entity to develop solutions and bring them to market, in a bilateral or multi-party context;

• Acquisitions and acqui-hires, which are acquisitions of young companies and their commercial-ready products by corporates in order to secure human capital and/or access new technologies, skills, expertise or markets, or young companies pursuing buy & build strategies themselves.

The book sets forth transactional and IP strategies for designing and creating corporate partnering transactions, making a distinction between non-equity (Section 3) and equity (Section 4) based transactions.

The distinction between both types is to a certain extent artificial, as all corporate partnering arrangements share the continuous nature of interaction between the parties, with various types of transactions being inter-linked. However, since the use of equity requires complicated institutionalized arrangements, it was deemed appropriate to treat them in a separate chapter.

Except for the chapters on spin-off licensing and investments by venture capital funds, all models primarily relate to the business relationships between startups and scaleups on the one hand and corporates on the other hand, in a bilateral or multilateral context.

Inside-out corporate venturing models as means to originate startups and scaleups or scale them in collaboration with corporates are described briefly in Section 5.

This book has been born from practice. Over the course of many years we had the privilege of working with hundreds of entrepreneurs and companies from a variety of sectors and industries, helping them to scale their businesses. Thinking about, analyzing, designing, negotiating and implementing an incredible broad range of corporate partnering transactions has been enormously satisfactory. The analysis of the projected and actual performance of many transactions has allowed us to distill the elements required for the design and implement successful corporate partnering strategies and best practices.

It is our hope that our expertise in designing and structuring corporate partnering transactions provides entrepreneurs, executives, innovation experts and transaction professionals with much needed strategic and practical guidance to scale businesses to the next level by using and leveraging the vast scope of potential collaboration opportunities.

David Dessers

Managing Partner

Cresco

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1 Villeneuve, T., Gunderson, R. and Kaufman, D. (1997), Corporate Partnering: Structuring & Negotiating Domestic & International Strategic Alliances, Prentice Hall Law & Business, Chapter 1.

2.

CORPORATE

PARTNERING

OBJECTIVES,

COMPLEXITY,

BENEFITS

AND RISKS

2CORPORATE PARTNERING - OBJECTIVES, COMPLEXITY, BENEFITS AND RISKS

2.1PARTNERING OBJECTIVES

2.2PARTNERING COMPLEXITY

2.3PARTNERING SUCCESS AND RISK FACTORS

Strategic Success and Risk Factors

Shared or Diverging/Conlicting Objectives

Clearly Defined or Unclear or Expansive Collaboration Scope

Freedom to Operate or Restricted Freedom to Operate

Risk Sharing or Lack Thereof

Worst Case Planning or Lack of Exit Scenarios

Senior Executive Support or Lack Thereof

Business Success and Risk Factors

(No) Business Value Proposition

Due Diligence or Lack Thereof

Optimal or Sub-optimal Legal/Business Structure

Appropriate Partnering Metrics vs Wrong or Absent Metrics

Rewards or Penalties vs Wrong or Absent Rewards or Penalties

Operational Success and Risk Factors

Decision-making Processes

(Poor) Management and/or Communication

Change Management vs Faulty or Absent Change Management

Issue Escalation Mechanisms vs Poor or No Escalation Mechanism

Cultural Success and Risk Factors

Collaborative vs Conflictual Mindset

Dedicated vs No or Rapidly Changing Alliance Managers

Joint Decision-making vs Non-aligned Processes

Appropriate vs Faulty or Wrong Incentives

Startup or Scaleup Specific Risk Factors

Allocation and Overuse of Scarce Resources

Failed Growth Transactions

2.4HOW TO STRUCTURE AND NEGOTIATE CORPORATE PARTNERING ARRANGEMENTS

Partnering Decisions

Design, Structuring and Negotiation Chronology

2 CORPORATE PARTNERING – OBJECTIVES, COMPLEXITY, BENEFITS AND RISKS

2.1 PARTNERING OBJECTIVES

No company can go-it-alone entirely and thus will be required to collaborate with other partners to enhance and ensure the realization of its objectives.

Corporate partnering transactions can be vertically established between a company and a commercial counterpart such as a supplier or client. Such arrangements are, by their very nature, collaborative or cooperative relationships. In other cases horizontal relationships are established between two competitors.

The focus of this book is on startups and scaleups intending to scale their business through collaboration with corporates, primarily in the capacity of client or venture partner. In our experience it is crucial for startups and scaleups to think beyond venture capital financings (with all consequences such financings entail) and actively use a vast spectrum of corporate partnering arrangements to scale their business.

To ensure the success of any corporate partnering transaction, it is crucial for the startup or scaleup to first determine the objectives it intends to realize in such transactions, but also to anticipate on the objectives of suppliers, clients, investors and other potential commercial counterparts. While this book is clearly written from the perspective of the startup or scaleup, we will also elaborate on the objectives of such counterparts.

