The pros and cons of taking corporate VC money
Way back in the last century I had extensive experience garnering corporate VC funding. Investments included two direct investments by MIT (where I had worked as Director of Information Services), Apple Computer, Ernst and Young, Reed Elsevier, NACSCORP (National Association of College Stores) and Silicon Valley Bank.
Back then VCs frowned on their companies taking corporate venture as outlined in the article ‘Dumb money’ and other myths about corporate venture capital by Igor Taber of Intel Capital on VentureBeat. However, my experience was uniformly positive, though not nearly so much as we expected. For example, at that time Apple dominated the education marketplace and we expected our investment from Apple to really help our company, which was focused on the higher education market. But while we did manage a bit of co-marketing, on the whole there was little benefit.
The investment from The National Association of College Stores was by far the most beneficial as they became our distribution arm, which worked out well for both companies.
At Throughline, Silicon Valley Bank was also helpful, setting up a meeting with startup CFOs (our target market) for us.
But the investments from Ernst and Young and Reed Elsevier were very passive, mainly resulting in a lot of meetings with their staffs who wanted to understand how we could develop a far better web site than their’s at 5% of the cost. A time sink for us.
So the bottomline in my experience was that the upside is where the corporate investment can galvanize the investing company into providing true added value as NACSCORP did as our distributor or at least provide warm introductions to target customers as Silicon Valley Bank did.
None of these investors asked for or were given a board seat, though we gave Allan Bufferd, Treasurer of MIT, visitation rights which worked out well. We got the benefit of Allan’s wisdom without increasing the board size.
Here are some salient quotes from Taber’s article — keep in mind you are getting the viewpoint of a CVC, not that of a VC or an experienced founder:
CVC is a large and growing player in the venture industry. According to CB Insights, corporate VC firms invested $18 billion in North America in 2015, which is roughly 25 percent of all venture investments that year
…. 900 collective deals in 2015 — a 15-year high …
He lists and debunks three myths about CVC:
- It’s dumb money — I agree this is not always the case.
- CVCs aren’t involved enough to build great companies — while this may not be true in Intel Capital’s case, I think it is still true. Most CVCs don’t take board seats and their companies lack the startup DNA of traditional VC firms.
- CVC’s limit a startup’s strategic options — Many entrepreneurs fear that if they take capital from a corporate venture fund, it will limit their potential partnerships, customers, and exit options. Again, while this may not be true for Intel Capital, I would caution founders that it could well be true for their companies. I know our VCs had one major concern: that taking CVC could cap our upside in an acquisition. They argued that if the CVC’s parent company didn’t acquire us then other acquirers would assume we were somehow “tainted” since the CVC was assumed to have insider information on the value of our company.
There are a couple of other issues with CVCs that are important that aren’t mentioned in this article. CVCs rarely, if ever, lead an investment. They like to have a VC they know both set the valuation and lead the round. That saves them the cost of due diligence and they don’t get into the often contentious negotiations over valuation. So as a raw startup don’t go after CVC money. Wait until after your A round at the earliest and preferably your B or C rounds. Then your CVC can simply follow your VC investor(s).
The other issue with CVCs is they tend to have shallow pockets. None of my CVCs participated past the first round. So don’t expect your CVC to keep investing past the first round or you may be disappointed.
I do agree with Mr. Tablor’s conclusions to his article.
When an entrepreneur comes to me seeking funding, here’s what I say: Do your due diligence, consider all your options, and don’t fall prey to stereotypes. Most of all, do your homework on the partner who will champion the deal and sit on your board, regardless of whether it’s a corporate or traditional venture firm.
In other words, seek a smart, active, and savvy investor who can help build the company you’ve always dreamed of running.
Igor Taber is a director in Intel Capital’s datacenter investment group, which focuses on artificial intelligence, big data, analytics, and cloud investments.