How Corporate Investors Can Partner More Effectively With VCs

Venture Capital investors are wary of working with corporate investors. This comes from years of experience where corporate investors have tried to impose terms on the companies that are investing in that may limit the upside in the event of an exit for existing investors. So there's a conflicting dynamic there. And that is something we continue to observe; it is not necessary.

I see some corporations behave very well and are great Investment Partners. I've seen some corporations be the opposite, and really try to take advantage of smaller companies in a way that is detrimental both to the company, and sometimes even to the corporate. So I'd like to explain a little bit more about how you can be a great investment partner to a small company, and a great member of an investor syndicate, so that everybody wins.

Build Great Business Relationships

The benefits to the small company are twofold. They're very obvious, it's usually that there's a great business relationship that can be realized when a corporate invests in a smaller company, then there's some shared upside and some reason to partner and work together for collective riches. Also, strategic investors or corporate investors tend to be less focused on price. So sometimes the dilution to the entrepreneur is lower. Those are the benefits but the problems can be many. Corporations sometimes don't follow on, they'll make one investment but they won't reserve capital for follow on investments when the company might need that. That's an important aspect of being a good member of a syndicate; you have the ability to follow on your initial check with more checks later. As the company grows, the terms I mentioned that limit the upside are usually right of first refusal terms. If an acquisition offer comes in, then the corporate investor that invested wants to be made aware of that and have a right to purchase the company for that same price or perhaps something a little higher, but at least respond to that and in an advantageous way. Therefore they have an advantage in a bidding situation that limits the upside for the other investors and that's really a killer for French corporate venture deals. Over and over again, those refer clauses are the things that cause the parties to not consummate the investment.

Ideal vs. Reality

Sometimes the business deal that is envisioned doesn't become reality later on. There's a lot of excitement around what the corporate can do for the smaller company, but when it comes to actually operationalizing and realizing that value together, there's disappointment that can be a problem. There are conflicts of interest in the boardroom, as maybe a competitor wants to do business competitively, the corporate wants to do business with the company as well. How do you resolve that? Sometimes those conversations can be challenging. There are some challenges to working with corporates that have a different strategic initiative, different strategic objectives than the investors who purely have financial objectives.

Examples of Financial Investor Behavior

The good news is there are two ways that you can mitigate all these problems. If you look at what Google has done, or what Intel has done over the years; and Comcast ventures has done a terrific job. There are a lot of good examples of how you can behave more like a financial investor, and less like a corporation who's trying to gain advantage over a company. Those two ways are, if you have a committed pool of capital that is separately managed from the corporate balance sheet, so you take money off the corporate balance sheet, you put it into a fund hire separate managers for that, and instruct them to behave independently to manage that pool of money for financial gain, and to also work with strategically with company, of course, but to  be stewards of that money that has a interest in the success of both the company and the startups.

Having that separate pool of capital that's committed, it can solve a lot of the problems of conflict of interest. And it also solves the follow-on investment problem.

Be a Good Corporate Citizen

And the second one, I think I've made this point loud and clear. If you have a need to have a right of first refusal, on acquisition, in all of your investments, then you're going to be it's going to be a problem for you negotiating with the other investors. It's going to slow down all the deals you want to do. I really strongly recommend that you never do that. The good corporate venture funds do not have rollover clauses. And I think that's absolutely the way to go. I strongly recommend that as the policy. That you adopt. It's a great way of thinking about how you can be a good corporate citizen and a good corporate investor.