In the last post, we looked at finding real mutual value in corporate–startup venturing linkups. In this post we’ll look at doing the deal in the right way.
Designing a deal structure which gets the value exchange, risk and rewards properly and fairly allocated is much more complex than many realise before embarking on the startup venture strategy.
Although various intermediaries are springing up with experience in this area, some of these lack the statutory regulation necessary for arranging these deals.
As more corporates look to deals with startups, in some cases we’re finding that initiatives are being created without full internal alignment around whether the objective is short term innovation or long term financial return.
This in turn creates issues around whether the money is coming from operating expenditure or capital expenditure. The route chosen has big implications on who the right internal stakeholders are.
If you are intending to take an equity stake in a startup, it’s helpful to understand how different the world of VC and angel finance (where startups tend to raise most of their money) is from the realm large listed companies.
The two worlds have such fundamentally different attitudes to risk and control that corporates can quickly find themselves facing challenges in either getting the startup to agree terms, or in getting internal approvals within their own organisation.
Before you start on the deal, you need to look at your organisation and honestly assess whether key stakeholders have a true picture of the length of time before they can expect a return, the risks, the likely additional capital needs the business will have, and who in the business will take the P&L hit from any writedowns (and inevitably there will be some writedowns).
Once you’ve got that alignment internally, framing the deal well requires you to adopt a win-win style of integrative negotiation rather than the hard-bargaining negotiation that might be more prevalent in your organisation.
Even if long-term equity gain is not your principal reason for forming the partnership, we’ve seen many times how putting some money on the table to become a shareholder can lead to better outcomes than simply paying for services or only trying to use non-monetary value added.
Once you’re a shareholder, you’re much less likely to bargain hard for a deal which might satisfy your short term interests at the expense of the startup’s long term future.
There isn’t really a shortage of investment capital right now, and for the good companies it is certainly an investee’s market not an investor’s; so if you want to work with the best, you want your deal to be smartest, best-value one on the table.
If you can’t, or won’t, compete on deal terms to work with the best startups, it’s worth questioning whether you should really be doing this in the first place.
In summary, doing the deal in the right way requires you to consider:
- What the real value exchange is.
- The time horizon in which your organisation needs to see a return.
- Whether you’re funding from capex or operating expenditure.
- Having the right internal stakeholders aligned.
- Covering off the likely future capital needs and taking account of the possibility of writedowns.
- Adopting win-win negotiating strategies.
- Having deal terms that are at least competitive and ideally the best in the market.
In the final post we’ll look forward to how you keep your organisation engaged, and how you can be a great partner to the startups you work with.