If God had wanted term sheets to be simple he would never have created corporate venturing. I was reminded of this truth at Leif’s and Global Corporate Venturing’s recent conference on advanced materials investing. One corporate venturer asked the panel, which included SAEV, Airbus APWorks and Pangaea Ventures, for advice on how to incorporate side agreements into investments. The questioner was referring to the corporate venturing parent seeking to combine investment with various commercial terms, such as exclusive rights to sell the technology in a certain region, a stake in “process intellectual property” developed through collaborative development agreements and a right of first refusal when it comes to selling the company. A thorough and heated discussion followed. Here is my take on this knotty but fundamental issue for corporate and financial venture capital groups (VCs).
If they are not seeking side agreements then they are not corporate venturers: My advice to companies seeking venture capital is to approach corporate venturers only if they are looking to blend their capital requirements with specific and detailed programme of commercial acceleration. Otherwise, keep it simple and go to financial VCs. The real value a corporate venturer can add is its ability to develop, prove and thereby commercialise markets to which it has proprietary access.
This looks like the rationale behind Sakti3, a US battery technology business, raising $15m from the UK engineering group Dyson. According to the Financial Times, the deal gives Dyson exclusivity to manufacture and use Sakti3’s batteries in its existing products, such as its cordless and robotic vacuums, as well as its new product areas. The Sakti3 investment is Dyson’s first foray into corporate venturing.
But this needs to cut both ways: Technology startups can sometimes find side agreements intimidating because they fear either being smothered by a giant business or being forgotten and neglected, following a change of management or some other turn of the corporate wheel. Startups should therefore negotiate some kind of penalty for the corporates if things do not work out.
For the investee, “side agreements need to be take or pay”, one family office investor told me recently, which is good advice. And to avoid being smothered, it is best to make sure that the commercial deal with your corporate venturer is not your only route to commercialisation.
“I generally recommend that our portfolio companies focus on commercialising a product where they actually can penetrate the market or hold the juiciest peach for themselves,” says Keith Gillard of Pangaea Ventures, the Vancouver-based advanced materials VC. Though I do not know the details of the Sakti3 deal, it is possible that its juiciest peach is not with vacuum cleaners, but with one of the other several applications for its batteries, such as electric cars or renewable power smoothing. Interestingly, Sakti3’s other corporate venturer is GM Ventures.
Take time: I find it astonishing that technology businesses think they can raise capital from corporate venturers in less than a year. The time to start looking for capital from corporate venturers is at least a year from the date when you really need it. Why? Because you need this time to negotiate the side agreements.
“My advice to companies seeking money is that if you want money fast, do not approach us,” says Nuno Carvalho, head of venturing at Bekaert, a Belgium-based steel wire transformation and coatings business. “A [Bekaert] business unit has to assess a technology before the venture professionals like me can really start our work in earnest,” he adds.
Rights of first refusal are a no-no: If a corporate venturer tries to insert a right of first refusal in its terms sheet, a startup should run a mile. A right of first refusal gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party. This can kill any competition to buy the business from other parties, leaving any financial VCs and shareholding management with lower returns.
A good corporate venturer is more likely to win over a potential investee business by citing examples of when it has either sold its portfolio businesses to parents’ competitors or negotiated highly commercial terms for sale to the parent – which happens, but is rarely talked about.
I look forward to seeing you at Global Corporate Venturing Symposium next month, where I may be touching on some of the issues in the two sessions I am moderating – “Collaboration within the corporation”, with BP and BP Ventures, and a break-out on advanced materials venturing with Pangaea and others attending the event.