50 Ways, Part 2: The Part Where We Offer You Advice
In my previous blog post -- which I gave a clever title and then promptly ran out of cleverness for titles -- I wrote about several ways that a startup, with a promising technology and a great relationship with an established strategic partner, can fail to have a successful commercial outcome. Here’s a summary:
Mis-timing the market: Developing, scaling up, and commercializing the technology takes longer than anticipated. In the meantime, the market moves on, or competitive entrants obviate the need for the product.
Losing your champion: The principal ally at your corporate partner -- the one who believes in your technology and has bought into the vision of where it fits in their product strategy -- leaves for a new role or a new company, putting the future of your collaboration in doubt.
Not getting buy-in from marketing or product management: You focus like a laser beam on building the case for your innovation within your partner’s R&D organization, while not getting buy-in from other functions (marketing, production, sales).
Being replaced by other strategic options: Your strategic partner decides to pursue a different technology or alternate path (internal development, competing external development partnership, acquisition, etc.) to address the market opportunity.
Overlooking mission-critical tests: You or your partner omit key tasks from the protocols through which you’ve run your product, leading it to fail in larger-scale testing runs.
Each of these failure modes can be tough pills to swallow. Even the most successful product developers at large companies have experienced many of them in their careers. They might even tell you a few good stories!
Working with commercial partners to address critical market opportunities is one of the most important steps you can take to enable the successful commercialization of your technology. The challenge is that product development gets derailed by these and other pitfalls all the time -- much more frequently than new products actually get to market. The good news is you can significantly reduce the risk of encountering these hazards -- or mitigate the damage to your startup if you do run into one -- by taking calculated steps before and during your collaboration with a commercial partner.
I’ll break these steps into three categories: 1) general partnership strategy, 2) potentially useful agreement terms, and 3) management of the relationship with your partner.
Pursuing an effective partnership strategy
The most important step you can take to mitigate the risk of an unsuccessful corporate partnership is to form several of them running in parallel. This approach is easiest if you have a platform technology -- one that can address needs in several markets. For example, Fluid Efficiency (one of Rhapsody’s portfolio companies) is developing a technology that can be useful in applications in multiple hydrocarbon fluids -- motor oil, crude oil, hydraulic fluid, etc. It is fairly straightforward in this case to work with different commercial partners simultaneously to pursue a variety of different products.
But what if you don’t have a platform technology? What if there is only one market for which your product will be relevant? Then you need to be a little more creative by parsing the market by geography, go-to-market channel (OEM vs. aftermarket automotive, for example), or business model implementation -- e.g., one partner to sell the product and one to run a service-offering related to the product. The goal is to ensure that if one piece of the Jenga tower is removed by the cruel hand of fate, the entire tower doesn’t come toppling down.
Putting in place the right agreement terms
If you’re planning on working with a commercial partner on some aspect of your technology or product, that work will be governed by some form of agreement. Whether it’s a material transfer agreement (MTA), joint development agreement (JDA), sponsored research agreement (SRA), or some other acronym, this agreement is the most useful tool you have as a startup CEO for mitigating the risks associated with potential failure to launch. There are several agreement terms you can pursue, none of which is likely to create a significant burden for your commercial partner if handled correctly. Note (importantly) that I am not an attorney and am not trying to provide legal advice in any form.
First, to enable your de-risked general partnership strategy, pay careful attention when scoping the field of the agreement. Define the field so you provide your partner with the coverage they need to ensure their interests are protected in the market/geography/technology space for which you are developing the product with them -- but provide yourself with enough space to pursue parallel, non-competitive (within the definition of the field) opportunities.
