NEW YORK (CNNfn) - Startup companies on the prowl for angel investors and venture capital should also consider a third path -- creating strategic partnerships with large corporations who are willing to make investments in new technology.|
In the current environment, one that has spooked some angels and venture capitalists from investments in small startups, strategic partnerships are becoming more common.
Like angels or venture capitalists, strategic partners invest in cash-starved startup companies. The relationship between strategic partners is different from traditional investors, however, because in addition to contributing funds, strategic partners may also be business partners.
First, the good news
Angels and venture capitalists invest only for profit. They structure deals in the way that best assures that profit -- often demanding a seat on the board of directors and preferred stock.
Strategic partners are not investing in the hope of a high return on their investment. As such, they often don't ask for a spot on the board and are often satisfied with common stock.
Strategic partners can be beneficial in other ways. Startup companies nearly always benefit if they have an older, wiser and important friends who can guide them when they run into obstacles or need to make key contacts in the industry. In many cases, strategic partnerships institutionalize that type of help.
Often, having an important strategic partner or two also can make entrepreneurs much more attractive to venture capitalists, if they are still shopping for additional capital.
In most cases, however, partners won't invest in just any promising startup, so it is important for entrepreneurs to consider which companies will be the best, most compatible partners.
By and large, big companies like Lucent Technologies Inc. (LU: Research, Estimates) or Adobe Systems Inc. (ADBE: Research, Estimates) extend a hand to those companies that fill a need that they have. In other words, they try to partner with entrepreneurs who are developing a technology or service that will help their own business in the future or with companies who are potential customers.
Compatibility is key
Entrepreneurs hungry for investors may look at strategic partners as the answer to all their needs, but, as in all long-term relationships, compatibility is the key to ensuring a healthy relationship.
What seems to be a good thing can later become a bad thing if the dominant partner begins to lead the fledgling company in a direction the founders don't want to go. Or, if the opposite is true and the younger partner doesn't meet with its partner's expectations, the relationship may sour.
In the worst cases, one company has partnered with another, not to help it out, but to learn a few of the trade secrets. Once they got the information they needed, using their partners' expertise, they bought one of the competitors. So, those companies looking for large, strategic partners should learn as much about their potential partners as possible and try to make sure they have a track record in helping, rather than hurting, their partners.
Map it out
Nigel Howard, a partner at Brobeck Phleger & Harrison, said the volume of partnerships is definitely increasing, in part because pure investment deals are growing scarce. He added that the rapid pace of technology necessitates alliance building.
"The pace of technology is so quick, many companies just don't have the time to develop everything themselves," said Howard, a partner in the firm's technology group.
Howard warned that one way to get into trouble with strategic partners is not to think through the relationship before jumping in. What the partners need to agree upon, said Howard, will depend largely on the types of companies they are and what they hope to achieve in their partnership.
But before taking money and entering into a partnership, as tempting as it is for cash-starved entrepreneurs to take the money now and think about the terms later, the only way to protect your company is to map out the relationship now, all the way through to the end.
Among the things to consider:
· Who owns new products or technology developed under the partnership?
· Should you give the partner the exclusive right to take over your business?
· How often will you meet with your partner?
· What, specifically, are the goals of the partnership and how much time do you need to accomplish them?
· How long should the partnership last before you both consider extending the relationship?
"Write down everything at the start," said Howard. "Make sure there's enough in the agreement for both partners to be happy."