Raising capital from a corporate VC can bring many benefits beyond just money. Strategic CVCs, who measure ROI based on the strength of the strategic partnership with their portfolio companies as well as the financial return, will typically seek to maximize their relationships with startups for a long time after the investment is made.
Specifically, a CVC investor can offer the following to an entrepreneur:
- Resources and product feedback. CVC parent companies often have deep institutional expertise and teams of subject-matter experts who can advise startups on product development and guide them through issues.
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Partnerships. CVCs can leverage their supply chain and operations to build new partnerships that otherwise may have taken months or years for startups to create.
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Distribution. Strategic CVCs can become a distribution channel for a startup, connect that startup with their suppliers, or even use the startup to become a channel for the parent company.
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Branding halo. If a large company is willing to invest in your startup, it’s a strong signal that your product is good and that your business has a bright future.
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Acquisition. Many CVCs invest in startups that they may want to acquire down the line. A CVC may also endorse an exit-seeking portfolio company to their partner companies or suppliers.
Granted, seeing results from these benefits takes time, and even the best of intentions during a capital raise process may not always yield an optimal strategic relationship.
Here’s a list of factors to keep in mind for founders who want the best chances of a productive and successful relationship with their CVC.
Know which type of CVC you’re dealing with from the outset. In our previous posts, we outlined the three types of CVCs — experienced institutional investors, industry-specific strategics, and beginner or “tourist” CVCs. As we’ve discussed, be sure to spend time interviewing and building relationships with CVCs to determine which type they are, what kinds of benefits and resources they can offer and what their history looks like in terms of successfully partnering with startups over time. When in doubt, ask other founders who have done deals with them!
Ask your CVC how they typically approach partnerships post-investment
Different CVCs will use different methods of deploying their portfolio companies within their organizations after the investment. Some CVCs cease working directly with a startup after the investment is done, and pass the founder off to an internal team who will lead integration and follow-up projects. This situation may leave you in the lurch if you’ve already spent time developing a strong relationship with the CVC. Another scenario is CVC groups that build dedicated intermediary teams within their company to capture value from investments and help startups achieve more impact within the company.
The best CVCs stay involved, interfacing with corporate team leaders and getting their startups in front of the right people at the outset. These CVCs serve as a bridge throughout the length of the relationship, providing more stability for entrepreneurs and offering founders a “champion” who is incentivized to ensure that the partnership runs smoothly and effectively.
The ideal way to determine which type of CVC you’re dealing with is to do your research. “Some CVCs, like Comcast Ventures, look at how the corporate platform can be of value to portfolio companies. Others are focused on how the startup aligns with their own corporate strategic priorities. As a founder, you need to research an investor’s track record of bringing a strategic relationship to its optimum level where there’s a mutual benefit to the partnership,” says Rick Prostko, Managing Director at Comcast Ventures.
Come in with ideas for what you want
Don’t be shy about bringing your own vision for what you want the parent company to do for/with your startup.
“When you make your pitchbook, feel free to include a personalized flyer that describes specific desires for the partnership. What can we do together and how can we help each other? Show me that from the outset and I’ll work to make it happen,” says Kaushik Roy, Ecosystem Strategy Executive at Western Digital Capital.
Also take care to stay realistic about timelines, and keep your CVC honest about their typical timeframe for engaging in partnerships post-investment. “Sometimes we invest and then the gears engage a year or two down the line,” says Grant Allen, General Partner at SE Ventures, the CVC arm of Schneider Electric.
Be aware of regime-change risk
Large companies bring a risk of employee turnover, and CVCs aren’t immune to this trend. Ask the CVC leading your investment, who will support the company if he or she leaves? What will happen to the CVC if the person leading the venture arm departs? Will the company still do their pro rata if personnel changes happen? What about commercial relationships that you might be working on? It’s important to have a keen understanding of internal dynamics that could create friction later in the investment cycle.
Develop a plan for tackling regulatory issues
If the CVC’s parent company is in a certain area, it may be subject to government regulation. For instance, banks must adhere to a variety of regulations different from those that apply to large tech companies. Navigating these laws can be costly and time consuming, so be aware of what you’re getting into before you sign the dotted line and discuss how you and the CVC can avoid hitting any regulatory roadblocks.
Determine how much the CVC will focus on product performance
Because their focus is also strategic, many CVCs care about product performance more than a traditional VC. If your company is selling into the corporation, expect that product feedback will quickly make it back to the investment arm. If there are any performance issues, you can rest assured that your CVC investors will hear about it and may bring it up at a board meeting. To avoid any unwanted surprises, discuss the best pathway to create processes and channels for product feedback at the outset.
Understand that the culture, communication channels and management style will be different
While startups thrive on renouncing hierarchy, chasing innovation and pivoting on a dime, larger corporations operate at a different pace and under a different paradigm — which is why they’re eager to partner with startups in the first place. Change comes slower, decisions often involve more parties, different departments or business units often have different priorities, the list goes on. As a founder, you’ll be in charge of navigating these new circumstances in order to maximize the partnership value. Having a dedicated champion within the CVC’s organization to guide you through this process can be a lifesaver.
Collaboration takes two
Sometimes the reality is that you cannot force a company to collaborate — the willingness has to be present and stay present on both sides.
“A written agreement at the beginning can help formalize the relationship. But if the startup sees they aren’t getting any value from the company, no written agreement will help. The same goes for the CVC,” says Roy.
Sometimes a CVC and a startup may begin with a strong strategic link and then two or three years down the road, the larger company decides to leave that market.
“We want to be good citizens. We’ll still do our pro rata and be supportive of the company and try to make sure the company succeeds,” says Roy.
Don’t add too many CVCs to your cap table
Keep in mind that trying to spread your company too thin across a number of CVCs in the same industry, or even in concurrent industries, will essentially ensure that no partnership succeeds.
“When you have seven strategic investors, the situation is not strategic anymore — everyone has an opinion, and it’s all competitors investing so none of the [parent companies] have any edge,” says Roy.
Build a strong foundation from the start
As with many business partnerships, the key to creating an initial relationship that’s built to last is setting expectations at the outset. The best strategy to ensure that the relationship continues smoothly once the term sheets are signed and the capital is deployed is to handle as much as you can on the front end. CVCs are out to bring value to both their parent companies and their portfolio firms. Know your own needs as a business and as an entrepreneur, and ask the right questions to ensure that both you and your CVC see the maximum benefit for a long time to come.