Second, you can and probably ought to incorporate commercialization milestones into the agreement. Your partner may push to include technical development milestones triggering additional payments in order to ensure their investment is moving the ball down the field toward the end zone. In this same vein, you should make sure they are living up to their end of the bargain. Many companies use generally standardized product development roadmaps; in this case, finding the right milestones to include in the agreement is easy since they are well known throughout the partner organization and are likely to be used as metrics to gauge the progress of product development anyway. Otherwise, you can use concrete events -- like transition to pilot-scale production, implementation of long-term or qualification testing, etc. -- or requirements for your partner to apply minimum levels of investment for marketing or manufacturing towards your product. Just make sure to choose milestones which are easy to verify and track. If the partner lags behind the commercialization milestones, the agreement should provide you with the option to restore your rights in the field (note this option may not be free, however, since your partner has likely paid you to develop the product). Milestone metrics are indispensable for reducing the risk of your partner taking longer to get to market than anticipated, your champion transitioning to a new role, or the partner pursuing a different strategic option to address the market need your technology targets.
Similarly, you can also incorporate sales milestones into the agreement. For example, you can stipulate that the partner achieve a certain level of sales within a certain period of time -- or provide you with a minimum royalty payment -- in order to retain rights in the field.
Finally, you can include a term that dictates what happens in the event the partner acquires or divests businesses or assets that might be material to the product you’re developing. While this is not an everyday occurrence, it is by no means impossible and could be critical to commercializing technology in the field. As I mentioned in Part 1, I previously led commercial business development efforts at a product co-development company called Nano Terra. We worked with several partners whose business units were acquired by competitors during the course of a joint development program, or were acquired by private equity companies focused on maximizing the value of the existing product portfolio, or who acquired technologies or products during or after the program that competed head-to-head with what Nano Terra was developing. In each of these cases, the path to commercialization for the product Nano Terra was developing became significantly more difficult.
Managing the relationship with your commercial partners
Large corporations are complex entities with their own internal politics, potentially complicated organizational structures, and (usually) highly engineered processes. Setting yourself and your technology up for success requires the ability to find the right levers to pull, and to pull them at the right times.
If you’ve successfully negotiated an agreement with a commercial partner, you’ve already found at least one ally within that organization who believes your technology has the promise to impact their business, and you’ve already navigated your partner’s legal group (which, at some large companies, is no small feat). These are important starting points to building the kind of relationship necessary to get your product to market.
The most important step you can take in the management of the relationship with your commercial partner is to expand the awareness of your technology or product within the partner organization -- both vertically within a function, and horizontally across functions. If your key champion is an R&D manager, find ways to meet his or her boss, and his or her boss’s boss. Offer to attend project updates and reviews (in person or via tele- or video-conference) or to provide technology briefings to the partner’s R&D community. Getting more people passionate about what you’re doing will insulate your program against the risks your project is left rudderless if your champion is no longer in a position of influence, and will provide you with alternative avenues for funding should budgets be overspent or finances run dry. The more people who believe in your special technology, the more people will be there to pound the table for your program when the going gets tough.
It is also to your significant advantage to build awareness, understanding, and enthusiasm for your program within as many functions at your partner company as possible. While an R&D head can choose to fund a program forever, the real money for your company will come from commercial sales -- and that only happens if the business unit owner decides it should happen, if manufacturing implements it at scale, if sales is motivated to move product, if marketing is excited to roll it out, etc. You should regularly request your key contacts introduce you to other functions. Even if the technology is too early-stage for manufacturing scale-up, or is too raw to produce demos the marketing group will be able to work with, it pays to at least make sure those groups know who you are and what you’re doing. Request an introduction -- even an informal one -- and gently press your champion to provide some direct contact on a regular basis with the functions that would be necessary to enable the commercialization of your products. After all, if there are critical issues with your technology that will make it difficult to manufacture at sufficient scale and speed, or there are aspects of your product the marketing group will likely never embrace, it is crucial to know about those issues upfront so you don’t waste time chasing an opportunity that will never materialize.
In the hard tech space in which Rhapsody Venture Partners generally invests (materials, chemicals, process and production technology, robotics, sensors), commercial partnerships are crucial tools that can help you to secure non-dilutive funding to develop your technology, leverage decades of industry expertise, ensure you are carrying out the right tests and setting the right targets, and utilize fully developed supply chains and go-to-market channels. The advice in this blog won’t guarantee you cross the high-wire of commercialization successfully, but it will hopefully help to provide you with a sturdy net should you fall off -- so you can get up and try again.