Corporate Venture Capital – Walking with Giants
Raising venture capital is as it has ever been, a tough process that requires determination and resilience. It takes time – you must kiss a lot of frogs, wear out a lot of shoe leather…..pick your cliché.
Despite more and more funds being launched, competition for raising venture capital is still a cut-throat business – your £2M turnover Adtech SaaS business is competing with this £4M ARR fintech company which is competing with that pre-revenue deeptech start-up.
For corporate finance professionals such as ourselves, knowing where to focus on investment for a particular sector, stage or level of investment is a full-time job and must be bewildering for the technology CEO with a business to build and team to motivate at the same time.
So how do funders differentiate between opportunities? It often boils down to market readiness and commercial traction manifesting in ARRs, LTVs, CAC, SaaS metrics and a host of other acronyms. The fact that someone is willing to pay for your tech is a key, if not the ultimate demonstration of product-market fit.
In the absence of substantial sales or other traction however, how do you convince the jaded investor of the value in your technology. This is where the Corporate Venture Capital (CVC) can often help and luckily for the ambitious tech entrepreneur out there, CVC is undergoing a real renaissance.
Feeling challenged by more nimble digital start-ups able to deploy new business models and challenge the status quo, large corporates are looking to tap into this dynamism.
There are now more than 2,000 active corporate investors in the world and indeed some of the better-known ones such as Microsoft, Intel and Google are amongst the most active in the investors in the world, full-stop.
Value-add corporate investors can add market credibility, validate product-market fit and can assist with market entry and reach in a way that financial investors cannot. And the pay-off is two-way – nimble start-ups help large corporates outsource innovation, plug gaps in product and service offerings and stay in touch with their audience in a fast-moving digital world.
Despite the value-added, CVCs are likely to be followers to a round rather than a lead investor setting the terms, so their interest does not negate the need for a strong financial investor to drive the deal. However, the market signals and confidence of being backed by a corporate can help transform your chances of attracting the latter.
In recent transactions involving CVCs, we have seen both scenarios – (1) where financial investors have been identified first but see the value in a corporate co-investor which then drives the focus of our remaining fundraising efforts, and (2) where a trade investor has been targeted early-on for a pre-revenue business to validate both the technology and market opportunity before then speaking with financial investors.
Whether the corporate has a dedicated venture arm or whether technology scouts feed into business development teams, entrepreneurs should prepare for a longer process than with financial investors. Our advice is to target your chosen corporate early to establish a relationship with an internal operational champion and ideally before you engage with the CVC itself.
Being able to then ‘connect the dots’ once contact has been made with the CVC arm is vital if you are to make for as efficient a process as possible, so that the operational teams can articulate the strategic fit of your technology and business case to the CVC team.
If you do not already have a champion, then the CVC team will have to find one so be prepared for a potentially long feedback loop as the CVC reaches out to the relevant business unit. Depending on what else that business unit might already have on their desk or how wedded they are to incumbent methods and technologies, the feedback may still be that they may just not be that into you.
Where there is interest, it is not uncommon for a joint development project, pilot or trial to have to be identified to drive the CVC’s business case before they can proceed. Ideally, the timing of such trial should be negotiated as a condition-subsequent rather than condition-precedent to the deal so as to not hold things up.
Be wary of agreeing to non-commercial or sub-optimal terms just for the sake of getting a deal done. A financial investor will not want you to sign up to anything that is going to impact on your attractiveness or otherwise limit your ability to be sold to anyone else further down the line and so they should have your back in any negotiations.
Corporates can add real value to the fundraising process. But it pays to get your corporate finance strategy clear from the outset, do your homework and engage early. Being able to point to interest from a CVC is a great validation for your company to financial investors and customers alike, but make sure that you understand their processes, timescales, any commercial requirements and internal sign-off processes. Remember that any fundraising process is only as fast as the slowest moving investor!
Pros of CVCs
- Should add credibility in the eyes of financial investors and potential customers
- Can provide value-add access to distribution channels, sales and technical resource
- Can lead to commercial sales that will be value-enhancing
- Requires clear commercial or technical business case
- Not as quick to respond as financial investors
- Likely to be followers in a round rather than leaders and can require a lot of resources to progress
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