Editor’s Note: Amit Sridharan, is director of US Venture Investments & Partnerships at Mahindra Partners, one of the leading farm equipment manufacturers headquartered out of India. Sridharan is based in California in the Bay Area and is currently conducting research at Stanford University about corporate venture capital. Here he shares some insights.
“Don’t trust corporate venture capitalists!” You search these keywords and you will find a lot of views on why not to take corporate venture money in your startup. However, the reality today is that corporate venture capital (CVC) is becoming an important part of the startup ecosystem.
Corporate backed VC deals are growing as a proportion of global VC deal count and there are now more than 1000 CVC units active in the VC investing space. As traditional VCs are raising larger capital pools to invest in fast scaling unicorn tech investments, the CVCs are filling in a void as syndicate investors in smaller early stage deals, particularly Series A, according to research we’re conducting. This has implications for sectors like Agtech, where VC funding has been traditionally selective and now emerging.
So, where do CVCs get traction? Industries, which are in the process of transformation, could be an ideal environment for this phenomenon to play out. In the Ag world, digitalization of the farms and use of data for precision agriculture is emerging as a key theme. The Big Ag Corporations are seeing technological changes disrupt their existence and hence want to tap into the external innovation ecosystem and use corporate venture capital as a strategic weapon to build the learnings around emerging technologies.
While corporates are creating both internal and external structures that are not constrained and participate as CVCs in a way that makes it attractive, startup founders in the space are constantly faced with this question of whether to associate themselves with corporate venture capital? My on-going research at Stanford University tries to outline some of the questions and factors that could help start-up founders make the decision on partnering with CVCs on their journey.
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Here are five areas to think about when considering a CVC investment in your startup.
Understand the Purpose of the CVC’s existence: Why are they doing this? What is the strategic rationale? Explore their philosophy of investing and the balance between driving strategic returns, which is important for the partnership and the financial returns, which will justify the existence of an investment arm. Financially focused CVCs can be leveraged for the brand while strategic focused CVCs will drive Proof of Concept (PoC) and pilots. While there is, no one answer to choose from, founders will benefit from setting the expectations upfront from the CVC.
How does CVC look to creating Strategic Value internally: If the goal of the CVC is not purely financial returns, how are the CVC investments tied to the corporation’s strategy? Look for signals on what strategic value means for the CVC. If the corporation is looking at investments only as a tool for acquiring information and knowledge, they may be less aggressive in providing the strategic platform for the startup. While, on the other hand, if the startup investments fits in the corporation’s three to five year strategic horizon, there may be significant partnership opportunities in the near term. Many CVCs also have a focus on building an ecosystem of startup partners to drive emerging products and technologies for go-to-market opportunities. Startups founders should think deeply about what they are looking for in the relationship and whether the CVC unit can realistically provide that in the near-term timeframe.
Internal Structure & Alignment: It is also important to understand the structure of the CVC unit and the equity of the CVC unit head internally within the corporation. Startup founders could ask who the CVC unit heads report to in the corporation and who approves the investments? CVCs thath report into the Chief Technology Officer will be focused on creating PoCs first before making investments, while units reporting to a strategy head will make investments first and then drive internal connections. For a founder, it is important to establish upfront the goals for the engagement to derive value out of the relationship.
Governance: What role does a CVC play in the Board of an early stage company? Most CVCs do not mandate board seats but look to be board observers. The key question that founders need to think about is the role of the CVC in helping build the company. While in general CVCs can bring domain expertise, what is important to understand is whether the representative from the CVC unit brings that expertise in helping the company at that stage of development. Startup founders should do reference checks with other founders who have worked with a CVC and understand the value they have derived from the CVC relationship.
Deal Structure & Signaling: If the startup founder ticks off all the above and is convinced to get a strategic investor on board, they will still need to tackle the issue around signaling and alignment with the corporation. It is therefore important that the founder builds a syndicate of investors that ensures that there are multiple players around the table. Many CVCs today understand that they will not get exclusivity, right of first refusal, or right to information on technology, and founders should align the CVCs in advance around the best practices for engagement.
You can trust corporate venture capitalists, if you partner with them after careful consideration and understand the role they can play in your startup’s journey.