There is plenty of evidence that a downturn is hitting the investment community full force now, with Crunchbase noting a 50% decline in funding in Q3 in North America, and a similarly dramatic pullback in Europe.
Corporate investors are not exempt from the pullback. If you are facing a situation where you and your team are being asked to take your foot off the investment gas pedal, if not outright stepping on the brakes for a quarter or two, this is the time for a CVC unit to heavily pivot to your business development function.
“Closing a commercial deal in partnership with the business units is the CVC superpower.”
Closing a commercial deal in partnership with the business units is the CVC superpower. It allows you to help a startup validate the product in the market and help the valuation of the startup. It brings you closer to the business unit and helps them with their immediate problems, filling the technology gaps that are preventing them from reaching their near-term goals. It shows the strategic alignment with the business unit is real. It’s something that institutional VCs don’t do.
Some CVCs are structured with the business development team as a separate alliance unit, some are an all-in-one functional team where the partners wear both hats.
Teams that have separate functions keep the balance of work reasonable (especially for the investing partners) and in some cases may be better in order to be able maintain a regular cadence with the business units. That team will get regular input and a sense of timely change if and when the needs of the BU may change. But when the investing team has a pull back, they have a harder time with their outward facing storytelling to both startups and their investment syndicaton partners.
All-in-one positions allow consistent communications with the startup for investment and leading the internal relationship at the business unit level. They have a birds-eye view and can immediately help when something goes off the rails and in a downturn, (or recovery) makes it easy to shift work loads without skipping a beat
Closing commercial deal isn’t easy. Business units don’t always welcome new requests from CVC units to sponsor or work with their portfolio companies. These requests come as distractions from their immediate business challenges — especially in the current economic climate. But corporate investment teams can build their credibility by bringing in startups that do go on to become an ingredient, an OEM partner a white label deal or a joint selling partner.
How to get the business units on your side
If you are in the last quarter of the fiscal year it’s going to be very difficult to light the fuse on something brand new. Often the trick is to work on something for the business unit near term first. If you help them with the goals they need to achieve “right now” they tend to become open to listening to discussions about projects that are nice to have further out, which tend to take the form of a proof of concept in early stages.
“The first two quarters of the year can have unspent money left over. Use some of those funds to cover a portion of a proposed proof of concept to get the deal over the hump.”
Getting the business lead of your group to reach out and request a short 15-20min discussion on the strategic priorities for the upcoming fiscal year with his peer in the targeted business unit (with the team listening in and taking notes) is usually enough to getting the first contact started. This meeting should happen in the first quarter of each year so everyone is on the same page for the measurement period. Also the first two quarters of the year can have unspent money left over at the end of a quarter. If it helps to grease the skids, you can propose using some of those funds that may be lost to cover a portion of the cost of a proposed proof of concept to get the deal over the hump.
Over time these internal partners become more interested in listening to you about the innovation you want to bring to the corporate. It also solves another unstated challenge. Often the investment review board wants to see that the business unit pushing the investment has real skin in the game, and a commercial deal can help with that question.
Generally, each business unit has its own innovation team that is tasked with coming up with the latest and greatest to give the corporate the needed differentiation to compete in the market. This is an internal business unit group that should welcome your help. A CVC unit is the eyes and ears of the company and provide a way for the corporation to see around the corner for what is coming next. Helping startups to get paid for proofs of concept completed will show continued value to both parties and are actual examples of active activity engagements you can count while showing the business unit the potential commercial future.
Don’t wait for the market to change, you need to keep active and there is lots to be done.
Mitchell Weinstock is a former Partner of HP Tech Ventures, the corporate venture arm of HP Inc.