Top story: A different kind of VC: How start-ups and companies can drive innovation together
New ways of working together for a stronger future
How can we better combine the fresh ideas of start-ups with the experience and resources of established companies – especially German SMEs? When these two worlds work together effectively, it can be a real “superpower” for Germany’s future.
Why does it often not work?
Collaboration often fails due to an attitude called “not-invented-here”. This means that some companies only focus on their own solutions and reject external ideas. Another obstacle is “paralysis by analysis”: so much time is spent planning and analyzing that nothing moves forward. In addition, many companies focus on doing things right (efficiency) rather than doing the right things (effectiveness).
What ways of working together are there?
There are various models for how companies and start-ups can work together without the company having to invest directly in the start-up. Instead of “venture capital” (risk capital), we are talking here about “venture clienting” – in other words, companies becoming clients of start-ups.
Medium-sized companies with a turnover of less than 500 million euros often do not have the resources to set up their own investment programs for start-ups. In addition, an investment also means responsibility: you have to look after the start-up, support it financially and integrate it into your own processes.
The basic idea is to pool strengths and share the results fairly. Here are three concrete suggestions:
- Joint Development Program: In this form of cooperation, start-ups and companies work together to develop new products, technologies or processes. Both sides contribute their expertise to create innovative solutions. The start-up benefits from the company’s technical, human and financial resources as well as the opportunity to test its products on a larger scale. This model offers the company the opportunity to develop innovations together with an agile partner without having to bear the high costs and risks of in-house development. How can the results be shared? For the company, exclusivity in terms of time, geography and/or content, the use of future licensing income or lower licensing costs are advantageous. For the start-up: down-payments, cost savings or joint marketing of the results.
- Pilot customer programs: Start-ups with in-depth technology expertise often lack user expertise from the field. At the same time, the criteria for purchasing in larger companies are often so strict that young, less solvent start-ups are not recognized as suppliers. This dilemma can be resolved through controlled pilot customer programs. Approaches: (1) Company employees are actively involved in product development (establishment of a customer council), (2) prototypes/MVPs are tested in safe, non-mission-critical environments or (3) start-up employees are sent to companies as part of “secondments” to work on the application. The advantages for the company are early access to technologies, a say in product development, access to personnel and more favorable conditions. In-depth user knowledge, well-known references, product ambassadors and early sales from secondments or beta licenses are essential for the start-up.
- Service for Rev-Share: Companies make unused capacities of their services available to start-ups free of charge or at a heavily discounted rate (at cost) and in return receive a share of future revenues. ProSiebenSat.1 SE is one of the leading providers of these solutions in the media industry. Start-ups receive advertising space at significantly reduced conditions and give up a share of their revenues in return. This has two advantages for the media company: (1) unused advertising space is at least partially monetized and (2) the start-up recognizes the benefits of the advertising space and will continue to purchase it as it grows in the future. The concept can be transferred to numerous companies: contract developers and manufacturers, agencies, sales partners, retailers or software developers.
What should start-ups look out for?
All models offer great opportunities, but also challenges:
- Joint development: Start-ups must take care to maintain their independence and reach fair agreements on the distribution of results.
- Pilot customer programs: There is a risk of adapting too much to the needs of a large customer and becoming less flexible as a result.
- Revenue share: In the short term, you save costs, but in the long term, giving up revenue shares can be expensive.
What should companies look out for?
Companies benefit from new ideas and technologies, but should bear the following points in mind:
- Joint development: There is a risk that the project will not bring the desired success.
- Pilot customer programs: The cost of support and integration can be high.
- Revenue share: If the start-up is not successful, the investment remains without consideration.
Conclusion: collaboration is the key
The models presented show that there are many ways in which start-ups and companies can benefit from each other. Open communication and clear agreements are important in order to avoid misunderstandings. If both sides find the right balance, the result is a win-win situation that promotes innovation and strengthens Germany as a business location.
About atares
atares is the digital M&A boutique for technology-driven midcap companies in Germany and sees itself as a pioneer for the digitalization of the M&A industry. Founded in 2001, atares has advised more than 200 transactions in more than 20 years. The focus is on transaction volumes between EUR 10 and 100 million of mostly owner-managed companies. Since November 2023, the company formerly known as Proventis Partners, Munich, has been operating under the new company name atares GmbH. Atares has long-standing personal contacts with corporate and Private Equity investors and M&A advisors in Europe, North and South America and Asia. Highly specialized expertise for the market, empathy for people and passion make atares a sought-after M&A partner for the tech champions of tomorrow. More than 20 employees at atares in Munich and Düsseldorf manage their projects via the in-house developed digital M&A dealfloor (dealfloor.co) – for value-adding, efficient transactions with the best user experience.
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