Garrigues Digital_

Legal innovation in Industry 4.0




The keys to successful collaboration between startups and large companies

Alejandro Sánchez del Campoof counsel in the Garrigues Startups & Open Innovation area.

In order for a relationship between startups and companies to work it is essential that they spend time understanding each other’s culture, values and needs and focus on complementary aspects. Additionally, contracts governing the relationship between the parties should be in line with the interests at stake and the risks should be distributed adequately. The importance of including clauses to help tackle unexpected situations has come to the fore in the context of COVID-19.

“Innovation department are where startups go to die”. This was one of the most proactive statements of the events organized by the Innovation Center of the Consulate General of Denmark in Silicon Valley, in the context of the Techfestival which was held in Copenhagen in September last year.

The statement may seem a little exaggerated but it reflects the difficulty startups and corporations have in working smoothly together in a way that is mutually beneficial. Theoretically, the idea of open innovation - a term first used by the professor Henry Chesbrough - makes sense for both parties. Startups benefit because they gain access to valuable resources: financing, customers on which they can test their solutions, a distribution network, an international presence, mentoring with experienced executives, etc. Companies in turn receive ideas and disruptive projects, potentially from any corner of the world, which enable them to solve their organizational, technical and business challenges, as well as any other challenges they may face. In the right circumstances an ecosystem is created in which everyone wins.

However, in practice, things tend to be a little more complicated. Some companies create innovation departments but don’t have the budget, strategy or leadership necessary to boost the initiatives. It is what is known as “innovation theater” because the innovation projects appear to have marketing or corporate social responsibility aims in mind. In other cases, innovation departments are not able to connect startups with business units or the relevant individuals at the company, or the decision-making procedures are not as fast and transparent as they should be.

Another recurring problem is the cultural clash: startups tend to think of companies as slow, hierarchical and bureaucratic, yet they are not capable of understanding the importance of internal processes, compliance or the need for a reliable product or service when you are operating on a major scale or in regulated markets. The way risks are dealt with is also different: a startup is fully aware that success involves taking many risks and accepts this as a matter of course. As the company grows, the tendency is to avoid decisions that can endanger the company itself or even the job position.

How could the situation be improved?

In a recent webinar organized by Esade, in which Iñaki Arrola, founder of and Nicolás Moya, head of innovation at Santander Consumer Finance participated, an important idea was floated: elephants and gazelles must learn to move together and to dance without treading on each other’s toes. To achieve this it is essential to spend time understanding each other’s culture, values and needs and focus on complementary aspects.

Once the objectives and use cases are clear, it is necessary to look for the best way of structuring the collaboration. It is usually the corporation that takes the lead. A first step could be to organize a joint event or carry out one or several pilots to test the startup’s product or service in a restricted environment (for example, a small group of employees in a specific city). Another option, one which large companies have increasingly been turning to over the last few years, is to create accelerators or incubators, where they offer different services to startups. As part of this acceleration program, companies can choose to take up a minority stake in the startup’s capital, which continue to be managed by their founders. The final step is the acquisition of a majority holding in the startup’s capital, which from then on becomes just another subsidiary of the large corporation.

Another key to a successful collaboration is for the contracts governing the relationship between the parties to be in line with the interests at stake and to distribute the risks adequately. Large corporations do not always bear this in mind and include exclusivity or preferential sale clauses or other overly burdensome conditions in the specimen agreements regulating accelerators’ incorporation, which causes startups with more potential to lose interest in participating in their ecosystem.

It is essential for the contracts to be flexible in order to adapt to the circumstances involved. We live in a constantly changing environment and it does not look like it is going to become more stable in the short-term. The crisis caused by COVID-19 has taught us the importance of including clauses to help tackle unexpected situations that break the economic balance initially agreed between the contracting parties, such as the MAC (Material Adverse Change) clause, that allows the buyer to cancel its obligation to close the transaction if, between the time the contract was signed and the time of close, an adverse situation arises which has a serious impact on the company that is being purchased.

An additional way of gaining flexibility in collaboration agreements is to go step by step. That is, to first sign an MoU that enables work to start with guarantees, followed by one or several pilots to test the technical and commercial viability of the product or service, and end up with the final contract that regulates in detail all the rights and obligations of the parties and which includes conditions precedent, termination clauses and, in general, formulas to review the conditions that were decisive to enter into the agreement, if a clear imbalance arises, as well as agile methods of resolving the conflicts that will probably arise during the contractual relationship.