Entrepreneur

The most unlikely place to find startup funding

(Editor’s note: Robert R. Ackerman, Jr. is the founder and managing director of Allegis Capital. He submitted this column to VentureBeat.)

It’s no secret it’s been a daunting period for entrepreneurs seeking venture capital. While the market is easing a bit, it will remain tough for the rest of the year and probably well beyond that.  So what’s an entrepreneur to do?

Look for money inside corporations.

Odd as it might sound, the case for a startup/corporate collaboration is actually quite compelling. Startups are renowned for their creativity and efficient innovation models, but they often find it difficult to introduce their product or service to the market because they lack an established brand identity (and, thus, have minimal distribution and customer support infrastructures). On the other hand, corporations have recognized brands, established distribution channels and strong customer relationships. What they lack is a culture of innovation that can keep pace with chronically changing markets.

A partnership between a startup and a corporate partner offers the potential for some seductive synergies. As a startup moves from pure research to product and sales execution, a corporate investor can provide more than just cash. It can help explain market dynamics to a startup, how best to introduce the product to the market and how to scale. Commonly, it also provides manufacturing or distribution channels.

For startups seeking a corporate partnership, it’s critical to realize the goals of the two organizations are different, naturally. The corporation wants to leverage the startup’s innovation to respond to market opportunities. The startup wants high velocity access to new customers for its products and/or services – usually the corporation’s customers. Finding common ground and developing a relationship that promotes a healthy partnership requires significant effort on both sides.

The corporation typically has more leverage, so startups often have to make a disproportionate effort to foster, develop and support a mutually acceptable strategic vision. Eventually, this transitions into a more reciprocal relationship, once the cultural conflicts between the two companies are mitigated.

When a startup is able to demonstrate strong demand for a good product, execution becomes paramount – and could be the catalyst for a discussion about the corporation buying the startup outright. An advantage here is if a startup is acquired before it spends millions scaling up manufacturing and building a sales team, it can avoid unnecessary duplication – thus, saving both companies money.

IronPort Systems, one of our former portfolio companies at Allegis Capital, is a good example of this unusual type of collaboration.

In 2007, Cisco Systems acquired this electronic messaging gateway company. While Cisco could have bought the company a couple of years earlier, it decided to wait and first become a customer. After IronPort proved its worth and began to scale, it became a less risky investment. When Cisco bought the company, it gave IronPort a huge boost by selling its product through its corporate channel, causing revenues to more than triple. When Cisco bought the company, it retained almost 100 percent of the team.

Needless to say, the scenario doesn’t always play out this smoothly. In fact, major mistakes, cultural and otherwise, commonly kill the marriage and inflict irreparable harm. If you’re giving this sort of partnership consideration, here are four crucial tips to keep in mind:

  • Share experiences and goals. Like any good relationship, the more similarities between the two parties, the better. Both companies should have experience in the same areas and be good communicators. Both should also have good give-and-take skills, as well as mutual tolerance, because periodic disagreements are inevitable – and they need to be resolved amicably and successfully.
  • Seek a synergistic culture. Large corporations tend to resist change. Entrepreneurs are precisely the opposite, priding themselves on being untethered, fast and efficient. Predictably, partnerships between the two can create huge frustrations. Successfully combining the two cultures requires acknowledgment from both parties of what each type of company does well and what it does not. To promote collaboration, the startup should have an inside “champion.” Clearly, the startup won’t always win debates. If you don’t think you can have fruitful conversations with a corporate partner, however, don’t bother with this sort of partnership opportunity.
  • Develop strong negotiation skills. A corporation engages with a startup for one of two reasons – to fill a technology product void or to secure an option on a potentially useful innovation. In other words, the corporation is looking out for its own interests. Startup entrepreneurs need to do the same. A large corporation can easily overwhelm the resources of a much smaller strategic partner. And a large corporation can walk away from a strategic partnership with no more than a bruise. The consequences can be far more dire for the startup. So a startup must maximize its exit options to protect itself against the possibility of a dysfunctional partnership.
  • Ensure alignment of interests. Strive to develop a partnership of equals, one in which both parties share commitments, milestones and benchmarks. If a corporate partner asks for a startup’s financial records more than once or twice, don’t do it, since this undermines the notion of a partnership of equals. Negotiations are impossible when a corporation holds all the cards.

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