How Your Small Business Can Play in the Big Leagues
Sheri Atwood had all but run out of operating capital when she scored a meeting with Salesforce Ventures, the CRM software giant’s strategic venture fund. “I was a day away from applying for food stamps and a week away from shutting down,” says Atwood, founder and CEO of SupportPay, a child-support payment platform for separated parents.
Instead, the Santa Clara, Calif.-based entrepreneur nabbed investments from Salesforce and elite Silicon Valley venture capital firm Draper Associates in the same week. Suddenly, she had the attention of multiple angel groups, VC firms and family offices. “The moment I could say that Tim Draper and Salesforce were in, I emailed all these people who had been sitting on the sidelines, and then everybody wanted to invest,” Atwood says.
In May 2014 SupportPay closed a $1.1 million seed round, with Salesforce contributing what Atwood calls “a large portion” of the kitty, despite not leading the round. This year SupportPay announced a $1.5 million seed extension. In all, 10 angels and investment groups contributed to the $2.6 million the startup has raised.
Corporate venture capital investments are on the rise, with companies joining 357 deals in the first six months of 2015, according to VC data clearinghouse CB Insights. The tech sector doesn’t hold a monopoly on corporate VC; in recent years, healthcare, financial services, telecommunications, entertainment, construction, energy and insurance companies have joined the investment act, too, with players like GE, Comcast, MasterCard, Lowe’s and HCA taking a seat at the table.
Money and street cred aren’t the only reasons for startups to seek corporate investors. Besides understanding the intricacies and challenges of the market, many corporate venture arms offer support services and partnership prospects, including technical aid, mentorship, leadership and efficiency training, distribution channels, joint development opportunities and introductions to potential customers.
Of course, corporate VCs have an agenda beyond the cash. Many want to keep a toe in the innovation pool, helping to shape groundbreaking products and, in some cases, acquire them.
When attempting to raise corporate VC funds, it’s essential that you go in with your eyes open and target strategic investors who complement your corporate vision. Here’s how to do it.
Research their MO.
Motivations vary wildly among corporate investors. Some, like Google Ventures and Intel Capital, operate independently of their parent companies and place more emphasis on returns. Others prioritize partnering with startups over reaping financial rewards.
Nashville, Tenn.-based hospital chain Hospital Corporation of America (HCA) considers itself a customer first and an investor in health-tech startups second, says Will Morrow, who manages HCA’s venture capital group. To invest in a company, “we have to at least believe that we will be a user of their product or service at a fairly significant scale,” Morrow says.
Comcast’s investment arm, on the other hand, behaves more like a traditional VC firm, hoping to unearth media and tech startups that will be runaway hits four to six years down the line, according to Andrew Cleland, managing director of Comcast Ventures’ New York office. “We like to position ourselves as ‘VC plus’ because you get this additional benefit of commercial opportunity,” he adds.
Some corporate venture groups invest six figures or $1 million to $2 million per deal; others routinely invest at least several million dollars per deal. Seed funds can be the hardest to raise. According to CB Insights, during the first half of 2015, seed investments comprised only 11 percent of corporate VC deals, while Series A and B contributions accounted for approximately 50 percent, and Series C contributions accounted for nearly 20 percent.
To understand a company’s investment approach, look at its last five deals, advises Tom Drummond, managing director of Heavybit Industries, a nine-month program in San Francisco for seed-funded companies making developer-focused products.
“That will tell you both how active they are and how they pay,” says Drummond, who worked for corporate VC Reed Elsevier Ventures for almost a decade. “Are they leading the round? How big is the round overall? How many other capital partners are in there?”
Boston-based 3-D printing company Voxel8 closed a $12 million Series A round this year that included an undisclosed contribution from Autodesk’s Spark Investment Fund. Voxel8 gleaned details about Autodesk’s investment philosophy from public statements CEO Carl Bass had made about 3-D printing. “We follow what he says quite a bit,” says Voxel8 co-founder Daniel Oliver.
For other clues, scour the company’s financial statements for the coming year’s business priorities, suggests Asif Khan, co-founder and CEO of Caremerge, a Chicago-based healthcare platform for seniors. Studying a company’s recent acquisitions and write-ups by industry analysts can yield additional breadcrumbs, says Khan, whose $4 million Series A round was led by health insurance provider Cambia Health Solutions and included GE Healthcare.
Khan also chats up corporate product managers and VCs at trade shows and other industry events. “Usually people have their guard down at these conferences,” Khan says. “If you have a meaningful and purposeful conversation, and they understand and like your product, they will introduce you to other people.”
Prove you’ll add value.
For the sake of argument, let’s assume you’re targeting corporate VC groups that share their parent company’s strategy, as opposed to those concerned solely with financial returns. (Let’s also assume you’ve applied the standard principles of investment networking, initiating talks at least six to 12 months before you’ll need money.) To court strategic VCs, you need to show how your startup complements their business goals.
