How To Cross the Startup-Corporate Divide With Novel Climate Technologies
A recent ADL Ventures run “innovation summit” at PG&E, America’s largest investor-owned utility, featured a keynote from Elon Musk and attracted an astounding 600+ applications for their upcoming Pitchfest. How can other corporations unlock the power of start-up partnerships at such a massive scale, and how do start-ups navigate this highly selective and often intricate process?
Last Thursday at Greentown Labs in Somerville, MA we were thrilled to highlight many of the strategies and subtle details that can make or break a successful engagement between a startup and a legacy sector corporate. On the panel moderated by ADL Partner Chris Richardson, we hosted Boston-area climate leaders such as Autodesk, Azolla Ventures, Eni Next, and Aeroshield Materials, who each brought diverse and unique perspectives to this topic.
Though large funding rounds often get all the attention, most climate ventures will ultimately live or die based on whether or not they can successfully partner with incumbents in their sectors. Start-ups build immense value in overcoming objections and setting up conditional commitments for adoption of their technology, while corporates will see returns on deployment and scale-up partnerships much faster than on investments with long exit timeframes.
In just 5 years since winning the first federally funded program to develop scalable partnering mechanisms for corporate / start-up interfacing in climate and sustainability, ADL has helped multi-billion dollar corporations both “spin in” (in an efficient, low-cost manner not requiring M&A) and “spin out” (using otherwise inactive / sidelined technology) novel start-up technologies. Our first open innovation challenge winner from 2019 has now raised >30X the funding of the co-development agreement issued by ADL’s client. A recent spin-out from a major utility closed a seed round and won one of the most prestigious research fellowships in our sector in its first year of formal operations. Here is a quick list of key thoughts to consider when trying to bridge that critical divide between innovative technology-based startups and incumbent corporations:
1) Honing in on corporate problem statements requires a multi-faceted market engagement and stakeholder roadmap: Many early-stage start-ups are technically focused (particularly if licensing tech out of a university) and aren’t naturally programmed to understand complex and multi-layered corporate problem statements. Having the discipline to do the discovery and establish a supporting “consortium” of buyers, end users and other stakeholders, not just a simple cost / performance trade-off or price point, is necessary. However, that network on its own is insufficient for attracting firm commitments from corporate partners. With many industry incumbents, there is a strong focus on core products and existing product lines, plus insufficient venturing bandwidth and experience (except large-cap players >$10-20B). A start-up must address a pressing problem statement that has been honed by billions of dollars and decades worth of market experience. Addressing that problem statement often includes the near-impossible task of balancing both upside and risk mitigation, particularly avoiding massive disruption of existing channels or other infrastructure (financing, installation, etc.). Dig in and find the influence and pain points which truly drive interest.
2) Don’t confuse corporate investment with corporate partnerships or sales: Make sure you're clear whether you’re looking for an investment or a partnership. An investment can often come earlier and easier than a partnership, because many corporations with venturing capabilities have investment funds which are actively in the market sourcing deals. However, the best start-ups are able to keep the investment and partnering threads separate and utilize good judgment in how and when to strategically add someone to their cap table. The reality is that money is not just money when a high cost of capital and potential ownership control is involved. Investors are forever (at least until a recap, which is even more disruptive than a standard funding round), whereas customers or manufacturing partners can be more temporary if bound to you via agreements that offer both sides flexibility. If you do pursue the investing route, it’s important to note the impact on perception of having a corporation leading your fundraising round – you risk the perception that you are beholden to them. Consider giving them a passive role (e.g. co-investor, no-board seat), and possibly even balancing out their interests as a stakeholder with two to three other adjacent corporations if possible.
3) Diligently drive discussions toward tangible “if-then” statements and real outcomes: Even when a fit exists, both finding a champion at your corporate prospect and overcoming resistance (not having a "no" is often more important than having a strong "yes") takes time and effort that neither the start-up (due to cash runway and staffing) nor the corporate (due to competing near-term priorities) have. In "Cleantech 1.0," CEOs often compensated by simply raising more venture and growth funding, if available, to scale capital-intensive ventures without corporate support (sometimes pressured by investors who perceived corporate support as insufficiently useful or valuable, even when available). In today’s vastly different "Cleantech 2.0” environment where corporate and grant interest has increased dramatically while the investment community has become much more experienced and selective, the start-up CEO needs to be 99% focused on identifying and qualifying strategic sources of capital, while patiently and systematically driving opportunities to closure. Don’t be afraid to talk about money right away, including who makes those decisions, who pays and how. You’re informed much earlier, and a quick “no” is infinitely better than a perpetual “maybe” which continues to drain bandwidth.
4) Start small and use those incremental measures of progress as building blocks toward greater credibility and scale: ADL often encourages both corporate clients and start-ups to seek what’s called a “contingent purchase order,” in which some or all of the purchase commitment may be subject to price, availability, market conditions, and other variables. As noted during the panel, investors now consider the contingent P.O. a very strong early demonstration of buy-in. Savvy investors and partners realize that major corporations often need to do months of cross-functional work to get comfortable putting their name and reputation on paper with a signature next to yours. Appreciate the value of that signal, and use it to build towards more. Similarly, for joint development agreements where IP and other complexities may come into play for larger scopes of work, don’t hesitate to start with a "Phase 0" just to plan the other phases. By breaking the partnership into smaller steps, it feels less risky for the corporate, and they may be less likely to ask for reciprocal actions that are show-stoppers for start-ups.
5) Find ways to fairly reward the corporate for the risk they're taking on a pilot or first-customer agreement: Whether it’s cost-plus pricing on early orders or specific exclusivity within a limited application / channel, the corporate partner is looking for commitment signals (just like you are from them) that you are committed to growing a strategic relationship. Recognize that some are better equipped to take those small carrots and run with you right away, and don’t go immediately for the “home run” when that may not be attainable or beneficial for your situation. For instance, when it comes to working with utilities, municipal electric companies and electrical co-ops (mid-caps) can be attractive places to test out new technology, and are much quicker to act than investor-owned utilities (large caps). They often have less bureaucratic vendor onboarding requirements and more favorable cash flow/payment terms. Each sector has a unique set of early adopters. As your product or service evolves, refresh your research from item #1 to hone in on those prospects.
Chris Richardson is a Partner at ADL and the head of our Energy & Transportation practices and Ryan Dunfee is an Engagement Manager at ADL.