March | 2017
Introduction
In today's venture environment, there is an abundance of capital available for investment. According to research firm CB Insights, Corporate VCs alone invested $24.9B in 2016 and 53 new Corporate Venture units made their first investment in the first half of 2016, indicating that entrepreneurs have ever-increasing choices before them. Given these conditions, entrepreneurs should spend time to understand a corporate investor's goals, motivations and operating style to choose the right investor, whose value proposition aligns best with their needs.
Much has been written on the differences between institutional and corporate venture capital investors, including VC vs. Corporate VC and Value of Corporate VC, weighing the tradeoffs of each. In this article, we will focus on corporate venture capital firms specifically, commonly referred to as Strategic Investors, and explore how best to analyze and understand the differences between them.
Understanding your (Potential) Investor
Corporate investors are often quite different from one another in their approach, goals and operating styles, which creates very different experiences for the entrepreneurs building companies.
One way of viewing Corporate VCs is to imagine a sliding scale, with one end representing purely financial motivation and the other representing purely strategic motivation.
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,
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.
We Seek:
Early to mid-stage companies (typically raising B or C financing rounds):
The Value We Bring:
Conclusion
To summarize, an entrepreneur should keep the following points in mind when evaluating corporate/strategic investors for an upcoming round:
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.
Venu Pemmaraju - Managing Partner
Venu is a Managing Partner at Wipro Ventures and serves as a board observer for Avaamo, CloudGenix, Emailage and ImanisData.
Prior to this he was an Investment Director at Intel Capital. He is an MBA (Finance and Strategy) from the Booth School of Business at the University of Chicago, holds a MS in Electrical Engineering from the University of Houston and a BS in Electronics & Communication Engineering from IIT, Kharagpur.
Venu has a successful track record in identifying investment opportunities around open-source software, cloud and mobile technologies.
Daniel Greene - Principal
Daniel is a Principal at Wipro Ventures. He holds an MBA from the University of California, Irvine, and a Bachelors degree in Bioengineering from UCLA.
Daniel has an investment focus on emerging technology in the Financial Services and Healthcare industries.
Biplab Adhya - Managing Partner
Biplab is a Managing Partner at Wipro Ventures and serves as a board observer for Altizon Systems, Demisto, IntSights and Tricentis.
Prior to this position, Biplab held several operating roles, primarily in the enterprise applications services domain at Wipro, Genpact, and PwC. He earned a bachelor's degree in computer science and engineering from IIT Kharagpur, and an MBA with concentration in finance and systems from IIM Bangalore, India. He is a certified Six Sigma Green Belt and a Kauffman Fellow.
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