In our experience transactions can only be successful if partners have carefully thought through their respective objectives, and such objectives are taken into account in the design, structuring and implementation of mutually fair and balanced transactions.

A number of general objectives of entrepreneurs who envisage such transactions are set forth in the table below:

A number of specific objectives of entrepreneurs who envisage such transactions are elaborated upon below:

1. Financing Growth

Many entrepreneurs are very concerned about financing their growth through equity, certainly at the earlier stages of development. Valuations tend to be low at such early stages, with venture capital financings resulting in significant dilution of the entrepreneurs.

Corporate partnering transactions with corporates can provide much needed sources of financing (e.g. through R&D funding) to startups and scaleups without diluting the equity stakes of the entrepreneurs.

From the startup’s point of view, entering into a customer agreement with the corporate who funds the product development also has the advantage of generating revenues, which is crucial for the stability and reputation of the startup.

A corporate on the other hand may be hesitant to fund product development through a commercial arrangement, and might insist on (partial) equity funding. Any equity funding by a corporate is fraught with pitfalls and needs careful consideration (as described further on in this book).

2. Risk Allocation and Sharing

The startup or scaleup is able to share the cost of its product development through R&D funding. The corporate can also leverage the innovative services and products of the startup or scaleup as a means to reduce its own research efforts and the associated development risks.

Prime examples of such arrangements can be found in the biotech industry, where biotech companies develop innovative products and are approached by large life sciences companies for commercial, investment and acquisition purposes.

3. Product Validation and Traction

For startups and scaleups having a reputed corporate as a (launch) customer is absolutely key. It is assumed that the identity of its potential corporate partner will lend it credibility with third partners. In general, this is true when such corporate is the end customer, but startups and scaleups should be more suspicious when establishing distribution channels through the corporate.

Ensuring that there is sufficient publicity given to the relationship and senior level buy-in within the corporate, will be crucial to make the relationship a success. Often these relationships end in disappointment because there are insufficient incentives within the corporate to make the relationship work.

4. Access to Technology and Expertise

Startups and scaleups should use to their advantage the fact that large corporates are currently very active in sourcing and obtaining access to innovative technology solutions.

Bureaucracy and inertia regularly make it difficult for corporates to think out of the box and develop such innovative solutions in-house. At the same time, the startup or scaleup can effectively exploit its innovative solution and reduce the development costs and risks of the corporate.

If carefully designed and structured, both partners to the corporate partnering transaction can come out winning.

5. Customer Base and Distribution Channels

Any entrepreneur will tell you that having reputed corporates as customers is crucial for reputation and future growth. Each new reputed customer serves as a building block to further grow the business. Fantastic solutions with no customers ultimately are useless and imperil the long-term future of any business.

Corporates can also serve as a distribution channel for startups and scaleups for further distribution of the innnovative solution on a stand-alone basis or integrated into a broader product or service offering of the corporate.

In particular selling to end customers in countries where the small company has no activities is difficult, making the corporate distribution channel very valuable. Entrepreneurs should, however, also take into account that the corporate will be wary on becoming dependent on the innovative service offering of the startup or scaleup, and is going to strive for continuity and access to the existing product suite but also future products and services.

6. Preventing Competition

For the startup or scaleup it will be key to ensure it does not turn its corporate partner into a competitor through the collaboration. As it will be difficult, if not impossible to force the corporate to agree to explicit non-compete undertakings, it will be crucial to ensure that the usage rights of the corporate are tailored in such manner that the corporate cannot directly or indirectly compete with the smaller company.

Likewise, the startup or scaleup should resist any exclusivity or non-compete arrangement with the corporate. Exclusivity or non-competition obligations should only be granted if such obligations are tied to strict revenue commitments or expire in the event certain targets are not achieved.

2.2 PARTNERING COMPLEXITY

If carefully designed and thought through, corporate partnering transactions can be very supportive to ensure future growth. Structuring such transactions is fraught with complexity, requiring the startup or scaleup to spend much attention to the design, structuring, negotation and implementation of its collaboration with partners. A badly structured corporate partnering transaction has a value-destroying effect which is likely to imperil the future of young companies.

The bulk of this book is dedicated to describing best practices in designing and structuring one or more complicated corporate partnering transactions, in combination with one or more relevant use case or cases and a summary of model structuring recommendations.

The expertise and tools included in this book should provide the readers with the means necessary to develop a comprehensive Corporate partnering strategy, which is aligned to the strategies, objectives and business needs of startups and scaleups.

2.3 PARTNERING SUCCESS AND RISK FACTORS

In view of the many different reasons why corporate partnering arrangements succeed or fail, it is difficult to provide an exhaustive list of success and risk factors. The most crucial success and risk factors from a strategic, business, operational and cultural perspective are set forth in the table below.

These success and risk factors are useful to determine appropriate strategies for designing and structuring such arrangements.