We often get asked by corporates looking to collaborate with or invest in overseas startups/scaleups how they can maximise their chances of picking the winners (and avoiding the losers) and how to mitigate the risks. For example, is there some sort of checklist?
Are you ready?
The first thing I’d ask is – are you ready? For the purposes of this blog I’m going to assume the answer is yes, which means you have a clear innovation strategy, executive buy-in, champions in key business units, adequate budget and people with, among other things, good English-language skills and experience of working overseas and with startups. If you don’t have the right people, can you plug the gap by hiring or working with a partner?
The checklist
There is no definitive list as every situation is different and some organisations have more experience of working with international startups than others.
But in the 30 years we’ve been putting together deals between Japanese corporates and foreign startups, we’ve developed a checklist of 10 ‘essential items’ which we think is a good starting place and covers most eventualities.
Top 5
The Market. You will have considered this already, but every market is different so it is probably worth asking the questions again: Is there a clear product-market fit? Are they getting the right kind of customer traction? Will it work in the markets you are targeting? Is the market big enough? As part of your research, I would always try to talk to the startup’s current or, if they don’t have any, potential customers.
The Technology. Many technologies developed by startups have not been tested in the real world, so it is imperative that you check that it works! Most corporates will undertake a proof of concept (and again if possible talk to the startup’s customers) and follow that with internal and in-the-field testing with customers.
The Business Model. Founders often select their business model based on past experience, but is it the right one for the product and target market? Are the numbers realistic? Has it been proven? Find out what the competitors are doing and charging, look at adoption and usage metrics, and perhaps suggest alternative or complementary models.
The Competition. Are there better, stronger competitors, perhaps ones that you don’t know about? Check whether the product is differentiated enough by benchmarking it against the competitors’ products. Examine the startup’s competitive strategy? Consider offering resources to help increase differentiation and perhaps, even, working with the competition.
The Team. What is the track record of the founders and do they have the right experience? Do they know how to work internationally and with big organisations like yours? Do background checks on them and their previous projects. Try to spend time with them in a social as well as professional setting. Provide expertise and, if required, consider leadership change.
Other things to consider
Those are our Top 5, but as part of your broader due diligence I would look also at these additional five risk areas:
Operational. When looking at the operational risks, you should consider the company’s internal systems and its ability to scale, as well as its human resources strategy. For example, do they have the talent to expand? Can they retain that talent? How will they train their people and attract new talent?
Intellectual property. Has the company registered its trademarks and does it have patents? How strong and defendable are those patents? What is the risk of the company being sued for trademark or patent infringement?
Solvency. Like any startup, the company you are interested in will need access to capital to fund its growth. To assess the insolvency risks, consider its ‘burn rate’ in the context of the business plan. What funding has it secured to date and what access does it have to funding in the future, for example from venture funds, grant money or debt.
Environmental. What impact – good or bad – could the company’s technology or products have on the environment? Do these fit with your company’s environmental policies, and do they comply with national and international rules and regulations? Could there be ways to make their technology more environmentally friendly?
Political. In the light of recent trade wars and, even, “real” wars, what are the political risks and how can you mitigate these? For example, should you consider joint venturing or setting up your legal entity in a “safer” jurisdiction?
Managed risk is better than no risk
No country has a monopoly on ideas, so it’s important that today’s corporates have a global perspective on open innovation and extend their search for “best-fit” technologies to all corners of the globe, including Europe, North America or even China.
There will, of course, be risks, but provided you follow a process and undertake the due diligence, it is possible to manage these and to pick the winners and avoid the losers. Perhaps the question shouldn’t be – can you afford to take the risk, but rather can you afford not to?