Typically, Corporate VCs will be a mix of both, but some act purely as financial investors. However, even if investors are close on the spectrum, they may vary greatly in their strategy and approach. One corporate investor may make many small bets on early stage companies, while another invests in a few large, extremely targeted deals. Understanding the motivations, or priorities, of a potential corporate investor and how they align with your objectives, is critical to maximizing the value from the relationship. In order to understand what type of strategic investor aligns best with your needs and expectations, entrepreneurs should consider the following key questions.
Key Questions to Understand Different Corporate Investors
1. What are you hoping to achieve by accepting money from this Investor?
The first step towards picking a suitable investor is identifying your own needs, goals and objectives, both now and in the future. For example,
- Are you looking for an investor with domain expertise to help shape product direction or help with technical development?
- Are you looking to boost sales through a large channel partner?
- Are you hoping to build a closer relationship with a big customer as they ramp up use of your product?
- Are you trying to become a preferred supplier, or entrench your solution as part of a company's larger offering?
- Do you just need to fill out the rest of a funding round and are looking for an investor that is not as valuation sensitive, or will not take a board position?
- Will an investment from the investor provide additional momentum through publicity and exposure? Are you looking to expand into a geography where the strategic investor has considerable presence and influence?
Once you have clearly thought through your goals and needs, you can begin to identify which investors are best suited to help.
2. What is the Investor hoping to achieve by funding your Startup?
This might seem obvious at first, as making money is a typical goal for any investor. Every VCs goal is to invest in high-growth startups that can generate value for their firm. Financial returns are essential, but to a strategic investor, other considerations like access to new technologies, customers and markets or filling a solution gap can be equally valuable.
A corporation could be investing with the goal of eventually acquiring the company, either viewing startups as an additional source of innovation and technical development, or as a way of hedging their bets on internal R&D.
Other corporate investors might never intend to acquire the startup but view an investment as a way to further their strategic partnership. Perhaps they intend to embed the startup's product or technology within their own products or create a broader end-to-end solution and an investment is a way to align incentives while collaborating with an emerging startup.
Some corporations use strategic investments as a way to enhance and build out an ecosystem around their platforms. Major SaaS vendors, as well as hardware platform vendors, have shown the effectiveness of this approach, investing in startups that increase the value of the platform while also boosting stickiness and adoption. Strategic investments of this nature are not restricted to software. Car manufacturers, healthcare providers, energy and industrial companies have all embraced strategic investments as a way to achieve the aforementioned goals. Furthermore, they can invest in areas viewed as high risk, or outside of their core, minimizing the cost of failure while allowing them access to high potential projects.
3. What are the "Fund Logistics"?
To be clear, we are using the term "Fund" loosely because most corporate investors invest from their Balance Sheet. However, for planning purposes, the board allocates a certain amount towards this "Fund" for venture investments.
By "Logistics", we mean details and questions associated with how a corporation will deploy the capital from their fund. What is the typical investment amount or check size? Can they lead an investment round, or do they need another to lead? Will they make follow-on investments? Will they make bridge loans if necessary? How long does it typically take to complete a financing? How many deals will they typically do in a year? firm
Knowing the answers to these questions will give an entrepreneur a better idea of how a corporate investor operates, enable better planning and eliminate potential surprises down the road.
4. What are the characteristics of the "Fund"?
Fund characteristics matter. They affect how decisions are made and dictate key elements of the relationship between investor and startup. An entrepreneur should understand how a fund is set up and how it is influenced by the corporation.
Is the fund a completely separate corporate entity or are investment managers investing from the company's balance sheet? How are investment decisions made? Do the fund managers have final decision-making authority, or do they report to an executive committee? What is the geographical focus of the fund, along with the overall corporation? If you are looking to expand your sales footprint to Europe, for example, it might help to choose a strategic investor with strong ties to that region.
These details further define how a fund will operate and indicate what the strategic investor can and cannot do to help. If you know that a strategic investor is set up as its own separate entity, it is possible there is less involvement between the entities.
5. How will they help grow your business?
This is probably the most important consideration for most entrepreneurs and they should evaluate it carefully prior to choosing an investor. Asking the right questions can help unearth the true level of involvement, as almost any investor will claim they are supportive of what their entrepreneurs need.
The issues to consider are - How will the strategic investor measure the success of this investment? If there is an executive sponsor for this investment, what is his/her involvement going to be? How many other investments do they manage or serve as a board member? What is the engagement process going to be after the investment is completed? Is it ad hoc or is there an established cadence for regular interactions? Is there a formal business or partnership agreement being signed as part of this investment? Will the investor take a board seat, a board observer seat, or neither? How will these choices affect your business, your future financing and exit potential? Is the strategic investor seeking exclusivity? Do they limit or expand your ability to establish partnerships with other partners? Note that a pragmatic investor should understand these concerns and construct a partnership agreement that results in a positive outcome for both parties.
Wipro Ventures - Our Approach
Wipro Ventures, founded in 2015, is a relatively new entrant to the corporate venture-investing world. Broad technology experience, a global footprint and deep understanding of the enterprise IT market drive our investment approach. We would be remiss if we did not lay out our selection criteria and the value we bring to the entrepreneurs we invest in.
Early to mid-stage companies (typically raising B or C financing rounds):
- Building enterprise software, Fintech or Healthcare IT products, targeting Global 1000 corporations
- Showing early proof-points of product-market fit
- Developing solutions that lend themselves well to value-added services or that fit well as a component of a larger service offering
The Value We Bring:
- Go-To-Market support and access to Fortune 1000 customers. Wipro has built long-lasting relationships with some the largest and most successful firms across the globe.
- Global Reach. With Wipro's broad reach and presence in six continents, startups get exposure to markets across the globe.
- End-to-End Solutions. Portfolio company offerings become an integral part of Wipro's best-in-breed solutions.
- Domain and Market Expertise to help shape product roadmap. Wipro has 55+ "Centers of Excellence" dedicated to developing and understanding emerging technologies.
To summarize, an entrepreneur should keep the following points in mind when evaluating corporate/strategic investors for an upcoming round:
- Know your objectives and expectations as well as those of your potential investor
- Understand an investor's decision-making process - will they support you through different rounds of financing and the "crests and troughs" that are inevitable in a startup's journey.
- Will an investment from the strategic investor come with restrictive covenants that may limit or hinder future alliances or exit potential?
- Last but not the least, ask other fellow entrepreneurs about their experience with the investors that you have shortlisted
Remember - you are entering into a long-term relationship with an investor, strategic or otherwise, and the homework you do upfront will pay dividends over the long run.