Sourcing and Partnering with Startups to Build New Products: Part I

Written by Jonathan Poor, Innovation Analyst at Quesnay

Quesnay is a boutique management consulting firm that helps Fortune 500 corporations identify and partner with startups to build new products and accelerate their innovation. In this three-part blog series, I’ll guide you through the process of:

Part I: Sourcing and identifying the right startups to partner with

Part II: Establishing the parameters and success metrics for the partnership

Part III: Successfully building and launching your product with a startup

I've tried my best to avoid TL;DR so I hope each post in this series helps your organization establish best practices and have a better understanding of the startup ecosystem.

Part I: Sourcing and identifying the right startups to partner with

© Quesnay Inc.

© Quesnay Inc.

Before you begin sourcing startups, you must take a step back to outline a clear partnership strategy and define use cases to prioritize partnership opportunities. Once this is set, you can dive into our four-step process detailed below - starting broad and then zooming into potential partners.

Sourcing Startups like a VC

The first step you’ll need to take is developing a sourcing strategy. At Quesnay we use four separate channels for sourcing:

When developing your sourcing channels, be sure to create a diverse network of people that includes corporate executives, VCs, lawyers etc. and not just startup founders. This will allow you to cast a wider net when searching for startups to partner with. Developing a sourcing strategy is a time consuming process and requires leg work on your behalf, so don’t expect to see immediate results. This is a long term strategy that will pay dividends once established.

Initial Screening Framework

Source: Brown, T. (2009). Change by design.

Source: Brown, T. (2009). Change by design.

Once you have established your sourcing channels it is necessary to define your screening and evaluation criteria. Screening criteria helps to rapidly shortlist startups to a smaller list that will be evaluated further. We have been using the Feasibility, Desirability, Viability framework to ask initial startup screening questions.

Each question should be binary (Pass/Fail) to guarantee the process is efficient. Questions to ask:

  • Desirability — Does this partner’s product/solution address a unique customer need?

  • Feasibility — Can this partner go to market rapidly (e.g. APIs available, current market reach)?

  • Viability — Does this partner have a market-ready solution that’s generating revenue?

You can modify the screening questions based on your organization’s needs. It is recommended to create a startup tracker in a shared spreadsheet at this stage too.

Further Startup Evaluation Criteria

For the shortlisted startups that clear the screening criteria, it is necessary to drill down further to evaluate a startup’s true capabilities. To do this we recommend asking more specific questions that align with your strategic and business objectives. Note, the ability to respond to these questions may require connecting with the startup live and putting a Non-Disclosure Agreement in place to gather additional information. Sample evaluation criteria categories include:

  • Strategic/Financial alignment — How strongly is the startup’s product aligned with our long-term vision and strategy?

  • Technology — How many users can the startup’s back-end platform efficiently support?

  • Partnership — How many large corporations have the startup partnered with in the past?

  • Sales/Marketing — Is the startup a market leader in its category?

The scoring for these criteria is usually more nuanced than the binary screening criteria to capture degree of complexity and/or alignment with your organization’s objectives.

The startups that score highly using these criteria should then go through the defined internal governance process to confirm the ones to move forward with to create a more formal partnership agreement. We recommend creating a detailed company profile for each of the shortlisted startups, using a consistent template. This will help you refine the value proposition in partnering with the startup so you can have a consistent narrative for internal stakeholder conversations.

Negotiating Terms and Closing the Deal

Once there is internal alignment on the startups to move forward with, the negotiation and contract development process with each startup begins. To better negotiate terms, you should first understand how other corporations are partnering with startups (business model, services offered), decide on key objectives for the partnership, and talk with other business unit owners to receive their input on desired outcomes from the partnership. Taking these steps will allow you to focus the discussion with each startup you negotiate with.

After completing your due diligence, you will need to decide on the type of agreement you are entering, particularly the type of business model and revenue sharing terms. You may also consider providing incentives to the partner if they meet or exceed deadlines. Disincentives aren’t recommended early on given that partners must iterate and learn while building the product. KPIs and success metrics should also be discussed while negotiating terms, and this is outlined in Part II of my blog series. To finalize negotiations be sure to discuss intellectual property rights and exclusivity terms if they apply.

All the information I’ve provided so far will help you when creating your startup partnership strategy. Remember to stay focused on your organization’s needs, and what you are trying to achieve through your partnerships while sourcing startups. In my next post, I’ll explain how to establish parameters and success metrics with each of the startups you have decided to partner with.
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