How established companies can secure game-changing innovations

Smart Business

(by SBN Staff with Justine Kasznica)

There is global consensus that large companies across various sectors need to innovate, be agile and anticipate new technologies, new markets and new demand cycles to stay competitive.

“We are seeing a paradigmatic shift among large companies,” says Justine M. Kasznica, a shareholder at Babst Calland. “Not only are these companies seeking to attract a diverse and innovative workforce, they are pursuing business-optimizing innovation and solutions, which are often found outside their walls.”

Smart Business spoke with Kasznica about how established companies are finding and taking control of technologies that set them up for a bright future.

How does internal innovation offer large companies a competitive advantage?

While large companies have traditionally innovated from within, recently this model has matured. Now large companies are creating R&D labs with a tech transfer capability designed to be more agile than the parent company. These innovation centers have a distinct culture that’s more agile, nimble, able to sustain high growth. In this model, the company funds and owns the innovations outright and can decide the best course of action to bring them to commercial life — as an asset of the company or a spinout entity that licenses the technology from the parent company and grows independently.

What should companies consider when acquiring companies for their technologies?

As an alternative way to innovate, many large companies search for and acquire companies to bring their technology and innovators in-house through M&A. In this model, due diligence is critical. In addition to financial assessment, it requires an evaluation of whatever technology is being purchased and whether the intellectual property (IP) is sufficiently protected. It further requires a review of employment, confidentiality and licensing agreements to ensure that the acquirer will be free to commercialize and develop the acquired technology assets.

How can companies leverage external innovation to add value?

Increasingly, large companies search for and identify technologies and technology companies in the early and high-growth stages outside of their organization and work with them as commercial partners, often as a prelude to acquisition. Using short-term evaluation agreements, large companies can evaluate a particular technology and test its commercial viability through the successful achievement of key performance indicators (KPIs) or other milestone-based criteria. These types of arrangements typically include inbound licensing of the IP.

When entering into a pilot or evaluation agreement, both parties are encouraged to protect their investment in the relationship by setting it up to convert to a long-term agreement if certain performance indicators are met. These KPI ‘gates’ present each party with an ability to shape the relationship, share in the development and enjoy the benefits of the innovative output. They also help each party mitigate the risks of overcommitting, with each gate presenting a chance to walk away.

Of course, contractual safeguards must be put in place to ensure the security of company IP, data and customer information, as well as regulatory compliance and other risk-mitigating protections.

How does strategic investment enable access to new technologies and innovations?

Some large companies establish investment divisions or entities, often run independent of the company, that operate under a venture capital model. These strategic corporate investment groups scour the world for high-growth, disruptive technologies and innovations, which they then invest in. Some corporate venture arms invest in high-growth targets as a way to make money for the company and broaden its value base through revenue. More commonly, they invest in companies developing technologies or innovations that strategically align with the parent company’s interest, where the portfolio company, if successful, becomes an acquisition target for the parent company.

Whatever the approach, large companies should work to understand the innovation landscape and the ways they can leverage it to stay ahead of the competition.

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