What are the advantages and disadvantages of bringing a corporate VC in your round?

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JASON LEMKIN

The world of corporate VC has changed.

It used to be that corporate VCs had lots of strings attached when they invested. Rights, options, business limitation clauses. That was a big downside. Rarely worth it.

Now, strings from corporate VC are pretty rare. If corporate VCs ask for any strings, it’s usually just notice before you are acquired. Not an option, just notice. While suboptimal, this really often isn’t that big of a deal.

The real downside is that corporate VCs rarely write another check, and especially, rarely write another check if you are struggling. So they are “one and done” investors, for the most part. Traditional VCs usually budget another $2 for further funding for every $1 they initially invest, by contrast. This is a big difference.

So all things being equal, having investors that can write checks in the future is a better thing than “one and done” investors.

However, even that can be mitigated by not selling them too much of the company. Having Salesforce or Amazon invest 5 or 10% of a round isn’t going to change things much. It won’t impact the cumulative ability of your syndicate to further fund you if their ownership stake isn’t too material. And you’ll get the benefit of their halo.

So the downsides are a lot fewer than they used to be.

Having said that, the benefits are often more limited than you think.

Corporations with active VC programs invest in a lot of startups, and really don’t have that much time to give them. Even if the investors do have time for you, getting a $500k investment from a $50b company doesn’t guarantee you any face time with the business line VPs you really want to work with, let alone the CEO.

But it does help. You get to attend their insider events. It helps with access, at least at the margin. It helps with partnering, at least on the margin. It helps with visibility.

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So if a great corporate VC wants to do 1–9.9% of a round, I say go for it. 10% or more of a round? Then take a pause. Make sure a “one and done” investor is worth it. It still may be.

Listen to our podcast with John Somorjai of Salesforce Ventures here to learn more: SaaStr Podcast #020: John Somorjai, Exec VP Corp. Development & Salesforce Ventures @ Salesforce

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Published on August 10, 2016
  • Simon

    Great piece Jason. To your points, I thought it worth sharing the Reinventure http://www.reinventure.com.au model of corporate VC. We are an independent VC but with one primary LP (Westpac, Australia’s 2nd largest bank) with whom we have a deep relationship of trust (key members of CEO’s direct reports included on our investment committee). As an independent VC we are on a pure management fee and carry model and have our own money at risk – no incentive to deliver strategic value other than maintaining the relationship of trust with Westpac that ensures we can open the right doors for our entrepreneurs. Our investment mandate is based on which ventures Westpac can add value to rather than the other way around, so we aren’t limited by their strategic lens, but instead invest based on their capability set (banks are basically data, distribution, and expertise). Importantly as you point out, we manage our fund vintages as a traditional VC to both manage investment team rem and to preserve follow on capital for our ventures. We’re 2/3 through fund 1 from which we’ve invested in 10 companies (few enough to add real value) and have just closed fund 2 from which all new investments will be made. Coincidentally, one of our portolfio companies, Auror, just won your ‘Show us your SAAS’ competition so hopefully my partner Danny will be able to share more about our model in person!

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