This piece is a summary of 5 pieces of advice to start-up companies out there who are considering establishing equity relationships with large incumbents.
As incumbent service providers scramble to transform themselves to compete in a new-technology driven world, they are establishing incubator programmes to entice start-ups to help them win in this new world.
In no particular order:
1) Be very careful about accepting investments from incumbents who compete with you in a marketplace.
Incumbents will have some visionaries who are trying to inspire change within their organisations and will work alongside start-ups to the point they start competing with them in the marketplace. At that point the large organisation’s natural immune system may try to limit you.
So it is best to choose to join an incumbent’s innovation programme if you see yourself as being able to provide a service to the incumbent or if you can expand their customer value proposition.
- Make sure that the incumbent has a successful history of working with start-ups and other partners with a mutual-benefit mindset. Speak to all those other partners and start-ups to understand their experiences with the incumbent.
- If their customers move to your services, the tide may start to turn against you within the corridors of the incumbent.
2) There is inherent conflict between the individuals who are leading innovation and those within existing internal operations.
If the key performance indicators that your business has are the same as the key performance indicators of the greater operations of the incumbent you will face an uphill struggle without very senior executives driving this alignment.
The innovation group may love you and promise you the world; the operations group may not. This is especially prevalent if you are building a core part of the business together. You should have very firm legal written commitments from all areas within the incumbent before signing on the dotted line to take on the investment and go into partnership.
Be very careful about monitoring the internal pulse of the incumbent, i.e. understand the corporate politics of your investor. This is something a start-up does not normally have to worry about with many of us never having worked in a large organisation.
3) If you have never met the CEO and board of the incumbent, don’t take their money.
Disruption is a painful contact sport that has to be aligned to a long term strategic vision and the reality is that the incumbent’s board drives this vision.
A disruptive business model will have many aspects, and most likely you will plan to release a series of “minimum viable products”. Herein lies the inherent problem: large incumbents may not work this way, so if the senior executives are not fully aware of all the aspects of the business and your first viable product is seen to be the entire product, you may lose the strategic momentum.
I can’t stress this enough – make sure that all areas of the incumbent, especially the CEO, board and very senior exco members, understand the whole strategic picture of your business and what you, together with their innovation unit, are doing.
4) Be careful if you sell more than 50% shareholding – i.e. control – and never allow effective negative control.
If you sell control then you must sell 100%. A partial sale may leave you floating in the wind neither in or out.
When they have effective control either via shareholding or via commercial operations you may be tempted to mould the business into what works for them and not what works for the business. It is just completely natural; all incumbents have areas of their business with which they struggle. Innovations units often then give these “opportunities” to start ups to see if they could make them work. So my advice is to build the business you wanted to build.
5) Do not believe anything that is not in an iron clad contract. In the innovation and start up world, a hand shake, written commitments and mutually agreed business strategies are legal contracts and there is goodwill towards others.
Never assume that by having cross shareholding the organisational divisions will honour the conceptual commitment or even see the strategic goals you have before you. As a matter of fact, they may work harder to limit you or control you as if you were another internal division.
In summary, I cannot more strongly advise every company out there that if you choose to take on equity from a corporate, do so only if you can clearly see whether you will be either a services provider to them or an independent entity; partnerships are difficult.
It would sadly seem that many South African institutions have difficulty partnering with start-ups and innovation units in the same way as in many other parts of the world. Perhaps this is why South African businesses struggle to innovate on a global level and why we are can’t get our start-up economy to grow in the way we would like.
Sean Emery is co-founder and CEO of RainFin
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