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Legal Advice

Start-ups as a driver of growth for mid-sized companies

Technological change means that companies have to look for and develop innovative solutions outside their own core business, even if they are disruptive to their previous business model. This is where start-ups can make a significant contribution.

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.

Invest­ment models

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.

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