I have written previously about corporate venture capital: The pros and cons of taking corporate VC money, however I still feel it’s an overlooked source of funding for startups and worth further examination. The article 5 Ways to Take Advantage of Corporate Venture Capital by Arie Abecassis is well worth reading, though it only presents the pros, not the cons.
According to CB Insights, there are nearly 200 active corporate VC funds. In 2015, they invested about $18 billion across 850 companies in the United States alone. Notable funders include Google/GV, Comcast Ventures, Bloomberg, Intel Capital and Salesforce Ventures.
Here are the 5 main points from the article on Entrepreneur.com with my comments below. Read the original article for details.
1. Market validation
The best way to validate your venture is to secure paying customers. But securing an investment from a corporate VC fund in your market is certainly a good validator. However, corporate VCs rarely, if ever lead rounds. They like to follow a VC firm who does the due diligence and sets the valuation for them.
2. Revenue growth
Large corporations can provide your startup with marketing and distribution, reducing your costs of customer acquisition and increasing your reach dramatically. However, gaining the attention of the corporate sales and marketing divisions is not easy. Corporate VC usually reports in to the CFO’s office, a long way from the VP of Sales and Marketing. So make sure you get any marketing and distribution agreements in writing, with clear milestones and deliverables.
3. Domain expertise
There’s no doubt the company operating the VC fund will have domain expertise in your market. In fact one of the best way to secure corporate VC funds is to start working with the operating groups within the parent company. If you have a good working relationship, as we did at Course Technology, Inc. with Apple’s Education Division, they will support the investment.
4. Access to capital
In my experience, contrary to the author’s, corporate VC funds don’t always participate in multiple rounds. Often they have smaller amounts of capital to deploy. You should understand the size of their fund and whether or not they have a history of doing follow-on financings or not. However, things may well have changed since I raised corporate VC fund in the later 1990’s.
5. Inherent exit option
Most VCs I have known have not welcomed corporate VC investments in their companies, as that investment can cap the upside. In other words, if the corporate VC company makes an offer for your venture other companies in the market may assume they have inside knowledge and won’t why to exceed the insider’s bid.
So while these are certainly ways to take advantage of corporate venture capital, beware of the disadvantages as well.
The best time to bring in a corporate VC is after you have closed a Series A or B round, not in the early stages of your venture’s life when the large powerful corporation behind the corporate VC fund can exert undue influence on your strategic direction. Corporate VC adds fuel to the fire, but is rarely, if ever, a fire-starter.