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Taking Corporate VC: When It Makes Sense
In recent years we’ve seen more and more corporations become more active or establish strategic VC arms. When there are many waves of innovation (AI/ML, voice, IoT, genomics, autonomous vehicles, blockchain, etc) propagating across many industries, it’s natural for corporations to use strategic investment as one way to harness that innovation for their own purposes. These corporate VC activities go hand in hand with other strategies of large companies including internal R&D, IP licensing, M&A, etc.
A startup can benefit in various ways from having a strategic investor involved in their company, but there are plenty of drawbacks too, both commonly known and more subtle. Here are the things a startup should ask when contemplating strategic investment from a corporation:
1) Does this corporate VC bring unique strategic benefit to my startup?
It seems obvious but strategic investment only makes sense when that corporate VC is providing technology, market access, or other aid that cannot be obtained through a simple business relationship or from a startup’s other investors or advisors. This is the first step in the decision tree… only if the answer to this question is “yes” then it’s worth thinking through all the second order issues.
One of our prior investments was an e-commerce company that grew primarily through organic search. Google Ventures was one of our co-investors, and in addition to all the other typical support GV provides their portfolio, this startup gained some unique insights for their organic and paid search strategy which were impactful and couldn’t have been gleaned elsewhere.
On the flip side, simply taking strategic investor capital because it’s there or it’s easier or cheaper than other capital rarely works out well for startups. I was an early employee at PayPal and back in the 2000-2001 timeframe, and we ended up taking a fairly significant amount of strategic investment (tens of millions of $) from various banks in the US, Europe, and Asia. Banks invested because they wanted access to our large and growing consumer base or to try to catch the lightning in the bottle of our virally growing payments business.
PayPal took on these investors in small part because it gave us an imprimatur in the stodgy and regulated world of financial services. But mainly we did it because these corporate VCs were among the only groups willing to invest at PayPal’s somewhat inflated post-money valuation, during the middle of the dot-com crash when traditional VCs pulled back sharply and other sources of funding were constrained.
Fortunately we proved skeptics wrong and every one of these strategic investors made a tidy 2.5 – 3x return once PayPal IPO’d in 2002 and then was acquired by eBay later that year. But if we are intellectually honest, on the whole I think both PayPal and these banks were mutually disappointed with the strategic value of these investment relationships. The distraction of these soured relationships would have undoubtedly grown over time had PayPal not gone public and generated a strong financial return.
2) Is now the right time for us?
All things being equal, seed and early stage startups are not usually well suited to take strategic investments. Startups at this stage are still seeking PMF and scalable growth, so their long-run strategic fit with a corporate VC is often still in flux.
Also most corporate VCs want to invest meaningful amounts (millions or tens of millions) in a startup, but are typically capped at owning no more than 10-20% of a company for a variety of reasons (e.g. larger ownership can trigger a startup to be classified as a “subsidiary” of a public company with additional accounting & disclosure required). There are still other potential complications from having strategic VC investment, but mid-late stage companies are often more suitable.
We recently led a large seed round for an autonomous vehicle company called Optimus Ride. The round was heavily oversubscribed so the founders could choose their investment partners, but the founders decided to include NVIDIA a strategic investor. Normally I would counsel seed stage companies not to take strategic investment but that wasn’t the case here.
While I can’t get into the specifics of the relationship, suffice it to say that it made a lot of sense for Optimus Ride since it gives them a set of unique benefits as an autonomous vehicle startup to collaborate closely with a global leader in GPUs, AI / deep learning, and computer vision. So the benefits both to the startup and the corporate VC must be overwhelming for it to be a good mutual fit early in a startup’s lifecycle.
3) Does this complicate my startup’s future strategy?
Most corporate VCs today understand the rights and responsibilities of startup minority shareholders, and don’t try to push for onerous requirements like ROFR on an acquisition or egregious information rights. But even when strategic investors are helpful shareholders to a startup, having that affiliation can complicate potential partnerships, acquisition, or other relationships with a competitor. It doesn’t mean it can’t be done, but having say Google as an investor can make it tricky to work with say Apple.
4) Are these investment partners for the long haul?
Probably the most common critique of corporate VC programs is that comparatively few endure across decades.
One could level the same critique at traditional VC firms, some prosper and some don’t, but at least VC investing is the raison d’être of every traditional VC firm. The same cannot be said of corporate VC programs, many of which come into being during bullish periods in capital markets but then wane when capital is scarce or when corporate leadership or priorities inevitably shift. It’s not just technology companies that have VC arms these days but also automobile manufacturers, financial services companies, energy companies, and others.
It’s worth recognizing the extremely small handful of strategic VCs that have demonstrated longevity like Intel Capital, SoftBank, and more recently Google Ventures.
In the last 25 years Intel Capital has invested more than $11 billion in over 1,000 startups. SoftBank has similarly invested at large scale and SoftBank alumni include founders of numerous VC firms across the world (USV, Foundry, Qiming in China, etc). But even Intel, SoftBank, and Google have all revamped the strategy and personnel of their VC arms in recent years.
Taking investment from a corporate VC means accepting that the priorities, future capital availability, and human team you work are at risk of changing without a great deal of advance notice.
We’ve invested in about 60 startups over the last 7 years here at NextView. While a solid majority have never received investment from corporate VCs, about 15% have at some point in their lifecycle. I don’t have the statistics for the overall startup ecosystem, but I suspect that they’re not radically different than the NextView portfolio. There’s no absolute right or wrong answer when it comes to corporate VC for your startup, but this framework can hopefully help folks think about whether or not it makes sense for their company.