A Corporate As Your Lead Investor? 4 Key Factors For Startups

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Startups get interest from strategic investors all the time. We expect that interest to become more pronounced given the current market conditions where traditional VCs are being more reserved. This article covers the pros and cons for entrepreneurs, within the framework of a past article entitled 10 Best Ways to Work with a Corporate VC. Note technically speaking corporate VC (CVC) is a subset of strategic investors but it’s by far the most prominent type so we will use the terms interchangeably in this article.

1) Partnership – Almost universally the number one reason for an investment from a corporate is the potential for a partnership, which can be game-changing for the startup but also can of worms. Sometimes that partnership is a requirement, in which case the entrepreneur should be very clear on the expectations. There can also be clauses disallowing the startup from working with competitors. Even when there isn’t an explicit legal framework the partnership will likely consume time and energy from a resource-constrained startup. So entrepreneurs should definitely budget what is realistic and whether the partnership creates an unwanted dependency. Our general advice having been operators in large companies, entrepreneurs ourselves, and now investors is to have clarity and a plan, to make sure the partnership is prosperity rather than a pitfall.

2) Timing – Having a strategic lead in a very early round can be a negative signal because it leads to questions as to why financially motivated investors didn’t bet on the potential return. Many corporates actually have mandates disallowing them from leading a round, partly to avoid this situation. So a first way is to have a co-lead, which could be an existing investor if you can’t find a new one. A second way to mitigate this concern is to raise from a corporate after the series A, when the business is more established. A third alternative is to raise as an intermediary round, perhaps as a convertible with a discount towards the next. Opening a round to get a CVC involved is also useful to frame both the company’s progress. For instance if you were in an unstable footing and this round makes you significantly stronger then it’s obviously a plus for morale (internal) and perception (external).

3) Board Seat – Many corporates will want a board seat or at least a board observer. How that fits in with traditional 5-person boards and whether the CVC keeps that board position in future rounds should be an upfront conversation. Note most startups keep to (i) a small odd number to avoid deadlocks and (ii) after series A rather than seed to ensure you are not unintentionally constraining the company. Similarly, corporates historically were more motivated strategically rather than financially but in this day and age, there is a whole spectrum around this. So having a conversation upfront on prorata rights is also key, since unbeknownst to your expectations the investor might be eager to fund more in the future.

4) Competition and Cooption – Your strategic investor may not be a competitor today but might become tomorrow. Perhaps that is a direct result of your partnership, perhaps that just happens as a result of unforeseen / unplanned developments. Chances are you will also have a conversation around acquisition, and chances are you want to make sure you have options. So beyond protecting your IP now and/or having NDAs, having a framework for these conversations is absolutely critical. Done well a corporate VC can be incredibly powerful, done poorly it can doom your company.

Originally published on “Data Driven Investor”. Amit is Managing Partner and Cofounder of Tau with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (we call it gl;dr — good length; did read). See here for other such articles. If this article had useful insights for you, comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are from the author(s).

Amit Garg I have been in Silicon Valley for 20 years -- at Samsung NEXT Ventures, running my own startup (as of May 2019 a series D that has raised $120M and valued at $450M), at Norwest Ventures, and doing product and analytics at Google. My academic training is BS in computer science and MS in biomedical informatics, both from Stanford, and MBA from Harvard. I speak natively 3 languages, live carbon-neutral, am a 70.3 Ironman finisher, and have built a hospital in rural India serving 100,000 people.

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