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When David Met Goliath - The Art of Corporate Development for Nanotechnology StartupsBy Mike Moradi - Founder and Former Vice President, SouthWest NanoTechnologies, Inc.
When I was asked by Mark Modzelewski to write an article on entrepreneurial partnerships between large & small companies, it forced me to think critically and formally disclose a method that has worked for me. We've tasted success at SouthWest NanoTechnologies, Inc. ("SWeNT"), a carbon nanotube manufacturing company whose rapid growth can be attributed, in part, to an early partnership with ConocoPhillips (NYSE:COP). Using a technique similar to that described in this article, my previous startup was successfully acquired by DuPont (NYSE:DD). This was the first Fortune 500 acquisition in nanotech. In previous assignments, I've worked on entrepreneurial partnerships from the other side of the table. In all cases there was a recurring theme: organizations will partner to extend their reach, thus creating an entity greater than the sum of its parts.
If you are involved with a startup company, where do you begin? After all, Corporate Development means very different things to different organizations. Typically it involves negotiation of mergers and acquisitions; direct investments; preferred vendor arrangements; and/or sharing of "soft resources" (market data, product stewardship guidance, informal business advice, etc). An equally important issue is how to avoid being taken advantage of, while still delivering value to your partner. This article is by no means comprehensive, but will hopefully provide guidance to the nanotechnology entrepreneur with limited resources, a great idea, and a will to succeed.
Technology commercialization is a risky proposition any way you slice it. Several nanotech products are long-term propositions and do not fit the 5-year exit window required by a traditional venture capitalist. Partnering early and often is a great way to reduce risk and encourage outside investment. The startup company may choose to partner for one or more of the following reasons: (1) financial support with the relatively long-term perspective of a corporate investor; (2) vast industry knowledge; (3) access to key markets and customers; (4) instant legitimacy and recognition; and most importantly, (5) to accelerate a product's time-to-market.
The downside of partnering should be considered carefully, but with a little clear thinking, it is manageable. Considerations include: (1) existing and future Intellectual Property rights should be addressed VERY carefully; (2) corporate partners will likely want exclusivity in certain markets, for some amount of time; (3) large corporations typically move slow, and big company equals big bureaucracy; (4) startups may become dependent on the partner's continued involvement; (5) loss of autonomy and control of your own destiny; and most importantly, (6) the risk of losing your proverbial "golden goose" and possible financial windfall.
It is often said that entrenched chemical and semiconductor companies will benefit most from a successful nanotech industry. Overall, this may be true, but the entrepreneurs and early stakeholders have assumed a great risk, and will expect to be compensated accordingly when this transition occurs. One way to extend the reach of a multinational corporation is by working with small, nimble startups for the following reasons: (1) Savings on R&D, coupled with shortened development; (2) R&D and product synergies with existing product lines; (3) New revenue via royalty streams, direct sales, and/or appreciation of equity; (4) Access to high-growth markets may provide a first-mover advantage; (5) Reduction of long-term risk to company's existing products; and (6) New business relationships.
The downside for a large corporation is somewhat different, and must be managed in an entirely different manner. This includes: (1) Potential culture clash between companies and/or management; (2) Capital, brand, and personal reputation are at risk; (3) Opportunity cost of capital that could be deployed internally, or elsewhere; (4) NIH or "Not Invented Here" Syndrome is your employees' desire to value internal developments over external technology acquisitions; which ultimately makes internal technology ventures difficult to integrate; and (5) Conflicts of interest with existing partners and/or portfolio companies.
How does one initiate a corporate partnership? There are several ways to approach one, and the process will vary from company to company, but the following method has worked for me.
Step 1: Make a list of ideal partners
Assemble an internal team with technical and business talent. Having a great networker as the co-lead for your partnership team will accelerate this process. Start by looking for prospects with a track record of working with startup companies. Some companies have internal Corporate Venture Capital (CVC) funds, suggesting that they are generally well-equipped to work with you (For your convenience a list of nanotech-friendly CVC funds is included at the end of this article). Look for complementary product lines that could either benefit from or be expanded by your technology. Read press releases and articles, and learn about their stated growth objectives, then align your pitch with those objectives. Be sure to contact multiple candidates.
