15 things founders should know before accepting funding from a corporate VC

More than $ 50 billion of corporate venture capital (CVC) was deployed in 2018 and new data indicates that nearly half of all venture rounds will include a corporate investor. The CVC trend is heating up and the need for founders and startup executives to stay informed is higher than ever.

We’ve covered the basics in this series, including how to approach CVCs and what to know before the investment, what to look out for when negotiating, and getting the most out of a CVC partnership after the investment.

A great CVC investor can be the best of both worlds — a strong corporate champion who provides insights and connections to help your startup succeed and a committed financial partner who provides the capital you need to grow. But CVCs aren’t just VCs with different business cards. Finding the right CVC requires the right approach and strategy, and getting the right CVC on your cap table can bring unique and lasting value to your startup.

To wind down this series, here’s a list of the top 15 things every founder should know before signing a term sheet with a CVC.

  1. CVCs come in three major types. The type of CVC you’re dealing with will determine a great deal about the potential for the partnership, the professionalism of the investing process, the resources you’ll have available once the investment is made and much more.

    Image credits: Orn/Growney

  2. Different CVCs have different investing strategies. Some CVCs view deals through the lens of, “I’m looking for a great team, huge market and a chance to bring in funding and connections to make a business as strong as it can be.” Others see their investment like, “I’m looking for a solution/product/platform that I can bring into my company or use to expose my company to a brand new marketplace or technology.” As a founder, it’s best to know which type you’re dealing with before the pitch.
  3. CVCs can offer benefits beyond capital. Choose one who can offer money AND … . As Rick Prostko, Managing Partner at Comcast Ventures, says, “Look for someone who will understand your business, meet with you and decide that there’s something beyond just capital that will form the basis for that relationship. In today’s venture market, founders want money AND value. Seek out a CVC who has valuable experience to provide, and look for someone who’s been an operator in this segment previously or who has valuable insight and experience to offer.”
  4. Some CVCs are a better fit for your company than others. As with all investors, some will forge a better relationship with you and the exec team. But with strategic CVCs, the need for a strong bond at the outset is even higher since you’ll be embarking on a strategic partnership with the CVC’s parent company.
  5. Do your own diligence, just as they do theirs. The best way to find out what type of CVC you’re dealing with, what to expect in the investment process and whether your chances are strong for a post-investment partnership is to ask around. Talk to other companies within the CVC’s portfolio, or founders who’ve pitched the CVC in the past. Ask for their feedback on how it went and what to expect. You’ll never regret having more information.
  6. Come into the relationship with ideas for how the CVC can help your company. Do you see possibilities for product feedback loops? New distribution channels? A potential future acquisition by the parent company? Don’t be afraid to share your vision with the CVC during the pitch, and discuss how and whether that vision can be realized.
  7. Expect deeper product and technical diligence. CVCs have technical, product and market experts at their disposal, so their level of product diligence is typically more rigorous than traditional VCs. Be prepared for some grilling by subject matter experts. On the flip side, this diligence process provides you with exposure to potential customers and partners inside the corporation, so use this time to your advantage.
  8. Stay aware of what information you reveal during the diligence process. Remember that you’re sharing confidential info with a large company. If you stay thoughtful and strategic with what you share, and determine whether the CVC is truly interested in doing a deal before you offer financial, technical and competitive information, you’ll usually be fine. Don’t rely exclusively on NDAs — they only provide so much protection.
  9. Ask questions during negotiations. Do they want to lead your round? Do they want a board seat? Do they understand your future fundraising strategy? Will they be using experienced lawyers to do the deal? These are all important touch points during the negotiation process, and the answers will be revealing.
  10. . Set clear rules on ownership percentages ahead of time. As a rule, don’t let any single CVC own more than 19.9% of your company. If they own more than that, the CVC’s parent company will likely need to consolidate your financials into their annual and quarterly reports. If that happens, you’ll be required to get an expensive audit done, meet strict reporting deadlines and invest in financial planning and projections, all of which can hinder your bottom line.
  11. . Be sure to get the CVC to waive audit requirements. We mean it! Do everything you can to avoid any audit obligations. Audits are notoriously time consuming and expensive — we’ve seen audits by Big Four firms cost startups over $ 30,000. While many investor rights agreements “require” an audit, traditional VCs usually waive this requirement to avoid wasting a founder’s time and money. You want a CVC investor to do the same.
  12. . Never give a CVC a Right of First Refusal. Under no circumstances should you let a CVC get a ROFR, which would give the parent corporation the right to “beat” any other potential acquirer if and when you try to sell your startup. In practice, a ROFR means that no smart competitor to the parent organization will try to purchase your company because they know the CVC’s corporate arm will be able to swoop in and steal the deal.
  13. . Be aware that you run a risk of regime change. Staff turnover is a reality that CVCs face as much as any other large corporate operation. Ask the CVC leading your investment: Who will support the company if he or she leaves? What will happen to the CVC if the person leading the venture arm departs? Will the company still do their pro rata if personnel changes happen? What about commercial relationships that come from the relationship? You have a right to know as much as possible at the beginning, though the future can always change.
  14. . You may have to tackle regulatory issues. If the CVC’s parent company is in a certain area, it may be subject to government regulation. For instance, banks must adhere to a variety of regulations very different from those that apply to large tech companies. Navigating these laws can be costly and time consuming, so be aware of what you’re getting into before you sign the dotted line and discuss how you and the CVC can avoid hitting any regulatory roadblocks.
  15. . Know that you may face challenges in the relationship over time. While startups thrive on renouncing hierarchy, chasing innovation and pivoting on a dime, larger corporations operate at a different pace and under a different paradigm. Change comes slower, decisions often involve more parties and some business units have different priorities than others. As a founder, you’ll be in charge of navigating the CVC’s parent company in order to maximize the partnership value.

