Bringing a corporate investor on board can be a massive moment for a startup. It validates your concept or your product, it can bring in a whole host of new and highly valuable customers, it can bring commercial agreements, and of course, a big chunk of money. But it’s not always plain sailing.
Startups have often been wary of taking on a corporate. From demanding highly specific and expensive demos that might never lead anywhere, to making eye-watering requests for clauses on term sheets, corporate investors tend to come with a host of strings attached in the eyes of founders.
There may also be the perception that corporates are new to the game relative to financial VCs, and therefore less familiar with what kind of asks a startup would find acceptable.
So what are the most common difficulties, bugbears and fears that startups have with corporate investors?
Startup tourism
A big part of developing a corporate investment arm is expanding your network of startups and having a robust pipeline of potential investments.
“Some corporates will ask startups to pitch to them and explain what they’re doing just as a learning exercise. Perhaps so that person can go and look smart in front of their colleagues” says Jack Stenson of Etc., the incubation unit of telecoms company BT. This makes sense from the corporate point of view, but can be seen as an incredible waste of time on the startup side, where founders are extremely time-poor, and presenting to a corporate can cost money, especially if there is a demonstration involved.
While financial VCs may want to see a demonstration of how the tech works, corporates may ask for more bespoke demonstrations of how the technology can fit into their particular ecosystem. This costs time and money, and can come at an opportunity cost if it’s unsuccessful.
Bureaucracy, delays and lack of agility
Corporate investors do come with additional layers of complexity in that they are not completely autonomous – they have a mothership, with an investment committee, and often multiple levels of approval.
The world of startups moves fast. The corporate world? Not so much. “A week to a corporate is the equivalent of a month to a startup” says Stenson.
A corporate investor is often part of a larger investment syndicate in which traditional venture capitalists can make decisions without so much red tape, while the layers of decision-making within corporates can lead to complications. It’s not unheard of to strike an agreement in principle, for example, only to be overturned or modified by the corporate’s investment committee further down the line.
Transparency on timings is key. It will give both sides the foresight to know whether the process is going to work, which parts of the process might take more time, and will put both parties on the same page.
Insufficient experience with startups
Whereas regular venture capital might be widely seen as being well-versed in the world of startups – it being their raison d’etre – the corporate world is less likely to be populated by people who are familiar with the dynamics of a nascent company.
The perceived lack of experience can make startups wary – will they understand the unique requirements of an early-stage company? Are they patient enough or do they want results right away? Do they just want to extract strategic value or are they really interested in the long-term viability of the company?
This can also result in there being inappropriate demands made on the term sheet. Things like rights of first refusal, overbearing information rights, and aggressive board representation are things that can put a founder on the backfoot.
That said, CVCs have been on a steep curve of professionalisation in recent years.
Soren Nielsen, senior manager at advisory firm Thursday Consulting, believes that CVC has matured a great deal. “They understand this space better, it’s more professionalized. Before it was like, ‘let’s take Peter from the finance department and put him over into the CVC or the venture department,” he says, adding that there is now an understanding that a CVC needs people that have substantial knowledge in the area.
“People that know how to find the right startups, that know how to put together an investment agreement. And they take a stand on whether they want to lead the round or not”.
Finding a champion or a sponsor within the CVC is also a huge help, according to Stenson. “Finding that contact on inside, someone that really gets what your company does, and can advocate for the partnership when you’re not there – that can be really key to reaching a point where both sides are satisfied,” he says.
A loss of control
There are many worries that occupy this area. No one wants to enter into a relationship where they feel like they’re losing all control.
Founders can also worry that corporates will try to pull them too far into strategic alignment, prioritising the mothership’s interests over that of the startup.
Be frank about your concerns. It means you can have open conversations around expectations versus realities before signing anything. Trust is hard to build and easy to lose – and it goes both ways.
The potential of being acquired by a corporate investor’s mothership down the line is something that founders can also be wary of, as the perception is it may affect the way the CVC approaches portfolio management, and potentially put limitations on what you can do.
Speaking of which…
Conflicting interests and corporate roadblocks
A common fear among startups is that a corporate investor will interfere with the way a startup does business, perhaps by trying to prevent them from doing business with competitors. Does taking one corporate investment mean you can’t take any investment from another corporate? Can you still protect your intellectual property and proprietary technology?
Investment is one thing, but if the deal ends up putting countless restraints on who, what and how you get new business in the door, it could put a real limit to growth and, by extension, eventual exit possibilities.
This is exactly the sort of fear that Stenson wants to allay from the initial conversation with startups, “We don’t want to control the startup, we want to build up a strong relationship. One of the key differences between a CVC and a VC is that we’ve got customers. Having strict term sheets and onerous clauses, that hamper the growth or control a startup in a negative way or give us unfair advantages, would do a great deal of damage to our brand. And the damage would far outweigh any value we would have created”.
