The nicest problem in the business world is to have too much cash. The best businesses are not capital intensive, and they can continue to grow and throw off cash without having to make significant new investments to produce those returns.
Meanwhile, many exciting, fast-growing startups are desperate for cash and, sometimes, the founding management team is over their head. The fun idea they had a few years ago is now taking 14 hours a day to keep going.
The solution to these problems is corporate venture capital.
Overview: What is corporate venture capital?
Many of the cash-heavy firms are in the technology industry. Gone are the days that making money means you need to lever up and buy equipment and land and factories and raw materials. Many software firms have immaterial variable costs. That is, their costs don’t increase as sales go up. Once they build the back end of their software, each additional dollar of revenue flows to the bottom line.
Many startups needing strategic investors are also in the technology industry, or at least adjacent to it. That’s where corporate venture capital funds come into the picture.
The big tech companies, awash with cash, can easily write a check that can save a startup. While venture capital (VC) funds may have strict limitations on where they can invest, corporations typically have fewer, with many more avenues to realize value.
Corporate venture capital vs. venture capital: What's the difference?
Traditional venture capital is a subset of private equity. A group of investors pool their money and a VC firm chooses startups to invest in. The firm earns carried interest on the gains and the investors take their money home at the end of the deal.
Corporations don’t have investors to worry about when they make deals. The amount of each investment is usually low relative to the total size of the corporation. Corporations can look for startups that will add value to their business which can come in more ways than the bottom line.
Types of corporate venture capital
Here are the main ways corporations will participate in venture capital.
Synergistic investments are when the startup is in a very similar business to the investing corporation. Think of an online streaming giant investing in a startup with a new movie review algorithm or a social media company purchasing a new startup that lets people share videos of them singing to their dogs.
Synergistic corporate venture capital investments typically create the most value outside of traditional return on investment. The corporation’s management will work closely with the startup, and ideas and strategies pass between the two. Often, synergistic investments end with the corporation acquiring the startup and making the founding management team executives in their business.
Opportunistic investments sit between synergistic and passive investments. The startup business is not related to the corporation’s but would help the corporation horizontally or vertically integrate.
A good example would be a big bank investing in a software startup making back-end software for banks. It allows the bank to contribute its expertise to the software while saving money on developing its own software or buying it from a third party.
Opportunistic investments can also end with an acquisition, but often, the startup will have a bigger target market if it stays independent.
Passive investments are basically corporate private equity. The corporation has a ton of cash, and one way it invests the cash is in startups, even if they aren’t even a little related to the main business.
The corporation usually does better if it limits its investments to passive situations. It’s better to stick to your core competencies than to di-worse-ify with something unrelated to your business.
6 benefits of getting corporate venture capital
Here are the benefits of accepting corporate venture capital in your startup.
The number one reason to accept any investment in your business is growth, and investment from corporate venture capital firms is no different. Investment allows you to invest in new equipment, marketing, or even a physical location.
Synergies are great. Many startups grow fast, and the accountant they hired right out of business school was fine when they had 7 customers. Now that the business has millions in revenue, they might need to get someone with more experience.
Most big businesses have massive accounting departments and can easily take on the additional administrative tasks and consulting with executives on how to handle big picture strategy.
The best situation is when the corporation takes over most back-office/administrative tasks, allowing the startup to focus on its core business. The corporation likely has far lower unit costs for these items, so it should improve the startup’s financial projections.
Very few corporations get big through bad management and even fewer stay big (big enough to throw off millions of dollars of cash to invest in startups) without figuring out how to keep hiring smart managers.
Possibly the best result of corporate venture investments is the founders’ ability to consult with management professionals in the corporation. These professionals should know all the industry business metrics like the back of their hand. Even if they aren’t industry experts, they’ll know business and financial strategy or simply be able to give advice on how to manage people.
If you listen to any podcasts, I’m sure you’ve heard endless startup marketing. Ads for male hair loss and other, uh, related products. Endless ads for online sports gambling. Even commercials for smaller wallets. You can probably figure out which type of podcasts I listen to from these examples.
Most of these ads are funded by venture capital. And you could use corporate venture capital in the same way, but there are even better marketing opportunities.
If you had a startup making software for turning uploaded photos into big printed posters, think about how many more people you could reach if Adobe invested in your company and prompted everyone who downloads Photoshop to download your software.
5. Potential exit
If you can swing a synergistic or opportunistic corporate venture investment, think about a potential exit from the start. Often, the venture investment is an audition for a full acquisition. Think not only about how your product can serve the general public, but also how it can integrate with your investor’s existing products.
6. Lead investor
Lead investors are crucial to raising venture capital. If you can swing a good lead investor who represents a corporate venture capital firm, you’ll have a great head start at improving your business and raising more money for it.
Should you go corporate?
Often as a startup founder, you scramble to make payroll or are traumatized by the endless new decisions you need to make each week. There’s no problem in “selling out” to a big corporation that can kill 17 birds with one check.