The Venture Capital (VC) industry is booming, especially in the tech space. Corporations are participating in this trend by establishing their own internal investment organizations. These corporate venture capitalists (CVCs), also known as “strategic investors” or “corporates,” are investing in tech startups alongside traditional “financial” VCs. In fact, according to the Global Corporate Venturing, over 48% of the top Fortune 100 companies have a corporate VC arm and these corporate VCs have participated in 24% of total deals globally for the past 4 years.
Having a corporate venture capital arm allows companies to utilize a small portion of cash on their balance sheets to make strategic investments in companies, allowing the CVCs to test out innovative ideas and leverage external talent. This is especially great for ideas which the company can’t develop in-house due to resource constraints or for technologies that can be more efficiently developed by others.
Google Ventures, one of the largest CVCs, has invested in more than 300 startups. Tech giants such as Intel, Qualcomm, Cisco and Microsoft have been building their portfolios for years. Other companies, which were VC-backed startups themselves, such as Twitter and Workday started their own venture arms in 2015.
While there are many great examples of corporate venture capital groups, there are also some corporations who really haven’t mastered the game of Venture Capital yet. These companies might invest in one or two startups, but don’t have a well thought out investment strategy.
In addition, they neither understand nor follow “venture capital protocol” and they don’t dedicate the appropriate internal resources necessary to extract strategic and financial value from their investments.
Let's classify the common types of corporate venture capitals:
“One and Done”
Once an investment has been made, follow on investments in subsequent capital raisings is often necessary to help a startup achieve a successful outcome. However, some CVCs don’t understand this and think of their investment only as a one-time investment. Corporate investors that are guilty of this “one and done” investment strategy are not really being CVCs but rather “business unit investors” who don’t have a sound understanding of corporate venture capital and consequently don’t reserve money (and resources) for follow-on rounds. From the startup’s perspective, raising money from this type of CVC can actually prove detrimental in the long run.
Bringing in a corporate investor that isn’t positioned to support the company from a strategic perspective and from a funding perspective over the long haul can do more damage to a fledging startup than good. Besides providing money, a VC is expected to bring their network and strategic guidance to a startup, both of which will be missing in such a “one-and-done” CVC.
From the perspective of the corporation which makes this type of investment, the investment doesn’t make sense even if the startup does well. If the startup needs to raise additional funding, and the CVC isn’t prepared to participate in follow-on rounds, then the corporation’s investment will be diluted and dropped lower in the liquidation stack, potentially leaving nothing for the CVC from a financial perspective.
In addition, this behavior often prevents the investing corporation from gaining the strategic value it originally set out to achieve through its investment.
“Dumb Corporate Money”
Often, financial VCs who are existing investors in a startup seek out “dumb corporate money” to obtain funding at a high valuation from a “non-valuation-sensitive” investor who may look at the investment from a purely strategic perspective. While sometimes these deals work for all parties, it is the exception rather than the rule.
In reality, these CVC’s tend to bring little strategic value. Additionally, they may demand unusual deal terms that can create unfortunate “optics” at exit. This can inflate the valuation to a problematic level, such that the valuation functions as an obstacle to future funding rounds. It might appear to be a gain in the short term, but more often than not, these inflated valuations from naïve investors hurt the company. For startups, working with such CVC’s can be a hit-or-miss experience that will depend heavily on the other co-investors in the deal.
Some CVC’s invest with the expectation they will be able to throw their weight around. They act as though their minority investment gives them control of the startup. They have a tendency to overstate their value and then underperform against expectations, while still expecting preferential treatment.
Hungry startups, anxious for traction with a potential partner or acquirer, often acquiesce to these investors. . Quite often these corporate investors appoint business unit leaders as their board members/observers, rather than some from their ventures team. Over time, they lose management and board trust, are not allowed to participate in subsequent rounds, and consequently are unable to protect their interest in the company. More importantly, they often leave the startup in worse shape due to their influence on the product roadmap or go-to-market strategy, which may have been uniquely beneficial to them. This can discourage future investors from investing; ultimately destroying value. Excessive control exerted by badly behaving CVCs eventually drives misguided behavior within the startup and leads to a less than optimal exit.
“The Good Guys”
The majority of corporate venture capitalists fall into this category. They know the game and understand the “investor protocol.” They are deeply connected to the financial VC network and they strive to add strategic value in order to accelerate growth for the startup, benefitting all investors. They match what typical financial investors do—fund raising help, strategy support, customer introductions, and board governance; while also providing the strategic value that makes them a great customer, partner, or even supplier. They have solid relationships and reputations in the VC industry and thus don’t have any problems finding partner firms for co-investing. These corporate venture capitals are always invited into subsequent rounds of financing and most obtain board seats or at least board observer positions in the company.
Lastly, like great financial investors, great corporate venture capitalists go all out. They are available 24x7, serve as mentors and empathetic listeners and solve problems in times of need. They provide unique and deep industry insight, since they are strategically positioned within the industry. They can shave weeks and months off the time it takes to develop a commercial relationship within their company and with their customer base, and can even be thought of as partners or beta testers!
When you find these CVCs, whether as an entrepreneur or a fellow investor, hang on to them. They provide value beyond just money.
Zebra Ventures backs 14 portfolio companies focused on industries like retail, healthcare, and transportation and logistics. The portfolio companies benefit from Zebra’s financial support through all development phases and enjoy continued access to Zebra's engineers and distribution networks. Zebra benefits from visibility and access to leading edge technology, while gaining the potential to participate in the value we may create through working with the startup.
In summary, if you are a startup seeking funding from a CVC, make sure to understand which one you are dealing with as you make your next important financing decision.
Tony Palcheck is the managing director of Zebra Ventures. In this role, he is responsible for identifying, negotiating and executing strategic minority-equity investments in start-up firms to accelerate access to new technologies, new markets and new talent for Zebra’s businesses.