Originally published: NH Business Review
There's no question that an infusion of funding through an investor will provide a nice boost to a balance sheet. But, this type of boost usually comes at a steep price: investors typically want substantial equity interest in the business and a voice in its management. While some businesses definitely need this capital input, many enterprises effectively increase their valuation at significantly less cost through a strategic alliance.
The term "strategic alliance" has no established legal definition. It is a loose term for collaboration arrangement among enterprises with complementary skill sets for the purpose of achieving each participant's economic goals. Typical goals are to obtain or enhance technology through joint development or to gain access to advantageous distribution channels, markets or joint manufacturing. The alliances are useful in allocating risk and costs as well as accessing capital, thus bringing values that each participant could not achieve alone or in a typical "buy-sell" arrangement. Below are some practical tips for using the strategic alliance to enhance value and possibly ease the way for future funding or an acquisition:
Strategic alliances that focus on marketing or publicity usually do not build substantial value. A potential investor or acquirer will be expecting your alliances to show validation of your technology or product; access to reliable suppliers and distribution channels or manufacturing efficiencies (e.g. learning curves, ramp up rates).
Patents are usually more valuable to investors and acquirers than trade secrets (unpatented proprietary information). Usually, the major issues for an investor concern whether key technology is patentable, whether a patent is valid and how much time remains on the patent. Patentable technology developed through a Strategic alliance can present the problem of who owns the patent and who has what license rights unless the agreement is carefully drafted. Patent rights can easily be lost inadvertently so patent attorneys should be consulted.
Be wary of strategic alliances with multiple participants. The enforcement of rights and obligations of each party becomes complicated and uncertain if more than two participants are involved. Two party alliances with clearly defined goals and objectively determinable performance requirements will create substantially more value than multi-party arrangements where the rights to...