3.4 HOW DO WE MAKE OUR CUSTOMER FUND RESEARCH & DEVELOPMENT?
FUNDED DEVELOPMENT
Each startup should establish a product roadmap, describing the various capabilities and modules to be developed over a certain timeline.
Such product roadmap is not static and will pivot in function of market demand and client feedback.
Funded development as described in this Section means the realization of the product roadmap through customer engagements, with such developments being fully or partially funded by the clients of the startup.
Funded development is an often forgotten, but very useful source of (non-dilutive) financing for product development, in addition to the use of operational profits, venture capital and debt financing.
The startup will have the following objectives while developing its products and services in collaboration with the corporate:
• Develop its solution suite by adding capabilities and modules in collaboration with corporate.
• Have its clients fund the development of such capabilities and modules through a services arrangement.
• Safeguard its product roadmap and retain all intellectual property rights to maintain its freedom to operate.
The corporate will have the following objectives while having the startup develop products and services in collaboration with the corporate:
• Ensure the products and services of the startup offer certain additional capabilities not (yet) available.
• Ensure a competitive advantage against competitors by obtaining certain exclusive rights in respect of the developed products and services.
• Alternatively, obtain a compensation for funding the development through discounted fee or other compensatory arrangements.
Funded Development Best Practices
Application of Licensing – Procurement Practices
The best practices for straightforward licensing are equally applicable to funded development arrangements between corporates and startups.
It is critical for startups and scaleups to determine and adhere to a product roadmap.
A roadmap maps out the vision and direction of the product offering and its evolution over time. It is a very useful guiding strategic instrument, which should also be used to determine which (generic) roadmap components must at all times remain owned by the startup or scaleup.
A product roadmap has several ultimate goals:
1.Describe the vision and strategy
2.Provide a guiding document for executing the strategy
3.Get internal stakeholders in alignment
4.Facilitate discussion of options and scenario planning
5.Help communicate to external stakeholders, including customers
Before the prevalence of the agile development methods, a product roadmap underwent much less fluctuation during the product’s lifetime. In the age of agile development, however, a roadmap has become much more of a living document, with far shorter timeframes and more frequent adjustments to accommodate changing priorities and market opportunities.
In a funded development project certain phases of the product roadmap are partially or fully funded by the client.
At The Glue funded development is an instrumental cornerstone of our business model. It allows us to realize our aspiration of accelerated delivery for innovative solutions in the financial services industry. By combining venture capital and customer-funded development we are able to consistently create win-win situations.
For example, the bespoke solutions we deliver to our customers are built on next-generation platform technology and innovative building blocks, financed with venture capital. Our customers win by leveraging the continued evolution of the building blocks that make up their solution. In other words, new customers’ projects drive and partially fund the evolution of existing customers’ projects.
This model of evolutive co-creation and co-funding establishes a deeply vested interest in our customers’ success. The model also contributes to the forging of close and natural relationships that result in strong partnerships, new ventures, equity value creation and new opportunities for our investors.
Stefan Dierckx, Co-Founder The Glue
Paul Grimbers, CEO The Glue
Functionalities and Specifications
The product roadmap should set forth existing and future functionalities and specifications.
One of the main advantages of funded development, is to be able to develop certain modules or versions of the product within a specific client project, thus allowing for the design in function of real-life customer requirements.
Throughout the development and testing phase, it can be immediately determined in real life whether the modules or versions meet or exceed customer expectations.
The main disadvantage of the funded development strategy is that it tends to become difficult to ensure “single source code” control over the product suite. It is inevitable that customizations take place for clients, requiring the maintenance of many different software versions for different clients.
No IP Assignment – Compensation Techniques
For the startup it is much more difficult to argue against a customer that it should retain all IPR related to software or deliverables which have been developed through a funded development project.
Contrary to standard available software, it cannot be stated that the amount paid for software or a deliverable equates to the purchase of a license only. It is not reasonable to expect the corporate to fund the entire development of a work phase and incur development risks as if it is purchasing readily available off the shelf products.
In view of the fact that the modules or versions developed within the context of a customer engagement form part of the roadmap and the startup needs to retain the ability to resell the products and services to other potential clients, the startup will need to offer somethings substantial in return for the retention of IP ownership.
The following mechanisms can be used for purposes of safeguarding IP ownership:
1. Discount as compensation for funding development
Contrary to software readily available at list prices, one of the possibilities to compensate the corporate for funding the development of certain modules or versions is to agree for the license price to be considerably lower than the prices to be charged to other clients.
A significant discount compensates the corporate for funding the development and incurring the development risk, while allowing the startup to retain the opportunities to resell or license the software or deliverable.
Intellectual property rights on all work phases, whether funded by the startup or the corporate(s), will remain owned by the startup. The startup can thus continue to leverage the knowledge and experience gained by its personnel on the funded development project.
2. Exclusivity as compensation for funding development
It is well possible that the corporate will consider the offered discount not to be sufficient compensation for funding the development. Likewise, a cash strapped startup may not be able to bear the burden of offering steep discounts in view of its development cost base, both from a personnel and capex perspective.
One possibility to solve this conundrum is to think creatively about exclusivity arrangements as another form of compensation. Any exclusive license needs to be carefully thought through along several dimensions:
• Duration: to be limited in time for the duration of the commercial relationship between the startup and the corporate and a certain period thereafter.
• Field of use: for a well-defined sector, industry or industry segment.
• Geography: on a country, continental or worldwide basis.
• Competitors: exhaustive list of other companies to whom the product may not be sold indefinitely or for a limited period of time.
3. Royalties as compensation for funding development
One manner to avoid having to (heavily) discount upfront license fees can consist of offering the relevant clients who funded the development a royalty arrangement, which entitles such client to certain royalties on the funded product sales to other clients until the client which had funded the development had recouped the development cost.
Such royalty should be capped at an absolute number and only be applicable during a limited period of time. Carefully defining the royalty base for purposes of applying the royalty rate is key to avoid unpleasant surprises.