by Sarah Anderson
Strategic partnerships between corporations and company creation funds are an important component of the thriving company creation ecosystem. Company creation funds give corporations access to the advantages of fast and efficient 0-to-1 builds and strategic partners give company creators access to ideas, early customers, and scale. However, these partnerships are often poorly structured and have a checkered history of success for two main reasons:
1) Many strategic partners work with company creators on a fee for services basis. This is largely due to internal structures, legal complexities, and IP ownership. However, fee for services arrangements lack mutual incentives to build big, successful companies, and instead incentivize hours spent and costs reimbursed. There is simply no upside for the builders other than covering operational expenses.
2) In addition, strategic partners tend to want a solution that is exclusive to their use. Thus, the builders are building for one customer. There are very few new products or services that drive outlier returns with one customer. While one customer can drive early scale, it is not a sustainable growth strategy. The struggle of embedding a still early start-up within a large corporate environment tends to kill the product or service before it has a chance to get to scale and limits the upside growth beyond a single customer use case.
Conversely, the potential advantages of partnerships between corporations and company creation funds are vast and varied, and these partnerships can be structured to succeed for both entities. Beyond the plagued fee-for-services arrangement, company creation funds are working with strategic partners to successfully generate equity value through:
- Ideation: Strategic partners experience unique industry pain points, which provide valuable insights into new solutions that can help industries advance beyond those pain points. As strategic partners surface needs and interests, it allows new company creators to spend more mindshare on those areas in order to find novel solutions. Strategic partners represent the second largest source of ideas for company creation funds after internal teams.
- Testing: Strategic partners also provide early testing centers for new capabilities, especially those that solve existing pain points. This can readily identify weaknesses in the capability to provide fast iteration and optimization of novel solutions.
- Efficiency in Scale: Strategic partners also provide access to embedded distribution channels and beta customers. Company creation funds that have existing strategic partners benefit the most from the efficient scalability that comes with large, early customers.
- Strategic Capital: Many strategic partners have the capability of providing follow-on capital at later stages. Usually this is beyond seed and into early scale rounds. Having access to this early capital provides benefits of additional business development and customer adoption.
- Exit Opportunities: Probably the most obvious advantage is the ability of strategic partners to acquire portfolio companies. Given these builds are rigorously tested with high growth potential, they create strong acquisition targets.
We believe strategic partners provide strong advantages to company creation funds as they move through their development cycle from ideation to testing to scale. However, these relationships necessarily need to be structured in a mutually beneficial way to create the significant upside that is possible.