1. Treat capital-raising as a business development exercise
If you are going to give a substantial shareholding and say in the running of your business to outsiders, make sure they are able to make a significant contribution to your growth. In this way, they quickly become insiders. If they are financial venture capitalists (VCs) they should have a great track record with businesses comparable to yours. If they are corporate venturers, they should have access to the customers you need to sell to, or the ability to scale up your technology for these customers – as well as a great track record.
Let us deal with corporate VCs first. Corporate venture capital is a fancy phrase for something quite simple. A larger company – call it company Y – provides capital, products, expertise and market access to a smaller company – call it company X – in return for a share of future growth and use of technology Y does not have but really needs. What is the difference between corporate venture capital and plain business development and collaboration, such as joint development agreements? Corporate venture capital – in the physical sciences space at least – works best from a startup’s point of view when it is done like this:
If X is also selling into markets other than those to which Y has access, then X maintains its independence from Y and is a potential acquisition target for other large companies. Thus X’s exit options are not restricted by Y’s investment.
If X is subsequently acquired, Y gets a return on its investment alongside all the X shareholders – meaning Y gets a financial and a strategic win-win, and a happy chief technology or innovation officer and a happy chief financial officer.
Sounds simple? It is not. It is complicated.
2. Keep it complicated stupid
If God had wanted term sheets to be simple he would never have created corporate venture capital. Typically, Y wants to combine investment with various side agreements – such as rights to use or sell the technology in a certain region or with certain clients over a certain timeframe, and a stake in intellectual property (IP) developed through collaborative development agreements. Y might even ask for a right of first refusal if and when you are put up for sale – a definite no-no. But these are the types of complication a startup needs because they are symptoms of growth. If you do not want side agreements, stick to financial VCs – see below. The trouble with complications is that they take time.
3. Start raising capital from corporate VCs long before you need it and make sure you are already well capitalised
The time to start looking for capital from corporate VCs 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. A [Bekaert] business unit has to assess a technology before the venture professionals like me can really start our work in earnest.” – Nuno Carvalho, head of venturing at Bekaert, a Belgium-based steel wire transformation and coatings business.
Y’s venture team has to speak to the relevant business units to establish whether there is a strategic need for your technology. This takes time. You may already know the business unit that needs your technology. If so, tell the corporate VC because it is possible he does not – sometimes communication between a corporate VC and its business unit can be imperfect. This will help speed things up. Initially send non-confidential information.
Do not insist that a corporate VC sign a non-disclosure agreement when you are in the initial assessment stage because it is unnecessary and it takes time. Once you show interest and need to go into more detail, sign an agreement then. This will also take time – and it should because you need to get this right. You have probably already been talking to them for two months and you have barely begun. The moral of the story – do not expect this to happen quickly, allocate time.
Y’s business unit has finished assessing your technology and you have got to know them, but you might not want them to be your investors. Maybe you have found a better fit with other investors. Maybe you would just prefer to keep Y as a B2B commercial relationship or approach them at your next fundraising round.
But time is a luxury only the well-capitalised can afford, so the sherpas of corporate venturing deals – that is you, your family, friends, angels, governmental investors and so on – need to be able and willing to carry the business during the minimum 12-month period you are talking to corporate VCs.
4. Allocate time efficiently
If you are not careful, fundraising can be such a distraction to senior management as to obstruct growth. So be ruthlessly efficient. Do as much early due diligence on potential investors as they would do on you. Who really needs your technology? Who is the best partner for market access? Do not do the classic dog-and-pony roadshow and speak to a bunch of ineligible investors, many of whom will be happy to meet you because of the free education you will provide them on you and your markets.
Time spent on reconnaissance and research is rarely time wasted.
5. Do not limit your exit options
If you get a corporate VC on board that ticks your boxes, great. But be wary of their impact on your brand and on your business development strategy. Most large corporates have very potent brands.
Once you are in their portfolio, some potential customers and acquirers – your potential exit route – will see you as a “Y company”. They might not check the detail. They may just assume that Y will acquire you. Y may also inadvertently or deliberately seek to ensure your management focuses exclusively on developing your business for its own markets to the neglect of your other markets, which can lead to one-sided business development. This might also limit your exit options.