“When you’re pitching a strategic investor, you’re actually thinking of them as a partner, customer and contributor,” says Manvi Goel, director of the Strategic Partnerships Initiative at Greentown Labs, a clean-tech incubator just outside of Boston. This means selling the goliaths on collaborating with you rather than selling them on the financial opportunity, she says.
Take SupportPay. Although Salesforce Ventures doesn’t typically invest in consumer products, Atwood knew the software giant wanted to expand into the government sector but was having trouble making headway. She also knew that government child-support databases were woefully outdated, despite federal mandates calling for state government improvements. She sold Salesforce on the chance to move child-support payment tracking to the cloud and the fact that she built SupportPay using Salesforce technology.
Relevant data about industry pain points and room for improvement can help make your case. “VCs love research,” Caremerge’s Khan says. “They want to understand what’s going on in the trenches.”
Soliciting feedback is also wise. “You get a different suggestion base when an entrepreneur comes in to meet with a corporate venture group than when you meet with a purely financial investor,” says Morrow, who often has HCA buyers attend pitch meetings. Just be sure to listen to the advice; insisting you know the market better than a potential customer impresses no one.
Weigh the risks.
The more corporate VC you score, the more strings may be attached. “Any entrepreneur thinking about raising money from a corporate venture fund has to make sure there are no special privileges given to the fund,” Heavybit Industries’ Drummond warns. For example, you don’t want to give corporate investors the right of first refusal. “It might negatively impact your exit opportunities,” he says. Also be wary of granting special information rights, special voting rights or other terms that give corporate VCs preferential treatment in the marketplace.
Entrepreneurs striking smaller, earlier- stage deals probably won’t have to contend with these terms, according to Ranvir Gujral, co-founder and CEO of San Francisco-based visual marketing platform Chute, which raised six figures from Salesforce during its $2.7 million seed round in 2012. “It’s not reasonable if they’re putting $100,000 in a $3 million round to get information rights,” he says. “But over a certain amount, most corporate investors have to treat that investment differently. It goes on the balance sheet.”
None of this means that selling to or partnering with a corporate investor’s competitors is out of the question. Just ask SundaySky co-founder and CEO Shmulik Weller. In 2013, his New York-based video-engagement company raised $20 million in Series C funding, with Comcast Ventures leading the round and taking a board seat. But this didn’t scare away the mass-media giant’s competitors. “It was never an issue; no one raised that concern,” Weller says. In fact, he adds, “many of Comcast’s competitors are customers of ours.”
Try partnering first.
Corporations aren’t necessarily known for their agility and quick decision-making. Nor can you expect their investment arms to maintain the same strategic direction for years on end; today’s mandate may be different tomorrow. That’s why it’s smart to build relationships over time with people from across the corporation.
“You’re not just getting in bed with the VC arm,” says Karl Martin, founder and CEO of Toronto-based Nymi, which last year raised $14 million in Series A funds for its wearable authentication devices, including $2 million from three corporate VCs. “You’re getting in bed with the whole company.”
Selling your product to or establishing a partnership with the business arm of a sizable corporation before taking its money is a great way to test-drive the alliance, says Martin, whose strategic investors include MasterCard’s Start Path fund and Salesforce. It also lets you amass internal champions so that when it’s time to raise capital, you’re already vetted.
Last year Nymi began working with MasterCard to develop a Canadian pilot program for secure mobile payments made by wristband, authenticated by the wearer’s heartbeat. Besides leading to an investment deal with the financial-services titan, the partnership gave Martin an inside glimpse into how the corporation operates. When Nymi pivoted from targeting consumers to targeting businesses, Martin wondered how MasterCard would respond. Happily, the credit-card colossus didn’t bat an eye.
“They were fully supportive,” Martin says. “They said, ‘Your justification makes sense. We’re not going to get in the way.’ They really understood early-stage innovation.”
Having the support of a corporation’s product team or other stakeholders can give future fundraising efforts a boost. Consider Boston-based HourlyNerd, an online marketplace for consulting projects that raised $7.8 million in Series B money this year, with GE Ventures contributing.
“When they thought about investing, they had readymade internal testimonials about how useful the product was,” co- founder Rob Biederman says of GE, one of HourlyNerd’s largest customers. “They were able to ask really detailed questions of their internal stakeholders and say, ‘Could you imagine using more of this?’”
GE’s interest in the young company was no fluke. “It’s often the case that somebody at one of our clients will refer us to their corporate VC group,” Biederman says, adding that GE remains the startup’s only corporate VC. “The trick for us is being disciplined. The right partner can generate a tremendous amount of value, but the wrong partner can potentially be a bit of a quagmire.”