Considering corporate investment for your company? If so, you’re not alone. Last year, the combined value of corporate venture capital financing hit $64.9 billion. That’s a ten-year high and a sign that companies are doubling down on startup investments in pursuit of innovation.
Still, knowing whether a corporate investment is right for you and your company takes some careful consideration.
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Understanding corporate venture capital
While corporate VC is a subset of venture capital, they are not the same. Corporate VC investments typically leverage the company’s balance sheet to make direct equity investments, rather than investing through a fund. Additionally, the corporation usually offers a range of other strategic opportunities for the startup beyond cash, including accelerator-like mentorship and guidance, access to certain tech or business development resources , and even the potential to become one of the startup’s all-important initial or marquee customers.
Receiving an investment from a major company can be a significant imprimatur of credibility for a young startup and may help that startup get market and media attention, ‘play big’ in deal conversations with potential customers, recruit key management talent, and a host of other benefits.
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When corporate capital makes
In my experience, working with startups that are deciding between the two types of capital, the answer isn’t always clear cut. Here are six things I suggest entrepreneurs and startups consider before making a decision:
The later the better. The lift from a corporate venture capital investment may only be ephemeral at the early stages when the startup has so much to prove to define the business – product/market fit, customer acquisition efficiency, recurring monetization strategy. However, I’ve seen it work great in later rounds, where the startup is more established and more appropriately values the contributions of a strategic corporate investor versus when it is just starting to figure out its business.
Leaders or followers. The most common drawback from accepting corporate VC is that some corporations tend to be less valuation sensitive than most traditional VCs and have gotten a reputation in the industry for marking up a startup’s valuation to unsustainable prices relative to the progress of the company. I’ve seen several deals with solid underlying businesses that had substantial valuations in early rounds only to have the company re-priced. The best ways I’ve seen strategic corporate investors participate is to follow in a round led by a traditional venture capital, and many corporate investors will only invest in startups with a strong traditional venture capital lead.
M&A is the new R&D. With recent several examples (Unilever/DollarShaveClub; Walmart/Jet), large companies are buying downstream startups with more frequency, and in some cases, paying a huge price. Many of these corporations realize that it is easier and more cost effective for them to buy growth vs building new, high-growth products/services internally. As a result, getting introduced to these acquisitive corporates earlier – and with an investment – is a great way to stay on the radar of the corporate’s C-suite and have a path to exit.
The corporation’s chief concern is the corporation. Corporations are big places with an unknowable array of independent forces affecting the success or failure of what is typically a very small deal in the eyes of the corporation. After all, a $5 million investment doesn’t move the needle for a multi-billion dollar corporation. Several times I’ve seen an executive's pet investment get quickly deprioritized in the wake of a plummeting stock price or a change in management where the internal champion leaves or is promoted away from oversight of the investment. For example, not too long after the AT&T/Time Warner merger was announced, it was revealed that Time Warner’s head of investments, Rachel Lam, would be leaving the firm as well as the relationships she’d built with portfolio companies over her 14-year stay.
The money is great, but the overall opportunity is even better. One of the greatest benefits of startups taking investments from a strategic corporate investor is the opportunity to simultaneously enter some formal business relationship with the corporation. These relationships can vary widely, but they can lead to significant new customers, enhancements to the tech roadmap, and revenue.
Do business with anybody, except everybody we care about. Often the most challenging aspect of negotiating a corporate investment is managing potential conflicts around dealings with the corporate investors’ competitors. Usually the corporation has an extensive list of companies that may be excluded from business deals, partnerships, or M&A and, depending on the industry, that list may include some of the best potential partners or ultimate acquirers of the startup. The best advice to entrepreneurs facing this is to try and limit the number of specific names by negotiating the smallest set of competitors or provide strict time limits on the exclusions to maximize flexibility when these conflicts invariably arise.
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Overall, I believe that soliciting and accepting corporate venture investments can be a blessing and a curse. It can help put a company on the map and distance it from other startup competitors, but may be a huge source of regret by startup founders if valuations get out of control or a wide range of exogenous factors impact the day-to-day management of the relationship. Remember, every situation is unique depending on the company, the growth stage, the lifecycle, and what the future holds for the startup and the corporation.
David Hall is a partner at Revolution Ventures and Revolution Growth and is responsible for investment sourcing, execution, and oversight for Revolution portfolio companies.