I’ll start to spend my money calling everybody honey
And I’ll wind up singing the blues
I’ll spend my whole paycheck on some old wreck
And brother I can name you a few
Willie Nelson sings in I Gotta Get Drunk. Surely he must have meant Corporate Venture Capital groups, or “CVCs” for short. Different corporations have different vehicles. Some invest from the balance sheet, others have funds. Some have dedicated investment managers, others have and top-down driven investment committee. CVCs can be really helpful, and I’ve occasionally seen great partnerships develop. Here are some things you might want to find out about your CVC. They might sound very “concerned,” typical German, you might say. Unfortunately, all of these scenarios really happened.
Does the corporation want to acquire you? It might actually be a good exit avenue for you, especially if you think you have a great product but are not so sure if you have a great company. But the corporation will want to keep the valuation low because they want to pay as little as possible for an M&A transaction, while other investors might want to drive the valuation higher to maximize their return. Your investors’ interests might not be aligned.
Is the advice coming from an R&D or “labs” unit, or from someone with an actual profit & loss (P&L) cost center? Is the advice rather general to the industry or specific to their business? Remember: The reason they started their venturing program is often so that they get exposure to new ideas and learn about new market and industry direction. You might get the wildest answers if you want any strategic advice in exactly the one area they don’t know anything about and are learning from you.
Beyond the Intro
The venture or partnership or labs or R&D arm might make an intro to a line of business. What are other ways the corporation or the investment manager can add value for you, or was that it? What if the line business has other plans, strategy changes, or an enterprise contract with a large incumbent vendor is just too prohibitive for the enterprise to buy anything from you? The CVC is sitting on your cap table now, and maybe even on your board. Do your homework and call other investments and ask them about concrete examples where the CVC was adding value. BTW: That’s, of course, true for all venture capital investors, not just CVCs.
If you’re an early-stage startup, every large enterprise account in a new region is a quasi-exclusivity: How many very large enterprise accounts with lots of systems integration and solutions requirements can you really serve? Could you negotiate a minimum required volume for exclusivity: if the corporate truly brings 2,000 new customers to you, then surely that’s all you could handle anyways in that region, right? But for which product line and for which version of the software does that apply? What if you pivot? What if you want to close down that line-of-business or retire that product — do you still need to support and maintain it for your CVC? What if you change your business model from an appliance to a software-only subscription model or change your bundling — will the exclusivity automatically include all current and new features that you are charging for? Can you still sell through channels and partners? What happens if one of your U.S. customers wants to use your software in a subdivision or local headquarter in a region where you already promised exclusivity to your CVC — is your exclusivity for the use or for the sale? Do you have to disclose the exclusivity and no-go-regions to your new customers? Will they find out in their due diligence and be taken aback?
The corporate might have international business, or might even be based out of a different country. Is he expecting you to go outside the U.S., and are you really ready for it? Are you willing to start a sales force and — more importantly — a product and pricing discussion for a new geography? Because no matter what your CVC says: When you follow your CVC into a new region you will have a product in that market, and you will set an anchor and price point, and you will need to support the product locally. Local support is especially costly if you have leading-edge technology in a new category where it might be hard to find local resources, and you end up flying people back and forth.
Board Directors and Observers
Have a clear understanding what a board director or observer role would involve. Would an observer step out of the room when it comes to discussing the sales pipeline and pricing because she might be gleaming insights about competitors and their strategies? Could some prospects turn away if they are afraid that one of their main competitors might get insights about their strategy, products, cost configuration, or go-to-market approach? Would a competitor rather push an independent vendor or perhaps even their own investment, and thus preventing you to ever reach critical mass, and perhaps even increasing customer acquisition costs? Board directors do vote on things that might be critical for your future.I hope your interest are aligned.
Do you know what documents and depth of information your CVC expects from you, and at what frequency? Does your investment manager know what their corporate mothership requires for their annual auditors? Is their reporting cycle aligned with yours, or will you have to produce lots of extra documents outside your regular reporting schedule? Will these documents adequately reflect your company progress — for example if your fiscal year ends in January with most of the bookings being signed in January, but the CVC’s fiscal year ends in September, after a traditionally weak Q3 of yours? What if your gross margin, cost configuration, or other contract pricing leaks into the line business — will you get pressure to reduce the price for them? Board members are protected by a client-attorney relationship. But if you get sued, and a board member had sent or stored information outside the board, then that information becomes discoverable in a lawsuit — and you will get sued, latest when the company has to shut down or just before your IPO.
Ownership and Signaling
Will there be enough room for the next investor, especially ownership-sensitive institutional investors? Could there be a not-invented-here problem: “Wait, so <CVC> had better dealflow than I do and saw that deal first?! That surely can’t be a great deal…”? Could there be concerns from future investors about alignment and strategy, and how would you answer these?
Sustainability and Speed
What happens if the CVC’s strategy changes, the CEO of the corporation changes, and the program gets shut down. Did you plan on getting their pro-rata or any other follow-on investment? How would that look in the press, for partners, and for customers? Will you know how to get any critical signatures or votings in time?
What would be your story for a graceful disengagement? Are your press releases aligned with that potential story? Imagine the following scenario: Your CVC creates a new division based on your product and creates $100m new revenue, while you have a $6m annual contract. You are both very happy, a great engagement. After some time, you find a different area that is much more lucrative to you. Your product has evolved, and the new product lines going forward are really something very different. Your CVC also wants to move into a different strategic area, and you happily disengage, give each other a hug, wish each other well, and move on. In your next round of funding, the new institutional VC says: “Great! CVC so-and-so invested in you, what a phenomenal partnership, so what are you doing with them?!” — “Absolutely nothing! Well, we had a $6m annual contract, but that is gone. In fact, we both walked away, very amiable if I may say so, and now they are using our competitor.” — “Uhm….”.