When startups and car OEMs conclude that the benefits of working together will outweigh the risks, how do they ensure a successful partnership?
The ecosystem disruptions wrought by ADAS and AV development have made the automotive-semiconductor market more hospitable to startups. This four-part series explores the contextual drivers of the recent increase in startup activity, the challenges these new players will face as they build their businesses, strategies for success, and the potential impact of the Covid-19 pandemic on the startup trend going forward. This is the Part 3 of a four-part series on Chip Startups are Gaining Traction in Auto Industry.
Strategies for successful partnerships
Automotive companies implement strict internal rules and procedures so that they can meet the stringent external requirements and regulations governing their industry. Those corporate rules and procedures will act like white blood cells attacking an allergen when they run up against a startup that doesn’t quite fit the established ways of working.
So when startups and car OEMs or Tier 1’s conclude that the benefits of working together will outweigh the risks, how do they ensure a successful partnership that protects their respective interests?
What established companies can do
The larger company will presumably have weighed the pros and cons of working with a startup before taking the leap of faith and entering a full-blown engagement. Nonetheless, it is generally a good idea to have a strong advocate for the relationship within the organization. The higher up this advocate resides, the better. Once the companies engage with each other, the corporation’s immune system will kick in with a vengeance. A strong advocate can help suppress the allergic reaction and encourage the organization to be a bit more flexible with some of the less critical processes.
There are some specific measures that larger organizations can take to mitigate the risks of doing business with a startup. For example, to protect themselves from the possibility that a new supplier will go out of business, large companies can exert their negotiating power to require startups to put relevant IP in escrow. Such escrow agreements should not be structured as an exclusive transfer of IP to the larger company, but as a way to provide the customer with the legal non-exclusive means of developing the technology themselves or sourcing it from an alternative supplier in the event that the startup ceases operations.
Similarly, the risks associated with a possible acquisition of the startup can be managed by writing contracts so that they must be honored by the acquiring company, even if that company is a competitor.
Ultimately, the larger company’s broader support organizations will also need to buy in to the relationship. The support infrastructure can help to ensure enterprise software interoperability, from design and development to order management. The infrastructure can support the startup’s quality processes; it can even ensure there are sufficient firewalls to prevent IP leakage, thereby protecting the larger company against liabilities and supporting the successful development of the smaller company’s business.
If the support organizations are not on-board with the relationship, however, all of these systems and processes are potential sources of friction and excuses for inertia. Therefore, it is critical that the relationship advocate either be high up in the organization or be very skilled at getting the buy-in of the company’s infrastructure.
What startups can do
For their part, startups should also have some strategies for success when entering relationships in which the balance of power is clearly tipped against them. First, they must have confidence that they are dealing with the right people on the other side.
Less experienced startups will tend to grab on to any relationship they can. However, they should recognize that many Tier 1s and OEMs have established innovation centers dedicated to working with startups. Often, those innovation centers are decoupled from the core production-oriented divisions of the companies.
Furthermore, there are any number of reasons why a well-intentioned employee at a large company — someone who doesn’t necessarily have the ability to secure the buy-in of the rest of the organization —might take an active interest in a technology startup. When such an employee becomes the main point of contact for the startup, the smaller company risks burning precious resources on science projects and tire-kicking exercises with little hope of generating meaningful revenue. This risk is especially acute when the startup would otherwise be struggling to demonstrate traction to its stakeholders.
Of course, if an inexperienced startup does fall into this “relationship trap,” it can still turn the situation into a positive if they recognize it early enough. After all, the startup has successfully managed to get a foot in the door. Through some careful political maneuvering, the startup should be able to identify additional advocates within the larger company and even have their original point of contact act as a coach in establishing relationships with these new advocates. Having an experienced sales executive on the team can go a long way toward avoiding some of the most common traps and navigating the political minefields on the customer side.
Entrepreneurs should also do their research to understand the larger partner’s track record in dealing with startups. Some big companies have earned a reputation for “innovation mining,” or extracting innovative ideas and technology and then discarding the partnership, while others are known for doing talent “acquihires,” in which they acquire the startup at a significant discount because they ostensibly are only interested in the employees and not in the actual products or technology.1 An ideal corporate partner should have established methodologies for adopting innovative external technology while simultaneously working constructively with the startups to help them through the challenges associated with becoming a new supplier to the automotive industry.
Read the contract
Even though smaller companies may not be in the strongest negotiating position, especially when dealing directly with the large car OEMs and major Tier 1 suppliers, they should still review contracts with extreme care. Startups will often feel pressured to accept whatever terms are put on the table, but they should vet those terms scrupulously, paying special attention to clauses dealing with IP protection and payment terms. Payment terms of 180 days are not uncommon in the automotive industry. For a semiconductor startup, which incurs the bulk of the cost of goods sold weeks before it ships the finished product to a customer, such payment terms can place a heavy strain on the cash flow of the business.
During negotiations, startups should understand the competitive landscape well enough to know whether they are just being used to drive down the prices at established suppliers. More important, entrepreneurs should clearly understand their true source of value to the larger company and be prepared to hold the line on that value.
While startups have to work hard to operate according to the automotive industry’s established rules and norms for quality and operational control, they must never be tempted to compromise on the differentiators that make them unique.