In case you hadn't noticed, funding by venture capital firms has declined significantly in the last few years. But investments by big companies such as Google, GE, Intel, SAP and IBM have picked up the slack. In fact, the National Venture Capital Association reports that 2013 was a banner year for corporate venture capital, with companies participating in nearly 20 percent of the deals and 10 percent of the dollars invested.
What does this mean for startups? Besides cash, the upside of corporate capital is immediate validation of your idea by the marketplace, as well as access to talent, facilities and distribution from the company. However, for most entrepreneurs I meet, the thought of partnering up with an enterprise-level company is scary business. There's a fear of not aligning with the goals of a global corporation, missing out on a higher payday down the road and losing control.
To allay these fears, I find it helps to explain why corporations participate in venture funding in the first place. If you have an opportunity to consider investment from a company, here's what you need to know.
Understand the mechanism. In my experience, corporate venture groups fall on either the financial side of the house (treasury, pension, foundation) or the strategic side (mergers and acquisitions, research, business development).
If the financial side is driving investments, typically the company acts like a traditional VC firm, working toward earning a healthy return on its investment--and staying out of your business. More often, however, these types of deals are driven by the strategic side, meaning the corporation wants to bolster its development pipeline with the latest and greatest innovations it can find.
Fight for free agency. If you find yourself dealing with the strategic side, take measures to protect yourself in the negotiations. Do what you can to keep the corporate suits off your board and away from sensitive intellectual property.
Even if access to the company's distribution network is a big draw, be very selective in locking up distribution rights to specific markets or regions; for example, perhaps the company will hold exclusive rights to sell your product to the government, but you can still sell it to consumers.
Fortunately, in an effort to attract quality deals, corporations have had to play relatively nice with startups in these matters.
Weigh risk vs. reward. If you find your free-agency fight to be fruitless, run the numbers to see if the investment will be worth it. If early corporate participation limits your upside potential by 50 percent but doubles the odds of you getting to that liquidity event, that is a break-even transaction for the founding team.
Also, think hard about how happy you and your team would be if, over the next five years or so, your company morphed from autonomous startup to just another corporate division. Are you the type who would trade financial security for that scenario? Perhaps not. But for certain startups, corporate partners can be wildly beneficial--the monster in your corner who can instantly cause the market to take you seriously.