Corporate VC Investments: Limited, But Real, Pros. And Cons.

Even with some recent bumps in the public markets, this is still close to the Best of Times for venture capital.  1000+ new seed funds, and hundreds and hundreds of unicorns and decacorns.  And as part of this, more and more big corporations are adding and expanding their venture arms.

For the most part, this is a great thing.  More options are almost always better for founders.

Let me share a quick list of Pros, Cons, and Not Big Deals.

Cons:

  • Usually won’t carry the company or write many “second checks”. This is the biggest issue. Traditional VCs usually reserve another 1x-2x of their first check for later investments. Corporate VCs don’t. They also generally don’t want to “carry” a company and write another check if no one else will. VCs don’t like this either, but they’ll often do it.
  • Aren’t usually great at bringing in next round investors. Top seed investors are good at bringing in Series A investors. Same with Series A investors and Series B investors. This rarely works with corporate VCs.
  • Synergies often very limited if just from a check. If a $100b company writes you a $500k check, how much help can you expect? Be realistic. If the synergies are real, they’ll happen irrespective of some token investment.  If the synergies are real, in fact, they’ll be there before the investment.  The investment may just help solidify them.
  • Priorities change It may take you 10-12 years to get to an IPO, longer to go the distance.  What are the odds that corporate venture program will even exist at this point, or in the same form?  Low.  This may not be a huge deal.  But traditional venture firms aren’t going anywhere in most cases.  They legally and contractually live 10+ years at a minimum.
  • Rarely lead.  And you usually don’t want them to.  Most corporate VCs want to “follow” into a round, i.e. not be the largest investor, not set the terms, etc.  And really, you usually don’t want them to lead.  It’s best not to have a corporate VC own more than 5% of your startup.
  • Can take longer to close.  Many corporate VC funds just move slower.  Traditional VCs have gotten pretty good at closing fast, often just over Zoom.  Less so corporate VCs.  They can take months sometimes.  Not always, but sometimes.

Pros:

  • Can help solidify an existing partnership. An investment won’t create a partnership. It really won’t.  But as noted above, it can help solidify one that already exists. An investment may anoint one vendor in the space as the preferred vendor over competitors. This can really help.  In fact, corporations can take their investments in core partners more seriously than the relatively small investment would merit.  Big Tech Companies know the handful of startups they’ve invested in that are strategic to them.  It helps to be one of them.
  • Less valuation sensitive. Many corporate venture funds aren’t as ROI-focused as traditional VC funds. No one wants to pay a bad price, no one is stupid.  But corporate VCs often aren’t judged on pure IRR. But those that aren’t will be less sensitive to price, so long as it’s reasonable.
  • Validation. This is minor, but real. Having Salesforce or Google or Shopify invest in your company does equal validation.  It really can help.  It’s like a piece of PR you get … that is enduring.
  • Flexibility to buy smaller stakes and invest between traditional rounds.  A traditional VC fund may only want to buy 10%+ of a start-up, and may only want to invest in a traditional round.  But a corporate VC may be fine investing any time, and may be fine with a smaller stake.  This can be very helpful, especially for more capital-efficient startups that just want a bit more capital to fill up the tank.
  • The ecosystem. This is usually minor again, but real, especially in the enterprise. Being an insider in the Salesforce ecosystem is materially better than being an outsider. For real. Same with LinkedIn, Workday, Shopify, etc. Getting “inside circle” access is a benefit.

Not Such a Big Deal:

  • Few control issues these days — if Corporate VC is well established. Corporate VCs wanting to control start-ups with lots of conditions is a bit of a dated concept. This is rare these days with well-established programs. Just walk if there are a lot of strings.  No well-established corporate VC program is going to ask for M&A options or any real blocking rights.  New programs, or direct investments, may however.  And they may at least ask to be kept in the loop in some fashion for M&A.  That’s often fair, if the terms aren’t intrusive.  In any event, try to sell less than 5% to any corporate VC.  This is the most important way to minimize control.
  • Asks for integrations, etc. Many corporate VCs won’t have a lot of strings anymore, but often ask for integrations to be built in particular.  Just do it.  Integrating with one more API is not that big of a deal, and can be outsourced. Most importantly, these conditions, if put into deals, are often soft without firm or short-term deadlines.

If you net this out, corporate VC is usually ideal in smaller chunks, and not leading rounds. Which is what most of them like anyway.

(note: an updated SaaStr Classic post here)

Published on March 29, 2022

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