I recently participated in a webinar with Bob Ackerman of Allegis Capital, Mark Klopp of BellMason Group (formerly head of Eastman Chemical's venture capital program) and Claudia Fan Munce of IBM (Managing Director of their venture program). I was included because of my experience in working with startups as well as corporate investors (I run DLA Piper's Corporate Venture practice). The webinar addressed the issues of dealing with corporations as partners and as investors.
Large corporations are the major customers and the most common exit strategy for venture-backed startups. The webinar was a very valuable summary of how to deal with corporations as partners and potential investors. For example, Bob Ackerman described how IronPort was able to obtain a dominant position in the French market by partnering with Societe Generale.
As I noted in the discussion, startups need to be careful about being too reliant on large corporations for critical functions: large corporations may decide that a market is no longer attractive and leave them and the startup may be left in a very difficult position. For example, we worked with one startup who was making lead/acid batteries and relied upon a corporate partner to manufacture the batteries. Lead/acid batteries are difficult to manufacture and require careful attention to environmental issues. They are not popular neighbors, so the corporate partner was very important to the startup. Working with our client, we negotiated a six month notice period prior to termination of the manufacturing agreement. About a year later, the corporate partner unexpectedly declared that they were leaving the manufacturing business and told the startup that they were shutting down the factory in thirty days. We reminded them of the six month notice period and were able to find an alternative manufacturer.
Startups also need to understand the different expectations of large corporations: large corporations value predictability and planning. Startups, on the other hand, change their products and strategies. This mismatch of business cultures and expectations needs to be recognized and managed.
And corporate investors are very different from traditional venture capital investors. Corporate investors are frequently very concerned about the potential sale of their portfolio companies to "competitors", a term which can vary over time. Startups and traditional venture capital investors are focused on economic returns. Consequently, startups need to be careful that their corporate investors do not control the potential sale of the startup such as by owning a majority of a series of preferred stock which has a protective provision providing approval rights over the sale of the company.
If you are interested in learning more you can get more information on obtaining a CD of the webinar at: http://events.dowjones.com/webinars/20080314.html
