Landing a Superstar
When courting the best entrepreneurs, corporate VCs should focus on how they can provide unique value
--
The NBA season is finally underway, after an off-season filled with drama. The biggest news was free agent LeBron James signing with the LA Lakers, where he improved the prospects of a team that didn’t make the playoffs last year to having the second best odds to make the Finals this year.
Free agency for top NBA players is unique among sports leagues, in that all suitors are limited to offering a player the same maximum salary. Teams must compete on the quality of their organization, their existing players, their coach, or something compelling about their location. The Texas and Florida teams offer no state income taxes. Golden State has Silicon Valley opportunities, which helped them land Kevin Durant. And LA has Hollywood, which ultimately won over LeBron.
Landing the Best Venture Deals
There is a similar dynamic for VCs trying to get into hot deals. Like an NBA general manager who needs to sign star players to win titles, much of a VC’s success is based on her ability to invest in the best entrepreneurs. And getting onto those entrepreneurs’ cap tables is becoming as challenging as landing top NBA free agents.
Founders can afford to be more selective as the tides of capital sloshing around the industry today are funneled into fewer, larger deals. Venture capital investment in the first half of 2018 exceeded that of any six-month period in recent history (this year’s first half was higher than many previous full years).¹
Investors are also writing larger checks for early-stage companies.² With all this money chasing a relatively similar number of companies, getting into the best deals is extremely competitive.
The Entrepreneurs’ Perspective
Strong entrepreneurs are therefore in a favorable position to choose whose money to take. Everybody’s money is green, so founders should pick investors who can positively impact their startup’s trajectory.
The best investors shepherd startups through future fund raises, assist with company building through operational expertise and talent recruiting, and offer insights to help founders navigate challenges.³ What else can they bring to the table? Can VCs help remove barriers, reduce risks, or turbo-charge the plan?
More and more, we see entrepreneurs taking strategic investments from corporate VCs⁴. As companies take more time between VC rounds and wait longer to exit (average time to exit in 2018 is 6.1 years from the first VC financing the company has raised), founders increasingly look to non-traditional investors for more than just money.⁵ Corporate participation exceeded a fifth of global venture deals in the second quarter of 2018 — an all-time high.⁶
What Corporate VCs Can Bring
Corporate VCs are often in a unique position to bring distinct value to the companies that they fund. Portfolio company executives of GE Ventures and Intel Capital have described these CVCs as providing full-service relationships that offer support throughout entire company life cycles. This can mean access to the corporation’s R&D capabilities, distribution channels, global network, regulatory expertise, and more.⁷
The best corporate-startup partnerships pay off for both sides. Social & Beyond is a marketing software startup whose product turns free Wi-Fi at the point-of-sale into a customer feedback tool. Telefonica participated in Social & Beyond’s seed round and included its software in its broadband deals with retailers. The distribution relationship created an incentive for retail stores to upgrade to larger Telefonica packages, and simultaneously opened up access to customers and new revenue streams for Social & Beyond.⁸
As the table below shows, there are many ways that corporate investors can help startups:
At Touchdown, we spend time upfront with our corporate partners assessing what they can uniquely do to help an entrepreneur. This unique value can be essential when trying to get into competitive deals, similar to how NBA teams pitch a LeBron or a Kevin Durant.
While selling these benefits is key to landing hot companies, delivering on promises is equally important. All VCs rely on their reputations, built upon examples of having helped portfolio companies.
Fruitful CVC-startup relationships should be mutually beneficial. This can mean assisting the portfolio company grow faster, or helping revitalize a promising business unit at a large corporation, for example. Publicizing these successes can cause other startups to want to work with the CVC (I have previously written about how CVCs can create a virtuous cycle in The Harbaugh Effect). Good entrepreneurs often look for these success stories and stay attuned for instances where promises went unfulfilled.
A reputation based on the value your CVC brings is crucial to accessing the best investments. The Lakers were able to woo LeBron with the many benefits of Los Angeles and the Lakers’ storied history. Corporate VCs should ask themselves what unique differentiator can help land the best venture deals.
Footnotes:
- https://pitchbook.com/news/articles/us-venture-capital-activity-so-far-this-year-in-15-charts
- https://pitchbook.com/news/articles/fewer-fatter-seed-series-a-deal-sizes-skyrocket-in-2017
- https://blog.usejournal.com/what-founders-really-want-from-vcs-235d60801d4
- https://files.pitchbook.com/website/files/pdf/2Q_2018_PitchBook_NVCA_Venture_Monitor.pdf (page 20)
- https://files.pitchbook.com/website/files/pdf/2Q_2018_PitchBook_NVCA_Venture_Monitor.pdf (page 5)
- https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2018/07/kpmg-venture-pulse-q2-2018.pdf
- http://www.intelcapital.com/news/news.html?id=623. http://www.valuepartners.com/wp-content/uploads/2017/04/CVCs-022017-DIGIVERSION.pdf
- https://www.rocketspace.com/corporate-innovation/3-powerful-corporate-startup-partnerships-that-paid-off
- CVC-backed startups have a significantly higher rate of patent filing as compared to startups supported by traditional VCs https://pubsonline.informs.org/doi/10.1287/stsc.2017.0032
Eric never received an NBA max contract offer but did declare early for the NBA draft coming out of the University of Michigan in 1989 (he went undrafted, as he had not played competitive basketball past middle school). Olga Belyanina, who helped with research and writing, is more of a tennis fan and had to Google who LeBron James was for purposes of this article.
Unless otherwise indicated, commentary on this site reflects the personal opinions, viewpoints and analyses of the author and should not be regarded as a description of services provided by Touchdown or its affiliates. The opinions expressed here are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any security or advisory service. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. While all information presented, including from independent sources, is believed to be accurate, we make no representation or warranty as to accuracy or completeness. We reserve the right to change any part of these materials without notice and assume no obligation to provide updates. Nothing on this site constitutes investment advice, performance data or a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Investing involves the risk of loss of some or all of an investment. Past performance is no guarantee of future results.
