As a follow-up to my previous post on What the Enterprise Can Learn from the Startup, the following are practical, albeit non-comprehensive, thoughts around how to engage with today’s startups. The fact is that startups move faster because they have to. And for enterprises to stay relevant, they need to learn how to work with the small companies that are shaping the future of their industry.

Ultimately, the enterprise can find success in relationships with startups by seeing and treating them differently than other vendors or partners. The way enterprises onboard, manage risk, and extract value is markedly different from the large vendor relationships they are used to doing business with.

No one intends to handle these partnerships poorly, but with little experience on both sides of the table, opportunities are often missed. The following are lessons learned that can turn potentially ill-fated relationships into a win for both parties.

 

broken watch


When It’s Over Before it Begins


Does this narrative sound familiar? A business leader expresses interest in a startup, and makes lofty commitments around what the two companies can do together. The startup sees opportunity and shifts focus from other activities to what seems like a bird in the hand. The business owner turns the startup over to vendor onboarding and the same 30-page MSA used for “insert management consultancy here” is delivered to the startup. The startup incurs significant legal cost to understand the agreement, wrestles and redlines only to find the enterprise isn’t willing to budge for small vendors. The negotiation drags on, is caught up in legal, and nine months later the startup walks away frustrated and significantly worse off for the distraction and misallocation of resources.

 

“When dealing with startups, the burden of creating an onboard ramp and support network shifts substantially to the enterprise.”

 

The first thing to recognize is neither group is good at this type of relationship. By virtue of being a startup, the smaller company has not formed relationships with many large companies and there may be many hurdles it’s clearing for the first time. On the enterprise side, employees generally deal with vendors that fend for themselves with well-staffed onboarding teams who pave the way for success. When dealing with startups, the burden of creating an onboard ramp and support network shifts substantially to the enterprise.


Additionally, startups don’t have the financial runway or attention span to endure a six-month long onboarding process. We’re not trying to land a B52-sized partner here. Startups need a short, well-groomed runway to land on. This includes snap-out vendor management agreements with less aggressive terms. The following are 3 recommendations for those agreements.  

  

locked pen

Here are 3 Terms in the Enterprise MSA Startups Shouldn’t be Signing.


Insurance Coverage

Many large corporations require vendors to carry errors & omissions, workers comp, general liability, etc. – often totaling more than $5MM in coverage. What’s worse is that requirements across different corporate clients vary widely, requiring a small company to bear an unnatural coverage burden for its size.

These requests aren’t unreasonable, but the enterprise should consider scaling both coverage type and amount of coverage to the relative risk on the work being done. If the engagement is early stage R&D or proof of concept, then overall risk is low and coverage requirements should scale back accordingly. A framework with 3-4 coverage tiers based on risk portfolio can be developed to make it clear to both parties what the thresholds are.

Indemnification

The startup does not have legal, privacy, patent research, or compliance teams. Save this clause for organizations that do. Instead, recognize that the enterprise bears more of the burden for things like researching IP, compliance issues and privacy concerns. Startups are generally unequipped to do this on their own, and making them do so puts the enterprise partner at risk. Plus, if something goes wrong they have very little for the enterprise to sue for.

Make sure to keep protections in place for gross misconduct, data security, and employee behavior. These are valid and needed when working with smaller companies. Consider reducing liability to the total cost of the contract in order to limit “out of pocket” to a reasonable level. Just paying the full legal fees on a protracted lawsuit can kill a small company.

Revenue Concentration

The spirit of this provision is healthy. Large companies want to be sure their partners are strong, diversified and able to withstand a major client departure if things don’t go well. I’ve seen terms that range from no more than 50% of a company’s revenue to no more than 20% coming from a single client. Unfortunately, this problem is compounded further when paired with an exclusivity clause. Exclusivity should not be enforced in blanket terms but rather with a scalpel around key competitors. Consider making up for this request with the size or duration of the deal and time-boxing the exclusivity for shorter periods (6-12 months).


