Many startups actively seek corporate investors when they fundraise because of the help they can bring in putting new companies on the path to commercialising their product.
Startup founders value corporate advice on how to make their product meet market demand, and they value access to their sales force and the potential for the corporate to become the startup’s first customer.
But, despite the advantages that corporate investors bring to startups, founders also are wary of taking money from CVCs because of demands they exert on new companies that can hamper their growth.
Global Corporate Venturing held a webinar, Startups and Strategics – What works and what doesn’t, with startup founders to find out what they value when taking on corporate investors.
Participants are Kurt Busch, CEO of Syntiant Corp, a developer of machine learning models; Meidad Sharon, founder and CEO of ChargeAfter, a financing software platform; Scé Pike, managing partner of Azurens, an AI services provider; and Sterling Pratz, founder and CEO of Car IQ, a vehicle payment software platform.
Here is what they had to say:
1. Startups like to be assigned a business development contact
Corporate investors are increasingly integrating business development teams, or so-called platform roles, into their units to help startups establish commercial partnerships with the parent company. All startups on the panel said this was a great help as large corporations can be difficult to navigate without a company insider who can help them establish contacts in the mothership.
“One of the biggest challenges an early-stage company has is how to navigate these large corporations. And how do you find the right fit within a group that’s aligned with what you’re doing. You can waste a lot of time doing that,” says Pratz. “We really focus on that when we look for a strategic investor: who is it we’re directly working with that can lead to a project; but more importantly, can they help us navigate this organisation.”
He adds that payment services company Visa does a good job at placing the right people with startups. “They put leadership with us right away, a programme manager if you will. That allows us to communicate frequently about what we’re working on and things we could use some help from the CVC arm. And they quarterback who we can talk to and how we should talk to them.”
2. Startups prefer board members to be a business development professional
Founders also prefer to have someone in a platform role on their board rather than an investor. Pike said she learned the value of having an operational expert on her board when she ran a startup called IOTAS, a smart technology platform that was acquired by ADT. Canadian telecommunications company Telus, an investor in the company, placed the president of security and automations on the board, to help the company expand into Canada.
“I was worried because they were a complete stranger. But they said it was in my best interest to have an operator on the board versus an investment member,” says Pike. “He was an amazing board member in how we ran together alongside deploying in Canada. It really made a difference in how we successfully rolled out in Canada.”
Sharon agrees that having a board member from a business unit is preferable to an investor. “Ideally, in terms of increasing the probability for partnership and for the CVC to become a client as well, you would prefer the board member to be from the business unit or from the operational side, so the connection would be more around the product and the value proposition and not only from the venture side.”
3. Startups don’t like it if a CVC member sits on lots of boards
It is a turn-off to founders if they find out a corporate investor sits on more than a handful of boards because it shows that they don’t have the time to be a valuable contributor. Busch advises startups to ask investors how many boards they are on. “If the number is more than four or five, you are going to have a problem because they just can’t keep it all in their head.”
4. Founders prefer dedicated venture funds rather than units that invest off the parent’s balance sheet
Startups say they notice the difference in the professionalisation of CVCs that have independent funds compared with those that invest off the parent’s balance sheet. Independent venture funds tend to have more formal business development processes, they say. “The ones that have dedicated investment arms such as M12, Alexa Fund or Bosch Ventures, have these more developed BD functions. I definitely recommend taking advantage of them,” says Busch.
His comments were echoed by others on the panel who find dedicated venture funds less opportunistic than those investing off balance sheet. “We tend to have more success with strategics that have a venture arm because it helps us align our goals. We have a few that have invested off the balance sheet and they are good relationships, but they’re more of a one-time investment and they typically don’t follow on,” says Pratz.
5. Startups want to run pilot projects to prove their technology but are wary of it being a waste of time
Founders see corporates as not just a way to get investment, but also as a way to get help on the road to commercialisation. Pratz advises founders who take on strategic investors to “try to work with them on a roadmap that says, if you we do this, it will lead to a pilot or it’ll lead to a customer engagement, because then everybody wins along the route, and they will want to come back and grow the programme.”
But startups are also wary about pilots and proofs of concept (POCs) taking a lot of time that startups can’t afford. “If we are engaged with a corporate, we really need to have a good outcome,” says Busch. “I am always worried about pilots and POCs, because they can take a lot of time and don’t have a clear path to revenue. The ones that we’ve seen are the most successful is when we engage with the CVC’s salesforce and we go into an account together, so that it’s not just a pilot, it’s a customer.”
6. Startups want to know that the corporate parent’s sales team are on board selling a portfolio company’s product
Pike advises checking on the motivation of a corporate investor’s sales team to make sure they are on board selling the startup’s product. Most sales teams dislike selling new products because it can impact their sales. Many may not be motivated to sell a portfolio company’s product or service. “If you’re going to try to grow revenue through a corporate partner, how good are they are getting their sales force to sell another widget that they haven’t been trained on for the past five years to sell,” says Pike. “That is going to make a big deal on how you roll out operationally.”
Watch the full replay here.
