Collaboration strategies – how to partner right?

One of principle rules in attracting external resources to a starting-up enterprise is to make its expected profits highly plausible to interested parties, including investors. One of approaches toward de-risking planned activities is to bring attention to formal partnerships formed by the company. Having a right partner might increase chances for start-up’s commercial success and decrease its operational costs. So what are the most common dimensions of collaboration in starting up phase of business activity?

Crucial dimension for future commercial success of a start-up relates to its ability to interest, cooperate and receive orders for its goods, services, or solutions. One of the ways to make these aspects plausible is through working out and signing a document confirming pursued and shared declarations e.g. in form of letter of intent (LoI).

Purpose of LoI is to express in writing will of parties to explore together items they agreed to, and to declare officially that parties know each other and are negotiating. Usually final agreements resulting from LoIs take form of separate, legally binding contracts. LoIs are usually “soft” documents in terms of their legal power, can be general in terms of what they express, but still provide formal proof that parties are looking into more detailed ways of future cooperation.

You might find different examples and naming conventions for letters of intent, such as declarations of cooperation (DoC), memoranda of understanding (MoU), but what is common for all of them is that they are signed to declare intentions, which does not always have to  be finalized. Typical letter of intent should cover purposes for expressing intent by parties, scope and responsibilities of parties, organization and governance including representatives, and clauses such as non-binding effects, intellectual property, and confidentiality. You might find some examples of such documents in this place.

Letters of intent are not only signed with expected, future customers. Deriving from lean start-up approach we wrote about before, to lessen the costs of operations for start-up, letters of intent can also be signed with parties interested in running trials of products, services or solutions that are under development, parties expressing interest in testing a prototype, or parties interested in distribution of ready goods, services or solutions.

Depending on how advanced a start-up is, purpose section in letters of intent can range from exploration of joint business models, through detailed ways of cooperation in business development, even to declaring pre-orders once product, service or solution start-up is working on is ready (which is pretty strong confirmation of demand on start-up’s offering). LoI can also help a start-up to play the long game with big companies, which intent could be to find fit in cooperation model within agreed period of time.

To structure potential discussions on business models and to name them in your LoI you take a look into over 50 business models elaborated on by O. Gassmann, K. Frankbenberger and M. Csik in “The St. Gallen Business Model Navigator”, and also nearly 150 business innovation tactics shared by by L. Keeley, H. Walters, R. Pikkel and B. Quinn in “Ten Types of Innovation: The Discipline of Building Breakthroughs”.

Elaborated proofs can supplement another “stamps” looked for by investors such as certificates of attendance or completion a start-up acceleration programme or awards received from relevant communities or bodies. Altogether, they minimize perceived investment risk.

Having letters of intent signed by a start-up with couple of expected customers proves to potential investors that start-up’s offering raises interest, and demand for starts up’s value proposition is validated. These aspects might positively affect start-up valuation in its pre-market phase, which we wrote about some time ago.

Another way to demonstrate collaboration maturity of a start-up is to be able to license in part  know-how or technology needed, especially if it’s more beneficial than inventing new know-how or technology. Licensing-in, or in other words purchasing part of know-how or technology from existing entity can impact on perceived value of a start-up and foundations of its business (especially if part of know-how or technology is purchased from reputable entity). Finding entities offering know-how or technology of start-up’s interest should be part of state of the art analysis performed at early stage of product, service or solution development done with sources such as registered intellectual property databases we wrote about earlier.

Searching for a  right licensing-in partner through research queries in intellectual property databases can also lead to identification of potential customers and business partners. Licensing can also be done the other way around – in licensing-out form: from a start-up to external parties. It can make sense if a start-up has intellectual property, which is properly protected and can be licensed out without harm to future strategic position and profits of a start-up. Licensing out a part of know-how or technology can become separate stream of revenues needed at early development stage. Licensing agreements usually define fields of use of know-how or technology licensed out, rights which are granted, and rights which are retained (which ca be e.g. further research and development right to the subject of license). Therefore, rights to the same invention can be licensed out for multiple contexts and expected usages to many external parties. You can find supportive resources relating to licensing at website of MIT Technology Licensing Office in this place.

The last collaboration strategy we would like to briefly deliberate upon is outsourcing. Outsourcing usually relates to contracting out part of activities of an enterprise, which are not distinguishing in terms of capabilities represented by an enterprise itself. However in context of a start-up contracting out part of work to specialized organizations can again be a factor determining perceived value through teaming up with specialized partners. This can occur if parties contracted out demonstrate excellence in what they do and are responsible for resource-effective delivery of elements of product, service or solution offered by a start-up, belong to collective research organization (such as TNO, Fraunhofer, VTT), or specialize in rapid prototyping and production (such as RDLabs).

Collaboration strategies we have presented can take form of formalized expression of declared will, licensing-in and licensing-out agreements, outsourcing contracts, awards, certificates of attendance, or completion of relevant programs. Demonstrating ability to collaborate decreases risk of doing business with a start-up, impacts on chances to attract investors or being awarded a grant by grants awarding institutions. So which collaboration strategy is for you?