With a startup just breaking into the enterprise space, significant revenue concentration is inevitable. Both sides have to be mindful here. A healthy balance can be achieved even with high revenue concentration if:

  • The startup has bandwidth to pursue other enterprise clients and continue diversification.
  • The enterprise is not hijacking the product roadmap so as to make it only applicable to its needs.
  • The enterprise doesn’t require too much volatility in resources from the startup (Ramping up and down is painful when the company is small).
  • The startup doesn’t get greedy and take on so much that it’s distracted from the rest of its business.

This is an ongoing conversation. Clear and transparent communication on these points shows maturity from both sides and establishes a relationship of trust.

 



Getting the Most out of Each Other


Once a new company is papered up, the work has just begun. A network of entrepreneurial advocates within the enterprise is needed to help startups find fit within the organization. They need champions to introduce them to relevant business units and help them tell their story in a way the organization can understand.

Unless one has walked in the shoes of a founder, it’s hard to understand how consuming it is to break into an enterprise. Being onsite, showing up to meetings, delivering promotional assets, working on special features, demo days — they all take time. And time eats runway. And runways always end. Large corporations need to be respectful of how much time they require of entrepreneurs. In an effort to promote them, the enterprise can just as easily kill them.

 

“Large corporations need to be respectful of how much time they require of entrepreneurs. In an effort to promote them, the enterprise can just as easily kill them.”



Exchange Program

One way of increasing exposure between the two companies is creating an employee exchange program. Working out of each other’s offices helps the startup learn and adapt to the enterprise environment. The enterprise may find this an effective way to provide learning opportunities and reinvigorate its own at-risk talent as well. Imagine having a whole portion of your workforce on site with some of today’s most innovative companies. The overall situational awareness of your team improves and you now have valuable listening posts outside your corporate bubble.

Corporate Venture Capital

As of 2016, there were over 1,200 Corporate Venture Capital (CVC) units in existence. CVC is a rising trend among industry incumbents who use capital investments in young companies as a way to build relationships with and learn from innovators in their space. Sometimes CVC paves the way for M&A but often times it’s more about learning and joint ventures than acquisitions. Another benefit of CVC is that it can solve for constraints on a relationship where a startup cannot responsibly meet the rising demand from the corporate customer. Investing in a promising young company can ultimately help that company provide more value back to the enterprise. Managed well, this is a win for both parties. If your company is new to this space, I highly recommend our friends at Touchdown Ventures.


Joint IP

In the scenario where the enterprise has an emerging need without the resources or talent to create on their own, building IP with a capable startup partner is a good option. The enterprise can write in favorable terms of use on the product created, and the startup retains rights to resell it to other customers. This is especially useful in areas where the IP developed does not represent a major competitive advantage that needs to be kept from competitors. But see notes above on exclusivity.

 

puzzle pieces

When It’s Time to Acquire


Acquisitions are often essential for incumbents to attract new talent. The challenge is how to acquire without destroying value in the long run. While many companies acquire and integrate, Merck has found enormous success by creating a holding company for acquisitions to reside within where they can be left alone. Companies will need ongoing resources to grow and scale even after being acquired, but retaining talent, protecting culture and extracting value are best served when companies retain as much of who they were pre-acquisition as possible. In cases where the two company cultures are similar, assimilation can be preferred. This is rarely the case when an incumbent corporation is acquiring an emerging startup, however. Consider a strong bias toward leaving them alone for the sake of their talent, productivity, and ability to recruit.

 

The bottom line is that partnerships between very small and very large companies require a different level of intentionality and empathy. Leaders at the enterprise will have to step outside their normal process to make these relationships work. But there’s hope. With the right set of internal partners and engagement strategies, a new framework can be built to partner with smaller firms. Making this process scalable is a worthy investment for the long-term sustainability of the enterprise.