Looking for investors? Consider also Corporate Venturing

Guestpost by: Ander Orcasitas, Account Manager – International Venture Club.

Follow him on twitter @AnderOrcasitas

While VC funds are the most well known funding source for startups, the decline of active funds has led to corporations starting to take a slice of the venture scene. Here are the implications for your startup.

 

Corporates are now flooding into early stage investments. There are currently more than 550 Corporate Venturing units but research by Boston Consulting Group shows another 9,000 companies around the world are interested in investing in entrepreneurs (source: Global Corporate Venturing, 2012).

But why is this happening now? Most of them mention two reasons:

1. Incapacity to bring products to market fast: transformational innovation comes from outside,and only really slowly from the inside. Few corporations are able to allow new ideas to reach market at a reasonable time span.

2. Declining Venture Capital support for early stage companies: the VC industry did not deliver results as an asset class in the last decade, which is why many poorly-performing funds are finding themselves in trouble to raise their funds (67% decrease from 2008 to 2011 in Europe; source: DowJones VentureWire, 2012). This implies fewer investments on early stage and therefore a smaller amount of startups that reach the level at which corporate
traditionally acquired them.

For example, ARM (hardware manufacturer of e.g. for many Apple products) clearly stated that they are shifting their corporate venturing activities into investing in early-stage startups because of the fact that the companies they would like to invest in on later stage are simply not supported by VCs.

But why not just acquire early stage companies? Most corporate M&A teams traditionally bet on established startups with a running business and IP. This makes the valuation less arguable and requires much less “hand-holding” from the corporate: the chances of survival of an early-stage business inside a corporation are ridiculously low.

Corporates are nowadays investing in one of the following ways:

1. Directly through Corporate Venturing arm: a separate branch of the corporation that is not involved in the everyday work of the corporation with the goal of finding transformational innovations.

When engaging with Corporate Venture Capitalists (CVCs), it is essential to understand their investment focus. Most of them do not only look into financial returns of an investment, but look for a “strategic fit” on the investment. This fit is widely defined and varies in each corporation, but there are three main types:

  • Many newcomer CVCs only look for startups that have technology or expertise the corporation can immediately use.
  • Others look for purely transformational technology. An example of this is Castrol Innoventures, Corporate Venturing arm of BP Castrol. Even if the core business of the matrix is carburants, Castrol Innoventures is focused on game-changing tech such as Smart Mobility.
  • A third type are the most VC-like Corporates that only look for financial return and whose investment does not represent any kind of implicit commitment to the matrix company. This is the case of SAP Ventures, one of the best performing VC funds in Europe and in the world that only focuses on growth and later stage investments

2. Indirectly through investment in VC funds: Corporates that do not want to engage in creating their own CV department and want to leverage the experience of VCs who already have the knowledge and infrastructure in place take Limited Partner (LP) positions in VC funds. As an example, Orange and Publicis are the Limited Partners of Iris Capital. The corporate do not directly interfere with every investment decision, but have seasoned investors scouting and investing in upcoming Tech startups. They have all the information and therefore this gives them an edge when spotting new innovation.

So, here is what you should find out about the VCs and CVCs you approach:

1. Where the money comes from: even if you are dealing with a VC or a CVC, always look into who are the LPs (investors in the funds). For example, VCs who have a strong presence of Public sovereign funds LPs tend to invest in companies that are still located in their own countries. Knowing this is important as many VC who seem objective have as final conditions to e.g. move the decision center to their country of origin.

2. Stage at which the fund is: a VC fund usually lasts 10-12 years. This means that VCs have to give the money back to LPs after that period of time. It is on itself not a long period of time, the problem is that VCs are obviously not always at the beginning of the life of their funds. If the fund was closed 7 years ago, you have to take into account that in 3 to 5 years the investor will want the money back. And unless they have more funds to back you with, that means that they might find it difficult to support you in future Rounds. And needless to say that the market rarely interprets the latter as a good sign.

3. Amount of funds and their size: get as many deep-pocketed investors as you can from the beginning. The previous concern relatively vanishes if you count on the support of many CVCs and VCs from the beginning. Your goals should be to have investors with enough fire power to support you in future rounds and to have leverage to take the offer of the best bidder in future Rounds (aka higher valuation).

4. How that investor can help you: for example, CVCs involve their investments with the core business and allow them to leverage their distribution channels and customer reach, which in most cases means exponential growth. Because this, if you don’t foresee that your startup will be disrupted by any upcoming innovation, aim to keep part of the equity when exiting. The exit cash might be lower, but the actual value of the slice of the cake you will keep is likely to be higher.

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