Step 2: Identify and contact technical and business champions within the target organization
In large corporations, deals move quickest when referred by internal R&D or business personnel. If you can't find an internal contact, ask a colleague for a referral, or cultivate relationships by attending related industry conferences. Seek out titles such as research fellow, business or corporate development, technology assessment, or R&D management. Another method is to contact the company directly, sometimes referred to as "cold-calling." Locate the proper technical or business contact via news articles or by using the company's website. If you can't obtain a phone number or email address (try www.google.com), call the company switchboard during normal business hours. This technique works even with companies that have 100,000+ employees. If your idea is compelling, and lucrative,
Step 3: Demonstrate value to the prospect.
Contact your "champion," introduce your technology, and send your literature and a sample. After the initial call, your goal is to have them assemble a deal team with the 4-5 people that can assess the importance of collaborating with your company. At this point, most of these people will be technical, though make sure you include one or two businesspeople to accelerate a consensus. Remember that you are fighting two battles; one in the lab (technical viability) and one in the boardroom (economic viability). Without the prospect's technical and business talent working together, your deal will be very politely put on the shelf with all of the other great ideas. Don't oversell the fact that you are in "nanotech." Where you see a vast business opportunity, your prospect may only see a bolt-on addition to their product line. ALWAYS ask for a 2-way confidentiality agreement at this point, which may include provisions for sample evaluation, and ask for at least a 5-year term.
Step 3: Visit them in-person
Once you've demonstrated some initial technical and economic value to the prospect, push for a meeting at their location or yours. If at their location, try to include the prospect's entire deal team, as described above. This is where you begin the hard sell, i.e., how you will make money together. A few ways to accomplish this, with increasing difficulty, (1) by finding a way to create new revenue together, especially where product synergies exist; (2) cost-cutting initiatives; and/or (3) providing environmental, safety, or other secondary benefits. It is crucial that you "dollarize the benefit" of your product or service. By way of example, imagine that you are selling carbon fiber, and your prospect currently uses carbon black to dissipate heat. If your $10/lb carbon fiber dissipates 10 units of heat, and they are currently buying a $2 carbon black to dissipate 1 unit of heat, their effective cost is $20. You've just saved the prospect $10 per widget. If you are a few years away from a product, show them your timeline for achieving the $10 cost basis. Equally important, propose a few options for working together. Are you looking for sponsored research funds? Direct investment? Joint development? Preferential pricing? Ask them how they would prefer to work together, and do your best to be flexible. If there is a quick and easy deal to be made (even if you have to accept only a portion of what you were seeking), start simple and close this deal first. You can always press for more collaboration later. Agree on a few action items with due dates, then complete yours as quickly as possible.
One caveat: Entrepreneurs are typically headstrong and like to advertise the fact that they are working with Company X on a joint development deal. Resist the urge to discuss this with outside investors, colleagues, or anyone else. Negotiations can fall apart at any time, especially in high-risk technology deals. If the prospect learns of your indiscretion, your deal is in jeopardy. Honor your confidentiality agreement, and you will preserve your reputation if things don't work out.
Step 4: Brazen it through
Now is the time to iron out terms and push for a closing, but remember that nobody was ever fired for saying 'no' to a project. Remember that a Big Company typically equals Big Bureaucracy, so be patient. If you can avoid it, involve an attorney only after the basic ground rules for your collaboration have been agreed upon. Try to clamp down on excessive "lawyering," which slows everyone down, but be very cautious with your intellectual property arrangement. I have not discussed IP herein, and will only suggest that you hire very experienced counsel to protect your long-term interests.
How long will the entire process take? If the company has already identified a need for your product, deals can close very rapidly. Depending on the complexity of your deal, it could take 1-3 months from first contact to closing. Typically, the process takes 6-12 months. Another caveat: Never let a deal die by failing to pay attention to it. Send a friendly reminder if you don't hear from them after a few weeks.
Step 5: Managing the partnership
I won't spend much time here, since this is another article in its own right. Hopefully you have developed a win-win arrangement, and both parties will benefit greatly from the partnership. Communicate the obligations of your contract to all of your employees. Try to secure early wins by meeting your agreed-upon milestones ahead of schedule. Remember that your partner is not your friend, and your champions have their own people to answer to.
Technology commercialization is not easy. If it were, everyone would do it. However, where there is risk and uncertainty, where there is hard work and serendipity, entrepreneurs will find a way to create lasting institutions. It pleases me very much to have been involved in the development of our nanotech industry.
So whatís next for me? I havenít yet decided whether to start another nanotech business, but have no shortage of ideas. I remain excited about the prospects of our nascent industry and its rapid growth. Lastly, if you'd like to learn more about partnerships or contact me on another matter, I can be reached .
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