There are plenty of benefits to taking CVC investments. Many CVC investments lead to acquisitions, and even if the discussions with a CVC fall apart, your meeting can result in valuable introductions that yield new business relationships. The rising CVC trend offers a brave new world for entrepreneurs. If you know the ropes of CVC investing, you could be in for a partnership that benefits you both.

Startups – TechCrunch

5 Thoughts To Consider Before Starting Any Do At Home Internet Business

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5 Thoughts To Consider Before Starting Any Online Business Internet Business

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Startups – Rapid Growth and Innovation is in Our Very Nature!

Getting a equity raise before a round vs after a round

Hey /startups community,

I had a question around equity (from an employee perspective) what are the pros and cons to getting equity before and fundraising round vs getting equity after a fundraising round.

I can see arguments to both sides but I’m curious what you all think and am excited to read your insights.

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Startups – Rapid Growth and Innovation is in Our Very Nature!

What should startup founders know before negotiating with corporate VCs?

Corporate venture capitalists (CVCs) are booming in the startup space as large companies look to take advantage of the fast-paced innovation and original thinking that entrepreneurs offer.

For startups, taking funding from CVCs can come with many benefits, including new opportunities for marketing, partnerships and sales channels. Still, no founder should consider a corporate investor “just another VC.” CVCs come with their own set of priorities, strategic objectives and rules.

When it comes to choosing a CVC with which to enter negotiations, the most important step is doing your own diligence beforehand. An entrepreneur’s goal is to find the perfect match to partner with and guide you as you grow your business. So before you start discussing terms, you’ll want to understand what’s driving the CVC’s interest in venture investing.

While traditional VCs are purely financially driven, CVCs can be in the venture game for a variety of reasons, including finding new technology that might generate marketplace demand for their products. An example is Amazon’s Alexa fund, which invested into emerging companies that drive use and adoption of Alexa. Alternatively, a CVC’s parent company may be looking to invest in tech that will help them operate their own products more efficiently, such as Comcast Ventures investing in DocuSign.

As a rule of thumb, the bigger CVC funds like GV and Comcast tend to be financially driven, meaning they’ll be approaching negotiations through a financial lens. As such, the negotiating process more closely resembles an institutional fund. You as a founder have to do the work to figure out what’s driving your CVC — is this a customer acquisition or distribution opportunity? Or are they seeking to find a source of knowledge transfer and/or bring new tech into their parent company?

