Corporate VC penetration of early-stage deals
Corporate VCs seem to have grown substantially over the last decade and are investing earlier and earlier in life cycle of startup. What are the advantages and disadvantages of encountering potential portfolio companies with existing corporate VC money.
Seems to me this question is about CORPORATE VC money, not VC money, in general, so I'll focus on that.
The motivations of traditional VC funds are pretty clear, in that they tend to be fairly similar - invest in a business, support its growth,
sell the stake in the business at a profit change the world. Typically (although some will protest this, sometimes authentically), traditional VCs are motivated by generating a direct financial return for themselves and for their investors.
Corporate VCs, however, will tend to have more "strategic" (i.e. less purely financial) motivations. These might be a variety of things, dependent on the core activity of the corporation the Corporate VC represents. Investing in a company that has Corporate VC share holders means that it may be more difficult to predict when this shareholder might e.g. support a sales process - as the motivation may be based on the desire to generate profit INDIRECTLY, through some strategic advantage holding the stake in this company provides to the Corporate VC's corporate owner. Understand the corporation, understand its Corporate VC's motivation and you give yourself a better chance at predicting its activity.
VC's (usually) come with their own set of rules that can be a major detriment to a startup or budding company. You have to make sure - as a team - that VC money is something you are prepared for. They can offer great value and funds, but you can also "lose your shirt" in the contract.
Make sure that the short term gain is worth the long term pain. Also, consider the contract as it stands to selling/exiting the company. The VC's may have their own agenda as it pertains to an exit strategy. I've seen countless companies sell or be acquired and Founders get very little (sometimes nothing) from the deal.
This is obviously a blanket statement and is not true for all VC's. Just a fair warning to not get lost in the zero's in the amount, and focus on the agreement.
The unsolicited inquiry of a VC suitor/investor can mean (1) much-needed capital and credibility at just the right time, (2) recognition that what you're doing has perceived long-term/strategic value to one or more major players or at least well-heeled investors that track business trends, (3) the timely infusion of capital and objective thinking into your budding business vision/model as a trustworthy/committed (i.e., longer-term) minority investor, or (4) the death of your personal vision (or at least your control of the vision) if you partner with an aggressive, hands-on investor who churns short-term deals without detailed commitment/understanding and knows how to troll for those they're able to manipulate (with desparate or unwary) with cash/contracts, etc. Depending on the situation - and only you and your experienced/trusted advisors can judge - you might be dealing with any one of these four possibilities!
For this conversation, we need better definition of what the original question meant by "corporate VCs", since there are many forms of private equity and venture capital firms and funds (including some in corporate forms). An altogether different animal is a commercial corporation that's looking to strategically invest in a product line, business unit, or technology to extend/strengthen its portfolio... seeking long-term strategic alignment as a part of its on-going top/bottom line growth planning (e.g., strategic partner --> joint venture --> acquirer). Sometimes, companies can "crossover" between these two worlds (GE Capital did a bit of this), but generally, they have different motivations and time horizons for their investments than financial VC/PE firm/fund managers.
Randall - I am going to assume that you are asking the question from the perspective of a VC building your own “portfolio.” If there is a different intent, please let me know.
I was a MD in VC for 10+ years. I invested mostly in indutrial technologies and Corporate VCs were prevelant as LPs and co-investors. Today, I am advising several coporations on the creation of their won venturing units.
I would challenge the assertion that there are many more Coporate VCs today than there were in the late 2000’s or late 1990’s, but Cambridge and others likely have data that would tell us the real situation.
The implication of a Coporate VC in a deal can vary widely.
On the one hand, I regularly encountered a major oil company VC arm that had eviscerated the IP of its “early stage” companies. In exchange for a small amount of funding and the potential of a large customer contract, which rarely happened, they would acquire rock solid rights to the company’s IP. It made it virtually impossible to invest in follow-on rounds without a laborious and time consuming negotiation with the Big Oil.
On the other hand, there is a major utility company that invests and provides real validation and revenue for its group of companies. Co-investing with that group was a real pleasure.
I agree with the earlier comments that Corporate VC plays according to an opaque and shifting set of objectives. Their objectives reflect the changing politics of their companies. An insitutional VC, love it or hate it, is motivated by the purity of profit.
Here are a couple of other patterns that I encountered regularly in Corporate VC:
- Often think they are more important than they really are (limit their ability to control)
- Often fail to deliver customer revenue (make the equity investment contingent on follow-through)
- Inclusion of one often ends acquisition interest from others
- Inclusion of one my retard revenue growth from others
- Inclusion of one may cause the opposite when every customer insists on an equity stake to balance competitive influence
Bottom line...avoid Corporate VC co-investors unless you are confident that they have competent people, with the latitude to pursue indpendent financial decisions, and a track record of staying out of the way when they need to.