It’s no surprise that CEOs are increasingly looking at an investment from a corporate investor. Corporate investor participation is at a 15-year high, with corporate investors in almost 24% of deals, and data shows that corporates are now investing in earlier stage deals.
This is a short excerpt from a piece I contributed to an upcoming book authored by Andrew Romans on corporate venture investing called Masters of Corporate Venture Capital that will be published shortly. Andrew is also the author of “The Entrepreneurial Bible to Venture Capital,” which is the definitive guide to raising venture capital money. Next week I will follow up with another excerpt that includes advice to founders who are pursuing corporate venture capital investment.
I have the dubious distinction of having been both a corporate strategic investor (former managing director at Intel Capital) and having run a company that took a corporate investment (Symantec). A lot has change in the recent years in Corporate Venture Capital (CVC), the most of important of which is that corporate investors have matured tremendously in how and why they invest.
I think it’s time to stop considering corporate investors as “dumb money” with an inferior offering. In fact, now that they have firmly been participating in such a large percentage of deals, let’s stop comparing them to VCs at all. They are no longer an anomaly. Corporate Venture Capital (CVC) investors are simply different. They are regular, active participants in venture investing that are as capable as VCs in helping you grow your organization, but they face the task of balancing both strategic and financial interests.
Setting aside that need for balance, it’s time to face the facts that, in general, it’s actually harder to get an investment from a strategic investor than it is a financial one. But in the end, you may get more value out of your strategic investor. Let me offer this as my rationale why:
- Your first filter with a corporate venture investor will always be strategic, instantly limiting the type of deals they invest in. You may be the next big thing, but if you don’t fit strategically, you’re not on their docket. Believe me, there were plenty of deals we wanted to do at Intel Capital that looked interesting financially, but we just couldn’t come up with a strategic rationale.
- A good corporate investor, just by nature of their brand, probably receives hundreds to thousands of investment pitches per year. They have choice and they do get smarter from all that deal flow.
- A corporate investor will have more domain expertise than a typical VC to back them up in evaluating you. At Intel Capital, we had our pick of engineering, sales and marketing resources to check on every deal, as well as contacts with many customers and service providers to validate our investment hypothesis. Unless you are working with a theme-based VC, or an investor that is a former entrepreneur, they will not.
- Most corporate investors are global in their reach, or at least their corporate parent is, so they have a vast number of investments they can choose from. If there is an alternative company doing what you are doing, they will not only compare you to them, they have the option to invest in them. Most VC will not have the ability to invest in your competitor in Mumbai.
- A good corporate investor will be looking at you for strategic reasons so, if they are good, they will compare you to every other company doing the same thing and decide which is best to invest, even (or maybe especially) if that other company is in Mumbai.
- Unlike financial VCs, the corporate entity behind the CVC investor has alternatives for where to invest their money. Just ask any treasury department; someone, somewhere in the corporation would just as soon invest that money elsewhere. They don’t have to consider fund timing or fund dynamics like a VC; and yes, that does matter.
On the plus side, corporate investors can be quite beneficial when it comes to value creation to their investments, and there can be quite a difference between what a VC and a CVC is willing to put into your company. On a good day, you may see some benefit from a venture investor in terms of their network, industry knowledge, or operational expertise. Top tier firms often provide more, but when choosing a VC, it is clearly Caveat Venditor (seller beware) in terms of value add, with a huge variation in what each VC actually provides.
From the CVC, there is also variation, but you will tend to see more predictable value add and strategic returns from their investment in you, in terms of their domain expertise, market access, and ability to accelerate the growth your business. Moreover, most often contractually created upfront along with the investment in the form of a business agreement. Try getting a signed contract from your VC that they will commit a certain amount of resources, time, energy, or expertise to your company.
Overall, CVC money can be money well taken and they play a significant role in the innovation ecosystem. Next time, I will share tips for entrepreneurs on what they should consider when approaching a CVC for investment, including tips from more than a dozen CVC investors how to best approach and work with a corporate investor.