The Big Guns
It's a classic dilemma: How can you develop a great company if you spend all your time raising money? For a lucky few, like John Glossner and David Routenburg, there's one way to do both: Raise money from a VC who is also an important business partner and potential customer.
Co-founders of Sandbridge Technologies Inc. in White Plains, New York, Glossner, 39, and Routenburg, 57, needed both money and industry contacts to develop and launch their new wireless handset technology. The perfect fit? Siemens AG, an $80 billion multinational corporation and a leading manufacturer of telephone handsets.
Siemens was potentially both a large customer and a strong-armed partner. Glossner and Routenburg knew Siemens was also a great source of corporate venture capital. Through the Siemens Venture Capital fund, Sandbridge got not only a multimillion-dollar check, but also something even more valuable: industry credibility.
Around the world, several hundred companies deploy corporate venture capital. From Intel to DuPont to Wachovia, corporations are investing billions in emerging companies through these "captive" or "strategic" venture funds.
Make the Call
While there are certainly similarities between a traditional VC and its corporate cousin, there are important differences. Traditional VCs are in the game for financial returns; corporate VCs often put greater emphasis on a strategic mission. To catch a corporate VC, you've got to think like a corporate VC.
One thing on the mind of a corporate VC is helping business unit managers forge the kinds of relationships they need for current projects, according to Julien Nguyen, managing partner at venture capital firm Applied Materials Ventures in Menlo Park, California. "The other is discovering the next revolutionary technology and filling in the white spaces [of future product development]," says Nguyen.
One way to hook a corporate investor is to find the corporation's vulnerabilities, suggests Anthony Warren, Ph.D., director of the Farrell Center for Corporate Innovation and Entrepreneurship, which oversees the Garber Venture Capital Fund, at The Pennsylvania State University, University Park. "That's the key thing. Say 'Look, this division has been floundering; its competitors are right behind you. This is how I can help your division beat the competition.'"
And beating the competition is what corporate VCs love to do. "If we get in on more good deals at an earlier stage than our competitors, we'll end up getting ahead," says Louis Rajczi, managing partner at Siemens Venture Capital, the fund that invested in Sandbridge.
Even among themselves, however, corporate VCs disagree about the best way to make first contact. Some prefer to meet entrepreneurs through business unit managers at the parent company. Others prefer to work directly with the entrepreneur, perhaps making department-level introductions later. Either way, it's important to find the right person in the organization. Warren has clear advice: "Search the Net and find someone [who] has been vocal in the area," he says. "Someone who has made statements to the press about the company doing something in your field. Then make a personal appeal."
By thinking strategically, Routenburg and Glossner found investments from two corporate VCs: Siemens and the semiconductor firm Infineon Technologies AG. Routenburg, now vice president of business development at Sandbridge, couldn't be happier. "It has a magnetic effect, drawing people who see that we received an investment from these corporations," he says. That magnetism attracts customers, partners and investors, who see the corporate investments as a stamp of approval by industry giants. "It's a real differentiator over others that don't have this connection," he adds.
That kind of credibility-or "market validation," as it's often called-is just one of the extras that corporate VCs bring along with their money. A strong strategic investor will also give you access to the corporation's customers, vendors and R&D teams, plus global market intelligence.
"Our corporate investors bring an interesting mix of contacts and business relationships," says Glossner, now CTO at Sandbridge. "They understand that our product may be too forward-looking for their current product lines but still bring our story back to the product groups and open doors."
Routenburg agrees: "In many ways, corporate investment is more useful than many private investments if we effectively exploit the things that the corporate investor can do for us."
Despite the obvious synergies, Warren is quick to point out that corporate venture money is not right for everyone. "One danger in dealing with corporate VCs is that their objectives are not aligned [with the entrepreneur's]. If it's really a strategic investment, they may simply grab the technology, and your economic value becomes irrelevant to them."
Knowing how the corporate VC is structured can help you avoid such hang-ups. At Applied Materials Ventures, for example, the VCs operate independently of the parent corporation and are very careful to protect their portfolio companies. But watch out for funds that can't operate at arm's length from the parent corporation. Nguyen warns, "When you're an internal VC and you answer to the CFO or CEO, it's harder to build a Chinese wall."
Still, most sophisticated investors agree that taking advantage of a portfolio company is bad business. As a result, corporate VCs often keep their investment small and invest only alongside other investors, like traditional VCs. Such was the case at Sandbridge, where the corporate investors were just part of a second round that totaled $22.5 million.
Are Routenburg and Glossner concerned about their corporate investors ripping off the technology? Not even a little. "Ultimately, we want them as a customer, so it's very positive to say 'What would we have to build to be your supplier?' It's a very cooperative relationship," says Glossner.
Across the table, Rajczi at Siemens Venture Capital feels the same. He places an emphasis on building links between Sandbridge and Siemens, and focusing on what will make Sandbridge more successful. "That will increase the value of the company and increase our returns," says Rajczi. "We don't actually measure any of the strategic benefits; we simply leverage the strategic side into financial returns."
Even as it continues work on its first product, Sandbridge is already generating millions in revenues-thanks in large part to its corporate connections. And Routenburg is justifiably proud. Says Routenburg: "If you can get a global player in your chosen market to take an interest-one that has an established record for both innovation and staying power-that is a true home run."
David Worrell is author of the e-book Finding Funding. He can be contacted at firstname.lastname@example.org.