To avoid these dangers, you need a strong board, ideally with more than one corporate VC represented for counterbalance, or an experienced financial VC that can hold its own with corporate VCs. You will certainly also need an independent chairman with proven expertise in managing a talented and lively board.
It is imperative also to make sure that the commercial deal with your corporate VC is not your only route to commercialisation and that a trade sale is not your only exit option.
“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 … It is also important that there be a real possibility for the company to survive as a profitable standalone company, ideally with a credible, or even initiated, path to inital public offering.” – Keith Gillard, managing partner, Pangaea Ventures, a Canada-based advanced materials investor
NanoH2O, a Californian water treatment company, now LG Water Solutions, is a great case study in this regard. It had Total Energy Ventures and BASF Ventures – two potent brands – among its shareholders alongside experienced financial VCs. Many in the market assumed that NanoH2O would be bought by BASF, which had previously acquired Inge, another water treatment business in the BASF Ventures portfolio. But LG bought it, and all investors, corporate and financial, got a decent return. NanoH2O had good balance.
6. Communicate exceptionally well
Sorry for the cliché, but you get only one chance to make a first impression. Get your story clear and strong. Make VCs’ lives easier by hitting them hard between the eyes with a clear statement of how your management team and technology solve big problems profitably. VCs are different from you. They look at hundreds of companies, thousands even, whereas you are mostly preoccupied with a few – your company, your current and potential customers and your competitors. So in the early stages of your fundraising campaign, which is actually a longer-term business development campaign, make sure you are very good at being superficial.
And make sure your communications are consistent across all media – website, LinkedIn, Twitter, press and so on. If your website says you sell bananas, but LinkedIn says you sell apples, VCs are entitled to feel confused and conclude that you are confused. Keep it simple. Keep it very simple. There will be very smart people in the VCs you are approaching, but you will nevertheless have to try hard to communicate clearly and patiently, something that brilliant innovators are not always good at.
But be ready for VCs to get into deep detail very quickly. If this were a medical examination, you would have your tongue examined and pulse checked, and then you would immediately be stripped naked and readied for endoscopy.
You will have to explain why you and your technology are superior, not just to easily identifiable incumbents and has-beens, but to other startups lurking stealthily in the mist and the startups that could emerge in the next few years, during the lifespan of the VC’s investment in you. “We are much better than Kodak” will not wash.
7. Also approach financial VCs and find sherpas
After those hours spent on side agreements with corporate VCs, a financial VC focused exclusively on financial returns might be a relief. But there are not that many financial VCs with physical sciences expertise. And remember it is a financial VC’s job to be impatient.
“We need to make 10 times our investment and we need to do it fast,” one told me recently with admirable honesty. But if you are still at a relatively early stage of development, you probably require patience. So look to other groups of investors – angels, super-angels, angel syndicates and so on.
Look closely at corporate VC investments in companies you like and you will find the unacknowledged sherpas of corporate venture deals – those who carry you from the foothills to the summit or the summit base camp.
I like the look of Real Ventures, a Montreal-based early-stage investment company staffed by entrepreneurs. It took an early interest in Wiivv Wearables, a Vancouver-based 3D printing-meets-wearables-via-chemicals business that raised money from Evonik Venture Capital over the summer of 2015.
Find a Real Ventures near you. They are out there.
8. Choose advisers carefully
Establish what your needs are before you appoint advisers. Establish exactly the gaps you need to fill and then fill them. In my experience, early-stage IP-rich businesses often underestimate their need for advice on IP development and protection, which is absolutely crucial when you are engaged in business development across multiple industries. So get a good lawyer with expertise in IP. You might be surprised by how little they will
charge in the early stages of your development – they want the fees at the initial public offering or trade sale. And beware of advisers pretending to be investors. Ask whether they have funds under direct management. If an investor has no funds under management, he is not an investor, he is an adviser.
9. Do not raise capital unless you need to or want to
“I love the independence of owning 100% of the shares, of having to think only about the products and not to worry about shareholders. In that sense, we are completely free.” – Sir James Dyson, founder, Dyson
External investors will want control over, and a say in, your business. If you would rather have complete freedom of manoeuvre and not be told what to do, then do everything you can to stay alone – beg and borrow from trusted friends and family, get grants from government. You might grow more slowly, but if independence is what you want then this will be a sacrifice you are going to have to make.
10. Ignore advice – do it your way