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Corporate Startup Investors: Who Do You Want to Partner With?

By Hernán Fernández - Angel Ventures
Managing Partner

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By Hernan Fernandez | Managing Partner - Tue, 08/30/2022 - 11:00

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Corporate investors have traditionally been hard to read, both for startups and for VC funds alike. The reality is that except for a very few cases, they cannot be seen merely as financial investors. Most of the time, their agenda is aligned with the “mothership” agenda, which can mean anything in the startup world. It can be a whole-hearted effort to give back to entrepreneurs and be part of another success story. It can be a total Corporate Social Responsibility ploy to come across as good corporate citizens. Worst case scenario: It can also be seen as a disguised plan for “corporate espionage.” The reality is that startups and VCs are so far away from the ulterior motives driving a corporate/CVC decision that it is hard to figure them out but one thing is always certain: bringing a strategic investor to a cap table will always spark discussions at the board level.

After more than 12 years in the venture business, we have had the chance to work with corporates under several circumstances, as investors in our fund, co-investors in portfolio companies, or simply as partners in some other capacity. The experience is quite different in each one of these cases.

If the corporate is just a partner to the portfolio company/VC fund through any of their startup outreaching initiatives, it’s all a superficial bed of roses. A VC might get perks for the startups it represents, companies might get some in-kind benefits, and possibly some grants, and there is a good amount of goodwill generated all around. Relationships are not exclusive and to be honest, not very meaningful, unless the people running the program or the entrepreneurs opening to that “special” relationship really work toward it. Examples of this are AWS, Google, Microsoft, and a few others, that offer tangible benefits to startups and they do generate plenty of goodwill between the brands. The startup will only share as much of the business as it deems necessary to obtain the perks and the corporate will have a cookie-cutter approach to delivering those benefits. It works and it is a very friendly approach to start building bridges; hopefully, more corporates are doing this if they have a product/service that they can offer, but they should be aware that they should not expect something meaningful in return.

The second, more complex kind of interaction is to participate directly into a startup’s cap table. This is where things start to get interesting. As we mentioned before, it is rarely a purely financial transaction. The corporate, most of the time, will want to learn something from that transaction: Understand a new market or product, assess a team, gather insight on technology, pay to play to be first in line for an acquisition … it’s really hard to define at an early stage but this is a transcendental decision for startup founders and it gets even more interesting when there are competing corporates demanding exclusivity (think of a Coca-Cola versus Pepsi scenario). The hard reality for corporates, and what happens in most early-stage company boards, is that they would rather bring a strategic investor in until a Series A or later is in place, assuming there are no preferential rights, and even some limited information rights to maintain a veil of secrecy over key technology or data. We have had experiences with amazing corporate co-investors and a few ones where it was a hindrance to the company. Without elaborating further, it all came down to the people leading those CVC efforts and how detached they really were from the corporate mandate and could really look after their direct position into a startup that dwarfed in size to their employer or sole investor in their CVC. More seasoned CVC funds were substantially better at realizing this and thus made for better partners.

Finally, some of the most interesting corporates with which we have interacted, have a Fund of Funds program to work closely with a curated portfolio of VC fund managers. As a disclaimer, we do have several corporates on our investor base and most of our colleagues do as well, in a very synergistic relationship, but the fact remains that most seasoned corporate investors have this kind of program for a specific reason. CVCs will say that they prefer to co-invest with funds and in many specific instances, they will not even lead. Startups would rather take money from a well-established VC fund than from a corporate, perhaps on the idealistic notion of the value add of VC fund managers and teams. As it turns out, a corporate that becomes a Limited Partner in a fund becomes family and your incentives are aligned, whereas a potential co-investor that is not in your investor base can only aspire to be a good friend. We all know that friends come and go, except for a few good ones, but family sticks together, through the good and the bad during the life of the fund. As a fund manager, you must understand these motivations well, and stay true to your mandate as a venture capital toward your portfolio companies and all of your Limited Partners alike, but at the same time create all the right incentives and bridges to work closely with the corporate/CVC. There is so much both parties can get from a fluid, transparent relationship in this ecosystem.

Photo by:   Hernán Fernández

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