Most early stage startups that are fundraising automatically go to angel investors or traditional financial VCs; however, for founders who are starting to worry about the “funding crunch,” think strategically about the venture arms of Fortune 500 companies. There are an incredible amount of dollars invested in corporations, and increasingly, corporations are recognizing the disruptive power of smaller startups.
How should you approach corporate VCs? What questions should you come prepared to ask?
Are there any conflicts of interest? Make sure you really understand the company's business.
Founders’ biggest fear is often that someone else, especially a big company with significantly more power and money will rip off their idea. While this shouldn’t preclude you from working with corporates, understand what business they are in and ask about how this product ties into their main business units.
Will they be there for the long haul? Don't be left in a lurch.
Revenues wax and wane and publicly traded corporations are ultimately most concerned with shareholder value. When the economy turns, the first thing to go is often the venture arm.
Are they strategic or financial investors? Know how your startup fits into the company's goals.
Some corporate VCs like Comcast Ventures can operate independently and can invest in startups across industries, purely focusing on financial return; however others, such as BMW i Ventures must invest in companies that have some sort of strategic angle that will add value to the BMW mother ship. Find out what the corporate VC’s motivation is — purely financial, purely strategic, or a mix of both. Typically, it is a mix of both.
How are the individual investors of the venture arm compensated? Gauge how the investor is being incentivized and how this will help or harm you.
Some investors are compensated based on the ROI of their portfolio companies. Others are compensated by the quality of introductions and access they provide. Understanding if a corporate VC is motivated by facilitating introductions vs. purely by the value of your company will help you gauge how the investor is being incentivized.
What is the timeline for making decisions? Locate the decision makers and understand their process.
Especially if the corporate VC is a strategic investor, you’ll most likely be working with a particular business unit within the larger corporation. Where is this business unit and its decision makers located? Samsung GIC, for example, makes all investment decisions in the U.S. despite the corporation being based in South Korea. Figure out the right timing to meet with the key stakeholders and understand the process by which decisions are made.
How do they work with companies once they invest in them? Figure out what kind of value you can gain.
Talk with other portfolio companies and see how the corporate VC has added value. Think about what kind of access they can provide to talent, experts, distribution channels, and business development support.
Most importantly, make sure to do your due diligence. Understand your own goals for your company and whether it makes sense to seek out this type of money. If your goal is to ultimately get acquired, then you need to know if their investments have ever led to acquisitions. Remember there are diverse pools of capital available, it is up to you to decide what kind of investor is in line with your vision for your company.