In today’s tough investment climate, when capital is harder to raise, more and more startups are considering corporate venture investors as backers. Not only have corporate investors retreated from startup deals less dramatically that financial investors in the past year, but a relationship with a large company is seen by many startups as a faster route to profitability. Most corporate investors are focused on the strategic benefits of an investment and are highly motivated to get startups into joint projects with the business units of their parent company.
However, startups should be aware that a relationship with a corporate investor can be a little different than one with a financial investor. Corporate investors look for different things in a startup investment and have different red flags that put them off.
GCV’s Global Venturing Review podcast has been asking corporate investors about what turns them off a potential investment. There are a few common threads:
1. Don’t go crazy on valuation
It looks like you have a great company, but is it $800m great? Maybe not. Overinflated valuations were one of the main things corporate investors mentioned as a turn-off particularly in this downturn environment.
This isn’t vastly different to financial investors — but corporate investors can have even less need to get a set number of investments done out of a fund. They can sit out a whole season of investments if needed.
“Be realistic in terms of the addressable market and the opportunity that really exists,” says Brian Schettler head of AEI HorizonX. “The thing that I think turns us off the most is just being so kind of marketing-driven of showing, you know, excessive hockey sticks or just completely unbelievable future states.
“We’ve been in these markets long enough to know the timing it takes, the rate of ascent that certain technologies that can take, and a fear of just trying to sell us on something that’s so unbelievable.”
“Sometimes I see presentations where it’s like, ‘our total addressable market is anyone that eats food in the whole world!’ – I could see how maybe you could be all things to all people, but that’s not realistic,” says Erin VanLanduit, head of corporate ventures at Cargill.
“To me, red flags are when founders get so caught up in the process of raising money or focusing on the financials of just driving valuation up, but not being as sound on the core business principles and what their focus is, what it is that they’re bringing to bear on the market.”
A sure-fire way to squander your credibility early on when talking to a corporate investor is to go in with a selection of unrealistic projections. You’re trying to inspire them to see your vision, but don’t stretch their credulity – don’t exaggerate your addressable market or how much you can grow within it in the short term.
2. Do your homework on the corporate and the unit
You’d be surprised how many people want to work with a CVC then forget what the first “C” stands for. If your startup is completely unrelated to the corporate, then there’s not much chance of you getting an investment.
“And we do see a lot of inbound deal flow that has nothing to do with our industry. Please do your research before you contact us to see whether it’s even in the space that we might be able to invest in.” says Raj Singh, managing partner of JLL Spark Global Ventures.
It is also worth making sure you know what stage the fund invests in. If you’re trying to raise for a series D, it’s probably also not a great idea to approach a seed-stage firm, so avoid that embarrassment. The sweet spot for most corporate funds is series A and B, but a few will focus on early stage or mainly go for late-stage rounds.
“Don’t forget to come with the “why us?”. If it feels too generic, if it feels like we’re just seeing boilerplate material – we have limited opportunities to invest our dollars and more opportunities than we possibly could fund,” says Schettler.
Another reason to research the corporate ahead of time is to avoid problems down the line. If the company’s gone through a recent rough patch, or a lot of management changes or restructurings, you may need to consider how predictable they will be to work with.
“Maybe corporates who have gone through a lot of M&A deals in the last few years, which means there will be a lot of restructuring, a lot of integration taking place. The easiest way to really realise synergies is by cutting costs. And on top of it, you probably have many of those years having been done on almost absurd valuations, so [corporates] might even have to cut a lot more than they otherwise would in this downturn to try to justify that and try not to have to write down the value of it,” says Mario Augusto Maia, who ran the Novozymes corporate venture unit before recently moving to Cogent Venture Partners.
“Why does it matter to startups? Because it just means that many of those were not going to have startup collaborations and partnerships as a priority, and/or it just means that a lot of your projects will be delayed or will be shelved, which just delays your ability to reach milestones.”
3. Know your competition
“I have no competitors” is not something investors want to hear. It signals you either didn’t bother to do market research, or no one else has bothered to move into a market, likely because it’s too small.
Either way, not a good look.
Chances are the corporate investor has a very good idea who your competition is. They are likely to be working with some of these companies, so there is no point in bluffing.
“When an entrepreneur tells me that they have no competition, I’m always super sceptical of that, because it usually means, if you don’t have a competitor, then it’s probably not an attractive space to go after,” says Dina Routhier, president of Stanley Ventures.
“No matter what, try to find some competitor. Even if the competitor is that the customer can do it in-house or chooses to do it in-house or solve that problem internally – that’s a competitor. That’s what you have to fight against.”
4. Be independent
Remember that you are pitching a corporate venture team for minority investment, not for them to buy the whole business or create a comprehensive support system for it. Sometimes corporate investors do buy the companies they have invested in, but is is a surprisingly low number of case in which this happens. In our last GCV Touchstone annual survey, some 57% of CVC units said their parent corporation had never acquired one of their portfolio companies.
A corporate investor may be looking for the potential for partnerships and joint projects with a startup, but will want to know that the startup is viable even without this.
“Whenever they say, ‘if we could just use your brand on our product, everything would be great’ [it’s a red flag],” says Mike Mahan, managing director of Stanley Ventures. “So you’re telling me that unless Stanley’s with you, your company’s not going to go anywhere? That’s not a solid message. Partnerships are great, but if you are going be solely dependent on Stanley for the success of your business, then that’s probably not an opportunity that we’re likely going to consider. We want to invest in great companies, first and foremost.”
5. Be nice
At the end of the day, people fundamentally like doing business with people they like. Treating others with courtesy and respect isn’t just a pleasantry, but good business sense. If you come across too arrogant, or like you won’t be a team player or work collaboratively, you might miss out on names you wanted on your cap table.
“I think we all want to avoid people being overly arrogant. I think we all want to avoid people who don’t play well with the other kids. Those things I think are really important,” says JLL Spark’s Singh.
Make your potential partner feel like they will be exactly that – partners – and not just a piggybank or convenient name to be associated with.
The Global Venturing Review podcast features interviews every week with corporate investors and dives deep into how these units are run and what they are investing in. You can listen to previous episodes here.
