Innovative products are key to a company’s success. In the past, the entrepreneurial personalities in mid-sized companies were themselves the driving forces behind innovations. This usually involved improving existing products within or on the periphery of their core business. This resulted only rarely in radical innovations. But times have changed. Accelerated once again by the Corona pandemic, we are in the midst of a digital revolution. This makes it all the more important for mid-sized companies to pick up on new trends and make them economically viable. To keep up with the competition, companies must constantly reinvent themselves. But nowadays, that it is easier said than done. Sometimes technological change means that companies have to look for and develop innovative solutions outside their own core business, even if they are disruptive compared to their previous business model.
Start-ups as a driver of growth
Established mid-sized companies are still cautious when it comes to collaborating with start-ups. But they are increasingly realizing that it is better to accelerate their own innovation or to participate in disruptive business models and technologies before they endanger the company’s own business prospects.
So how do you find the right start-up for a collaboration? The first step is to analyze the technology trends in order to identify which disruptive developments could threaten your current business model and which technology you need to further develop that business model. The second step is to get in touch with the start-up scene. Information portals for start-ups, investors and established companies can give you an overview. Finally, it is important to find the right type of cooperation.
Collaborating with start-ups
There are different sorts of cooperation between mid-sized companies and start-ups. The collaboration can range from mere support or a classic cooperation to an investment model. Start-up events can provide the first step in getting to know each other. Mid-sized companies gain new momentum as they gather insight into innovative trends. Initially they might simply opt for a loose cooperation: smaller individual projects can eventually lead to a successful and long-term cooperation. Another possibility is a targeted cooperation with universities and research institutions.
An even more popular idea is to establish a partnership. This involves pursuing a clear goal, such as developing a new product or carrying out a specific project. Various forms are conceivable, ranging from operational cooperation and a development partnership to a joint venture. This can also be achieved through the collaboration of innovative minds from the start-up scene together with the company's own innovation management.
Importance of the right framework
The closer the cooperation, the more important it is to clearly define the parameters from the outset. The project goals and the form of cooperation must be determined. The project budget and the time frame must be specified. Furthermore, arrangements must be made to protect company secrets and to secure the rights to know-how and work results. Clear exit strategies should also be defined in case the project fails. Agreeing on appropriate rules builds trust and avoids misunderstandings at an early stage.
One possible investment model is to promote young start-ups through business incubator or accelerator programs. By providing expertise and flexible working equipment, financial resources and services tailored to the needs of the start-up, an established company can help bring the start-up's products to market maturity. In return, the companies often receive shares in the start-up.
Investments in the form of venture capital are another possibility. In this case, mid-sized companies provide financial resources to attractive start-ups. They also provide support in the form of know-how, contacts and marketing. By providing equity capital, investors can exert considerable influence on the success of the start-up - and they in turn benefit by expanding their field of business and from new technologies.
Spin-offs are another option for cooperation between mid-sized companies and start-ups. This option makes sense if an idea cannot be realized in the company’s business context, but the company still wants to support it through financial and other resources. This form of cooperation usually focuses on opening up future markets.
Unlike the provision of venture capital, the acquisition of a start-up by the mid-sized company means taking it over completely. Obviously this also means that the start-up loses its independence. This allows the acquiror to quickly develop new technologies and markets.
What to look for in any case
Regardless of how the cooperation with a start-up is set up, it is important not to overlook the following aspects:
- The shared development ideas as well as the short- and long-term goals of the cooperation should be carefully analyzed.
- Measurable successes, such as the market launch of a product or specific development steps, such as certifications, scaling or internationalization, should be defined.
- Special provisions should provide incentives to keep start-ups on board.
- Exit scenarios, access to intellectual property rights, licenses and rights to intervene should be clearly defined from the outset.
- Last but not least, it is important not to take away the heart and soul of the start-up. The greatest danger is trying to integrate the start-up into your company’s organization and make it report to you in a way that takes away its freedom and creativity.
The attorneys at Ebner Stolz provide legal support for all types of cooperation between mid-sized companies and start-ups. As a full-service law firm, we also provide support in all business law issues in the life cycle of mid-sized companies. Please feel free to contact us.