Pokémon Go Proves That Large Corporations and Startups Can Get Along

Pokémon Go has claimed the title of biggest mobile game in US History, according to Survey Monkey Intelligence, attracting over 20 million daily active users. Meanwhile, Nintendo’s stock has soared and added $7.5 billion to its market value in just two days. Behind the scenes of this successful app is a partnership between a huge corporation and a startup company.

While Nintendo has been getting most of the credit for the game’s success, it’s a lesser known company’s technology that is the driving force behind the augmented reality game. Niantic, Inc. was founded in 2010 as an internal startup at Google. Niantic’s first major successful mobile game named Ingress was released in November 2012.

Ingress is also an augmented reality game and players of both games will notice they look very similar to each other. This is because the Ingress technology was actually redeveloped and repurposed into Pokémon Go.

After Niantic was spun out of Google in September 2015, a struggling Nintendo, who had already been working with Niantic for a year, wanted to invest. With Google and Nintendo being co-investors of a combined $20 million in Niantic, the company secured the cash it needed to redevelop Ingress.

While most people view startups and large corporations as being in direct competition with each other, the collaboration that created Pokémon Go shows that by working together great progress can be made.

Without Niantic, Nintendo would have had to spend millions to develop the technology behind Pokémon Go. For a company struggling to stay relevant and profitable, a gamble on this technology may very well never have been approved by its directors. Without Nintendo, Niantic would not have access to the Pokémon brand and licensing. With Ingress and Pokémon Go being so similar in their gameplay and design, it’s clear that the Pokémon brand was the driving force behind the popularity of the game.

As Nintendo and Niantic are proving, these type of arrangements can be mutually-beneficial for both the startup and the large company.  Several other large corporations are leaning on startups to serve as their “skunk-works.”

While these arrangements can be valuable, they are not without their complications.  For example, there are many company structural, financial, accounting, and tax considerations.  To name a few:

  1. Will the larger company purchase stock of the startup?
  2. If equity is not at play, how will the royalty or licensing agreement be structured?
  3. Which company will be compensated for which part of the product?
  4. How will the companies be valued for investing purposes?
  5. Should a new legal and taxable entity be formed to hold the new technology? If so, what type of entity?

If there is potential for your startup to partner with a larger company, or of if your large company is in search of a startup’s entrepreneurial spirit and technology, contact an Anders advisor for guidance on how to approach the partnership and best structure the deal.