The entrepreneur seeking investment from major corporations with investment arms should recognize there are many advantages to seeking and obtaining such investment. However, such investment should be sought with the entrepreneurs’ having a strong understanding of their startups objectives and opportunities, and the strategy and fit with the potential corporate partner.
Corporate venture capital, (CVC)
This is venture capital funding provided by major corporations to startup companies with a high potential for growth.
This type of venture capital is a subset of the overall venture capital market. Funding is typically sourced through the capital budget of the corporation, as compared to that sourced from investors in the case of the independent venture capital fund. These corporate venture arms either invest in ventures that have some level of strategic synergies with their company’s business or they invest because of financial objectives. The latter may make sense for privately held companies, but many would argue that financial returns should not be the objective of the publicly traded company. This is because, in theory, the public company investors’ interest is in the firm’s core business, and not necessarily in riskier venture investing. Should they be, they would likely be better served to invest directly through a venture capital fund or other private equity vehicles which is focused on such investments.
Corporate venture units investing strategically may desire targets possess a close alignment with one of their core company businesses.
This alignment is desired because the ultimate objective may be to acquire the startup and consolidate them with the company’s internal initiatives. In some cases, a direct alignment may not be apparent. In these cases, the CVC partner may be seeking complimentary opportunities or related emerging, disruptive technologies.
In addition to cash, the CVC group may bring administrative support, infrastructure, management and marketing expertise, and technology to the venture.
Like angel groups and venture capital funds, corporate venture capital arms invest in startups in all stages of development, from seed to the expansion, growth and mezzanine levels. Generally, their desired liquidation event is not an IPO. As indicated above, they tend more toward the acquisition of the startup.
Corporate venture capital units invest in many of the same industries as do angel groups and VCs.
Scalable software, telecommunications, medical devices, and biotechnology are some of the common interests they share. However, due to their longer investment horizons, CVC units are much more prone to invest in pharmaceutical opportunities which have extremely long paths to market due to regulatory issues. In this case, the CVC investment may be very beneficial to the startup as traditional venture capital is interested in opportunities with shorter investment horizons. Examples of companies with CVC units include major players such as Eli Lilly, Dow Chemical, Siemens and Ascension Health. Some major universities even have CVC arms.
What corporate financiers bring to startups are many and varied. First, they have deep pockets and in their focus areas, they may be very open to providing funds for development and growth. Depending on the strategic fit with their existing line of business, the corporate player may be open to stronger valuations.
However, if the startup intends to continue obtaining funding from outside the CVC world, this can be a double edge sword as it may potentially result in a future down round. They may have the expertise and infrastructure to support the rapid scaling of the startup’s business. Additionally, each typically invests with a specific focus which is obvious to the entrepreneur.
Finally, the entrepreneur should note that the CVC investor may be most interested in the technology, meaning the breadth of the team may not be as important because; they may believe, they possess the skill sets to help develop and grow the startup internally. They are, of course, also potential acquirers and could become a “bird in the hand” acquirer for the startup.
The entrepreneur seeking investment from major corporations with investment arms should recognize there are many advantages to seeking and obtaining such investment.
However, such investment should be sought with the entrepreneurs having a strong understanding of their startup’s objectives and opportunities, and the strategy and fit with the potential corporate partner. At the early stages, until such time as the entrepreneur has confidence there is a synergy of direction between the organizations, they would be best served to manage the relationship with Chinese walls which permit the startup flexibility related to the control of both technology and operations, limiting access by the CVC representatives.