“Before negotiating, always look at a CVC’s existing portfolio,” says Rick Prostko, managing director at Comcast Ventures. “Have they made a lot of investments, at what stage, and with whom? From this information you’ll see the strategic thinking of the CVC, and you can determine how best to position yourself when you begin negotiations.”

Startups – TechCrunch

What You Have To Know Before Opting To Work In A Home Office

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I’ve read books, none agree, some websites appear to be made by folks who’s only idea was starting the website for advice. I have big hopes but a realistic outlook and need help in these areas

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Startups – Rapid Growth and Innovation is in Our Very Nature!

Looking for Digital Marketing services/people. I want to launch an app but I want to gather abit of attention before i launch.

Hi all.

Can anyone help me with marketing my app before I launch it. I want to gather some attention around it or create a buzz so that come release date it's not got 10 downloads. I don't mind spending on Google ads? ASO, SEO Twitter ads etc. But if anyone has experience doing this or can point me in the right direction in terms of methodology etc then I'd definitely be all ears. The app is almost ready to be launched. I also do not mind paying someone to complete marketing tasks.

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Startups – Rapid Growth and Innovation is in Our Very Nature!

8 Questions You Should Ask Before You Join A Startup

questions-before-joining-a-startupEvery startup founder loves to prompt for questions from investors and potential key team members about their vision, and the huge opportunity that can be had with their disruptive technology. Yet if you are on the other side of the table, there are some other key questions that you need to ask, which will tell you more about the real success prospects for this business.

Enthusiastic startup founders may try to deflect or minimize these questions in true media-training style, so you need to be patient, calm, and persistent to get the whole story. From my perspective as an investor, I recommend that every founder needs to know the answers to these questions, be open and honest in answering them thoughtfully, and without making excuses:

  1. What is the current runway and burn rate? These terms quantify how fast money is being spent, and how long the business can survive before another round of investments is required. Early stage burn rates over $ 50K per month, or a runway of less than six months may indicate an inefficient or desperate startup. Think twice before you jump in.
  1. How complex is the capitalization table? The allocation of shares among the founders, and the number and size of outside investments, will tells volumes about the health, stability, and management of the business. Most founders like to talk about their many months or years of sweat-equity, but cash invested is a stronger commitment.
  1. When did this effort really start, including pivots? If the company has been around for more than a couple of years, and still has no product or revenue flow, there better be a good explanation. One more key employee or one more investor will probably not turn the situation around. History gaps and founder turnover may indicate a long road ahead.
  1. Does everyone on the team have a clear role and mutual respect? You won’t get this answer directly from the founder, so ask to talk to other key team members to make sure everyone is carrying their weight, and communicates effectively. Some conflict and differing perspective is healthy, but too many titles or close relatives should be suspect.
  1. Any outside advisors or board members available for discussion? Every startup should have at least a couple of outside advisors who are not major investors or family members, anxious to talk to new investors and key new hires. These should be people with complementary skills to the founders as well as industry expertise or connections.
  1. Is there a real customer willing to give a testimonial? Don’t be sidetracked by potential customers in the middle of a free trial, or friends of the founder. If it’s too early for customers, make sure you understand exactly when the product ships, how detailed is the rollout and promotion plan, and how many times these plans have changed.
  1. Are any lawsuits and challenges to intellectual property pending? Before you invest your life savings, or bet your career on this startup, you need to know how much of a barrier to entry the brand and patents are projected to be. If you have questions or concerns, now is the time to seek legal advice, not after the fact.
  1. How much and when can I reasonably expect a payback? Since nine out of ten startups fail completely, serious investors look for a 10X return on their investment within five years. Look for examples of similar companies and revenue multiples achieved from acquirers. Calculate employee stock option values and vesting times, as well as salary.

These questions are the key ones in every due diligence effort, always done by accredited investors, but almost never done by key employees and new partners. Ironically, startup investors are normally in less personal jeopardy than early startup employees. Smart investors know that many startup investments will fail, while employees always plan on million dollar payouts.

In any case, in addition to the grand vision and the chance to change the world, I recommend that it’s worth your while to calmly and assertively get some good answers to some hard questions from a passionate startup founder before you sign your life away.

Marty Zwilling
Startup Professionals Musings