A strong partnership is built, not signed

A strong partnership is built, not signed
March 27, 2019 Benjamin Schmidt, PhD
I have worked at startups for several years now in B2B products. In B2B, it is very common to find a larger corporate entity, MegaCorp, that is already in your startup’s niche or very near it. That means every startup is then asking themselves whether they should partner with the bigger entity, directly compete or exit the market. Tough choices.
In almost any scenario where MegaCorp interacts with a startup, the conversation will at some point turn towards joint IP during a partnering conversation. Let us first look at the scenarios this might be discussed under and then dig into why this is unequivocally bad for both parties.

The Typical MegaCorp Playbook

In many contexts, the larger entity is already in the existing market space and there is a clear mutually beneficial relationship that could be crafted to the benefit of both entities. For instance, maybe the startup has developed a product offering that existing customers of the larger entity could benefit from. That’s a pretty clear partnership opportunity where they act as a channel to those customers.

Seek & Destroy

A strong partnership is built, not signed_MegaCorp Playbook

Alternatively, maybe the startup is starting to disrupt the market the larger entity plays in. A few scenarios might be possible at that point. The first is that the MegaCorp gets nervous and decides it needs to develop it in-house. This is all too common and they use the discussions to discover the startup’s strengths/weaknesses in the hopes of building it themselves. Bad idea. [1]

Disruption

Another scenario with disruption might be that it opens a market segment that is not addressed by the MegaCorp product (price, features, etc.) and so some downmarket segment is now available. This is ideal since the partner has the brand clout to access the other market segments and now there is a product that can fit those customers. [2]

The Return of Joint IP

So why is it that in all of these scenarios, the conversation will turn towards joint IP? Well, the scenario almost always plays out like the following.

A strong partnership is built, not signed_Joint IP

First, you and MegaCorp will establish that there is some interesting overlap in the space and some ways that you might work together. Being a startup, and the fact that the product is still improving (and rapidly), MegaCorp will start to talk about supporting the development of the product. Access to their customers, their experience in the market, the revenue coming from the partnership, would not have been possible without them.
Next, MegaCorp will either imply or directly spell out its motivations for JointIP:
  1. MegaCorp is worried about the ramifications of building a behemoth that could be a friend or a foe.
  2. MegaCorp sees the possibility for your success, which may just propel you to partner with MegaCorp’s competitor if they cannot lock you down.
  3. MegaCorp truly sees itself as the only entity with the knowledge and expertise to develop your IP to its greatest potential.
  4. MegaCorp believes it holds all of the negotiating chips and so they can extract a concession of joint IP which would make competition much more difficult and keep the partnership going.
  5. MegaCorp has some vague sense they could obtain some royalty for future revenue.
Each case is a terrible idea that will ultimately result in bad outcomes for both parties.

The Startup View

First, for the startup. Your IP, your moat, or whatever you want to call it is no longer owned by you. Just imagine for a moment explaining that to your future investors… bad. You just tied your fate to MegaCorp. What about MegaCorp’s competitor? Would they be a superior partner? Well, you will never have a chance to find out now.
And worst of all. What exactly are you getting in this deal? Ideas are valueless, so if that is what MegaCorp is offering then you are getting nothing. Access to customers is useful, but most people just call that revenue. And granting IP rights for customer access is absurd. You could argue that they will help you to refine the product with their expertise. That’s called feedback, so instead just run a survey for your existing customers or call them or anything else. But please do not grant IP rights for feedback that is under the guise of expertise or industry knowledge.

MegaCorp’s View

You have been granted the joint IP provisions. Excellent. You now have full reigns on the startup and know they cannot compete without your expressed permission. Without being too grandiose, you have (at its softest) hindered or (and it harshest) destroyed the business model, the investment prospect, and the startup itself. So you managed to lock down a single entity.
But what about all the others that will eventually encroach into your space?
Your foray into Joint IP was a single-use tactic that missed the strategic considerations. For starters, there is certainly an incumbent in your space that is ready to start disrupting. More will come. Your competitors are coming. It would have been better to partner, develop a closer relationship, engrain yourself into the process and become indispensable to the startup’s success. That is how you win. Not by handicapping what could become your greatest ally and most critical asset.

Competition is Coming

Some startup is ready to start shaking up your industry. More are coming, you can guarantee it. You need them to disrupt the industry and your competitors. IP rights that stifle the scaling of startups disruption to your corporation and industry are not where you’ll win. The best shot MegaCorp has is to be deliberate about pursuing partnerships with startups that are centered around accelerating the startup’s rise to success. Why? Because a good partner has the best position of acquiring them when the time is right.

Summary

It feels awfully tempting to ask (MegaCorp) and harmless to accept (Startup) Joint IP terms when forging a partnership. In reality, it is really a poison pill.
A strong partnership is built, not signed.

Commentary

[1] Unless you are an enormous tech company, this is an unequivocally bad idea. The types of people that disrupt the world do not work at MegaCorp. Your incentives are wrong, your culture, how you build products, etc. etc. etc. Just partner, and own the fact that you cannot do it.
[2] Undoubtedly, this conversation will center around, “We do not want to harm our reputation within the market for offering/differentiating/tarnishing our brand with our existing customers.” Good luck.