Someone recently asked me what I thought about corporate VCs. In brief, I like corporate VCs (CVCs). No need to be afraid of them. Just take the meeting and see what they can do beyond cash for equity. They may be able to provide vendor financing where they provide servers or data center floor space, or something else of value. They may leverage their sales force to sell your products and services with a lot more credibility than your unproven startup. Startups are challenged to win customers and when you have a joint press release that a multi-billion dollar technology company is partnering with your startup to disrupt some industry that is a great way to get the attention of clients, financial VCs and competitive buyers.
I raised $25m vendor financing from Lucent Technologies alongside a $15m cash series A from a financial VC for my own firm that I founded in the 90’s. Then I changed sides of the table and as a VC banker I raised vendor financing for a client from Huawei with support of China Development Bank (CDB). More recently some of my CEOs in The Founders Club raised CVC funding in the biotech sector and it seems that to some extent it is hard to get a VC funding round done without a CVC in biotech or even direct investment or support from the corporate itself. There are lots of classic tech companies in the Silicon Valley that will co-invest with VCs when they can see a strategic fit for their own programs. CVCs can be slow to wire funds and mostly will never lead an investment without a financial VC leading the investment and pricing the round. That said, I just saw Cisco act as the lead in a tech deal and the company is seeking other investors to follow Cisco’s lead.
On the other hand, an issuer (fundraising company) should not agree to change its strategy or technology just to get cash in the door from a CVC if it does not need to. Some big CVCs like Intel Capital or the old Motorola Ventures were super slow to wire funds and then would need to check for anti-trust making their dollars slow to hit your account. Most CVCs don’t want to own 20% of more of a startup until the day they acquire the company outright to avoid the need to consolidate financials into their own financials which are typically publicly traded. On the surface this is attractive to the young entrepreneur paranoid about dilution, but not good if the CVC can not continue to support a company as a pillar in the VC syndicate, because they are avoiding reaching a 20% ownership position. That said, I would not view that as a problem, but just something to understand.
Take the meeting and see if you can get a new customer lead out of their due diligence and consider it a sales call or getting on their radar to sell your company in the future. And don’t be paranoid that they will steal your intellectual property. They are generally too big to do that without buying you. When it comes to life changing or transformational technology, a team of 30 at a startup with $10m in funding can do more than a business division of 1,000 with a budget of $300m at a big corporate. However, there comes a day when the startup should sell to the big corporate to truly scale the distribution of the business. Nowhere is this more obvious than with medical devices. It does not hurt if that corporate was on your side from day one. I remember the day I got David Redberg to quit his job at Lucent running their softswitch team (software switching) and join my startup full time running our software development team and managing much of our software layer relationship with Lucent. I considered that a victory that signalled our future success.
I go into more detail on CVCs in my book, which is available on Amazon now and in book stores on August 16th.