Corporate-Startup Partnerships: Which Types to Distinguish and Where to Start
By: Christian Vogt
Tags: Corporate Venturing, Venture Capital, Startup, Partnerships, Innovation

Corporate-Startup Partnerships: Which Types to Distinguish and Where to Start

Corporate-startup partnerships can be rewarding for both sides if approached the right way. Here is how to get started.

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As a change agent driving innovation at your company, partnerships with startups are likely one of your most powerful levers. Corporate-startup partnerships, if done right, can generate enormous impact for both the corporate and the startup. Corporates may leverage the startup’s technology to bring to market a new generation of products that would have taken them years to develop on their own. They may develop net-new products that weren’t feasible without the startup. They may negotiate sell-through agreements to complement their own portfolio. And they may improve the bottom line through productivity gains anywhere from production to corporate finance.

Startups, too, stand to benefit from partnering with corporates. Beyond the fees they charge for the project work included in the partnership, they get a shot at becoming a supplier to the corporate. This could take their venture to the next level thanks to a significant revenue boost, a new logo on their homepage that people recognize, and a compelling success story to talk about. Startups may even use such partnerships to facilitate international expansion, effectively turning the corporate into a beachhead to a new market.

This said, unless your company has a track record of partnering with startups, startup partnerships can be daunting. While the taxonomy of all the forms and shapes of partnership types is reasonably straightforward as we shall see further down this article, each type of partnership has its own characteristics in terms of its potential for the corporate and the startup, in terms of how hard it is to pull off, and in terms of what makes it successful.

Let’s start with the taxonomy. At a high level, all corporate-startup partnerships fall in one of two categories: product-oriented partnerships and productivity-oriented partnerships.

Product-oriented partnerships use the startup’s technology to improve a portion of the corporates offering, be it a product, a service, or a full solution. For example, Bosch just announced a partnership with Chefling, a startup supposedly turning cooking, and planning your groceries accordingly, into a more enjoyable experience. The Chefling app connects to supporting kitchen appliances, which in the future will include a lineup of Bosch smart-home devices.

Another example is Daimler, who owns luxury car brand Mercedes Benz. Daimler teamed up with What3Words, a startup that has mapped the world into squares of 3 meters by 3 meters and uniquely identifies each by three simple words. Daimer integrated What3Words with their car navigation system, allowing drivers to find any location with or without street address, even a picnic table in a park. Deutsche Bahn, Germany’s national railway operator, is partnering with What3Words as well.

In contrast, in a productivity-oriented partnership the corporate consumes the startup’s technology internally. This can essentially be anywhere: supply-chain-facing like in production, market-facing like in customer support, or in shared services like corporate finance. For example, at Stihl we are using MemoMeister, the software-as-a-service from German startup Freiraum, to streamline processes in our tool field-testing group. Employees love MemoMeister because it eliminates repetitive manual work. So does leadership due to the efficiency improvements it unlocks. Similarly, United Parcel Service formed a new division called the Advanced Technology Group to test emerging technologies throughout the company with the help of startups, from embedding advanced chips in package labels to using drones as flying security guards.

Product-oriented partnerships in general have more potential than productivity-oriented partnerships because they help grow the top line and win market shares. This said, they are also harder to pull off.

For good reasons, corporates have developed elaborate processes to ensure that their products meet certain quality, usability, experience, compliance, and branding criteria before they are released to the market. These processes can be long, with many gates to pass, and corporate-startup partnerships may discontinue at any one gate. It is risky for startups to engage in a partnership that is so time- and resource-consuming. Many may be better off focusing their resources on selling their technology themselves versus integrating it with a corporate’s products.

There are three ways to make product-oriented partnerships easier to swallow for startups: splitting the partnership into multiple phases, creating a sub-brand for the collaboration, and releasing a beta version.

If a product-oriented partnership is split into multiple phases, it often starts with a non-committal proof-of-concept project, which the corporate uses to test the waters with the startup’s technology, and the startup uses to generate some revenue. This also helps both sides decide if there is chemistry between the teams. The proof of concept gives the corporate a better idea as to whether the startup’s technology is something they could see move inside their products. If that is the case, they might launch a co-development project, in which they proceed towards the prototype of a sellable product. The end of this journey marks a licensing agreement, in which the corporate pays the startup for every sold product featuring the startup’s technology.

Creating a sub-brand dedicated to the products jointly developed under a product-oriented partnership is the second way to make the partnerships more nimble. The sub-brand exempts the products from the long approval processes that products under the main brand are subject to, enabling the partnership to shorten time to market in a potentially significant way. Because the relationship between the main brand and the sub-brand is typically well known, the main brand will give credibility to the sub-brand nonetheless, creating an unfair go-to-market advantage for products developed under the partnership.

If the partnership is software-centric, the third way to make product-oriented partnerships more digestible for startups is to release a beta version that is safe to use and offers customers some initial benefit. The beta version is then refined step by step into a full product. This way, the startup can generate revenue well before the full product is ready to launch. Since, like most software products, even the full product will likely receive updates along the way, the mechanism to deliver software updates to devices in the field needs to be built either way. So it may as well be used to come out with a beta product early in the process.

If your company is new to corporate-startup partnerships, starting with productivity-oriented partnerships is a wise approach. Doing startup partnerships well is a new capability you need to build, including: identifying and prioritizing opportunities; scouting for the right startups; negotiating scope, outcomes, and milestones; setting up teams; guiding projects in a hands-off fashion to ensure people work with each other at eye level; and optionally layering a rotation program on top to offer your people to co-locate with startups for a while to understand the way startups work and bring that insight back to the main organization. Most of this new capability you can develop with productivity-oriented partnerships, at a lot less risk compared to doing it with product-oriented partnerships. Once you have a few productivity-oriented partnerships under your belt, you will be in a great position to step up your game with product-oriented partnerships.