Startup proof-of-concept is not a dirty word

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Introduction

One of us recently spoke with a startup advisor about problems we have seen with startup proof-of-concept pilots/trials for corporate incumbents.  He reported similar experiences, saying: “You know, with startups in [country x], PoC is now a dirty word.”

 Why is that? 

 The problem is a fundamental mismatch of expectations between startups and corporates as to what is a fair course of dealing in connection with a trial or pilot. The discussion below outlines our view of this problem, and also introduces our “best practices” pilot/trial agreement as part of a possible solution

 The Startup Perspective

 Startups carry out pilots to get validation and to get contracts. And the two are interlinked. 

 While startups may be paid for pilots, those payments typically are low (not, for example, billed at what contractor firms or incumbent corporations would typically bill for a similar exercise). In any case, startup resources are stretched. Performing a pilot for a corporate typically requires the startup to tailor its service, or carry out an integration, to meet the needs of the corporate. Consequently, the startup’s opportunity cost for a pilot is very high, particularly when the startup is at early stage. The performance of a pilot for company A may well rule out its ability to do a pilot for company B.

 A pilot that fails to lead to a contract does not simply fail to generate startup revenue. If publicly visible, the startup may also need to explain to other corporates why it didn’t get a contract. That is fair enough where the pilot fails to meet the agreed goals – but it is not fair where the KPI’s are met, unless the startup had no reason to expect a contract.

 The Corporate Perspective

 Executives in corporate incumbents don’t live in the world of the startup.   They don’t necessarily understand (or care about) the resource limitations of the startup, or its opportunity costs. They frequently fail to appreciate that the pilot pricing offered to the corporate does not reflect a true price for the work performed. 

 A corporate may do lots of pilots, sometimes simply to get a sense of what innovations are coming along rather than with a view to implementation. Additionally, a lower level employee with some operating budget may be in a position to pursue a low-cost pilot, without having held any discussion with relevant business leads in the corporate as to what should happen if the pilot is successful.

 The Expectation Gap

There is nothing inherently wrong with a corporate doing lots of pilots. There is nothing inherently wrong in doing a pilot without forming a clear view as to a future contract with the startup. 

 However, it is wrong, and unfair, if the corporate does not clearly set out, at least in a non-binding way, whether or not the startup should have any expectation of a contract if it achieves the goals of the PoC.

 What the Startup Should Do

 Of course, the startup should do its own due diligence. It should ask its corporate counterparties about the level of senior engagement with the project, including level of engagement with the relevant business units, who has signed off, and who will need to sign off to enter into a contract. 

 The startup also needs to understand the extent to which the future of the project may depend on one or more champions, whose future tenure at that corporate may not be certain. 

 The startup should also investigate the experience of the corporate in working with startups – information should be available from the corporate itself and from third parties as to how the corporate has behaved, and whether pilots have turned into contracts. Needless to say, the startup should also assess the corporate’s general reputation for acting with integrity in dealing with startups.

 That being said, many startups, particularly those operated by first time entrepreneurs, simply lack the sophistication to ask the right questions. Additionally, at very early stage, many startups are technically driven and cannot afford experienced commercial talent. These issues, and the related harms, can be magnified if the startup founders are from jurisdictions where there is less experience in managing relationships of this kind.

 So, the burden of getting this right should not fall simply on the side of the startup.

 How Corporates Should Behave

 Responsible corporate incumbents need to ensure that there is clear communication with the startup as to how the corporate will assess performance against the key KPI’s, and what the startup should expect if the KPI’s are met. Key additional points include those discussed above, as well as the corporate’s timeline for any implementation and whether the corporate is also considering alternative solutions/providers. 

 From the corporate’s perspective, appropriate behaviour with the startup is not only fair but also reputationally important.

 The Role of Documentation

 The possible mismatch of expectations can be partially addressed through clear legal documentation. A well-structured pilot/trial agreement can set out clear KPI’s, and at least a non-binding statement from the corporate incumbent as to the proposed next steps if the pilot/trial achieves those objectives.

 For this reason, the Corporate Innovation working group of Tech London Advocates/Global Tech Advocates has prepared what we consider to be a “best practices” standard form pilot/trial agreement. It can be found at DOWNLOAD HERE

 Tech London Advocates, and its affiliate Global Tech Advocates, is an international volunteer group focused on assisting the tech sector. Our working group includes members from corporate innovation groups, startups, and advisors involved with corporate-startup collaboration.

 We welcome comments from corporate incumbents, startups and other interested parties on this standard form. This document is free to use, and parties can also modify it to suit their needs.

 Let’s all make sure that PoC is not a dirty word.

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   This discussion is not intended to provide legal or tax advice, and no legal, tax or business decision should be based on its contents. If you have any questions or comments, feel free to contact robert.mollen@friedfrank.com or via LinkedIn here.

You will find Bob’s other blogs for emerging and growth companies and early stage investors on US issues, international expansion and early stage financing indexed here:  http://bit.ly/StartupGuidesIndex

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