3 min read Deciding whether your company should work with a corporate VC is a big decision and not one to be taken lightly. As with any business decision, you need to do your due diligence.
Start by gaining an understanding of what exactly corporate venture capital is, the pros and cons of working with a VC, and industry best practices below.
What is Corporate Venture Capital?
Corporate venture capital is an existing business utilizing venture funding to further the company’s strategic objectives. The firm takes an equity stake in startups either through an internal fund or off the corporate balance sheet.
Unlike traditional venture capital, corporate VCs look to gain a competitive advantage for the company and not a financial return.
These initial investments often lead to a buyout of the startup. The investment is a useful tool for diligencing a startup and influencing its direction.
There are some corporate VCs investing for a return on investment rather than strategic initiatives, but this is rare. Most corporate VCs make investments with the goal of winning more business for their current product and services.
It’s a useful method for exploring new markets without committing substantial resources from the corporation.
Pros and Cons of Working with VCs
There are both pros and cons to working with Corporate VCs.
Pros include:
- A long-term point of view gives the startup time to grow and develop.
- Access to partners, customers, and other resources.
- Domain knowledge can be far beyond what most traditional VCs bring.
- Funding of major projects is much longer than traditional VCs.
Cons include:
- You must gain commitment all the way to the top of the organization.
- It can be difficult to build consensus or sell ideas across department lines in corporations.
- Compared to the startup world, corporations move slowly which can frustrate new ventures.
- Competition between corporations is widespread.
- Corporate attention can shift, leaving the startup underfunded.
- The startup’s innovation will ultimately be pulled into the corporate structure which dilutes the startup’s brand.
Best Practices in Working with Corporate VCs
In working with corporate VCs, follow these best practices:
- Consider access to the R&D departments of the corporate VC and how much value that will add to your startup.
- Document your work and innovation in great detail as corporate VCs will want to understand the technology and ecosystem more than traditional VCs.
- Proactively educate the corporate VC on your technology and what value it can bring.
- Adjust the amount of funding you take from the corporate VC so as to control the amount of influence they have over the startup.
- Understand the timeframe of the corporate VC engagement. In many cases, it’s much longer than the traditional VC.
- Know your exit strategy and what comes after the relationship with the corporate VC ends or reaches a steady state.
- Leverage the relationship with the corporate VC for partnerships.
- Utilize the brand of the corporate VC to help gain access to customers.
- Expand your domain knowledge through the resources of the corporate VC such as attending conferences, collaborating on white papers, and working on research projects.
- Use the corporate VC funding to gain access to additional funding outside the corporate world.
Read more in the TEN Capital eGuide: https://www.startupfundingespresso.com/corporate-venturing-2/
Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group
