Startups need to choose how to fundraise and what type of partnerships are likely to drive their growth. Typically, I recommend that startups consider diversity when raising, since different types of investors bring different value to the table. It’s smart to raise money from a mix of angels, traditional venture capital firms, and corporate venture capital. Let’s take a look at the unique advantages that corporate investors bring to a successful startup.
Benefits of Diverse Fundraising
Just like diversity in the workplace, pursuing diverse fundraising benefits startups because it gives them unique perspectives. It’s common that startups begin with funds from the founders, family and friends, and later angel investors. Once they are ready for professional venture capital (VC), I believe it’s a good idea to consider pitching to both traditional VCs and corporate investors.
Traditional VCs are well-connected, well-funded, and have supported many successful startups. At the same time, they tend to invest in the same startups as their competitors. VCs often lower the amount they invest during difficult economic times, making fundraising more challenging for startups.
How Corporate Venture Capital Adds Value
Corporate venture capital (CVC) has grown rapidly, and I expect that trend to continue. According to INSEAD, there was an increase in the number of corporate investors between 2010 and 2020, growing more than six times to 4,000. Their cumulative investment was over $163 billion in 2021, an increase of 142 percent versus 2020.
How does CVC work? Corporations might invest through their own VC organization — such as Intel Capital — or they might operate through a VC partner, such as Pegasus Tech Ventures. In this model, known as venture capital as-a-service, corporations choose how much to invest, in which sectors, and what their investment goals are. Companies including Sega, ASUS, Denka, and Japanet invest this way. By outsourcing their investment efforts, they have great flexibility without having to form their own VC organization. They can invest as much or as little as they wish.
Like with any investor, it is critical that startups understand the motivation of a CVC investor. Are they investing for financial or strategic reasons, or both? What kind of results do they expect, and in what timeframe? Like with most relationships, it’s best to discuss these topics upfront. I also recommend that the startup does its own due diligence, finding out more about the corporation, its prior investments, and its reputation as a partner.
Because CVC is strategic in nature, corporations are less likely to cut back funding during a recession. They are looking for true technology partnerships that will not only make money, but will grow the long-term pie for the corporation and the startups they invest in. By collaborating closely with startups, the corporation becomes more innovative, and the startups benefit from the corporation’s brand, know-how, connections, and willingness to mentor.
Let’s expand on how CVCs and startups can work together.
Recognition: Startups typically benefit from the global brand reputation of their corporate investor. Just referencing the corporate name can open doors for the startup. What’s more, corporations can provide a significant amount of marketing expertise and support, potentially putting together a campaign that features the startup they invested in.
Knowledge: Since they’ve done it before, corporations are typically willing to share their knowledge of technology, manufacturing, and the supply chain — information that startups may simply not have had the chance to access yet. This can help spur the startup forward in the marketplace with a shorter learning curve.
Network: Connections of all kinds are key to the corporate-startup relationship. Corporations have a diverse range of employees, customers, vendors, and supply-chain partners. After making a startup investment, they are typically more than willing to share these connections for mutual benefit.
Mentorship: I like to encourage mentorship when advising corporations that make startup investments. Corporate executives have years of experience, so they are in the position to mentor startups based on what they’ve learned over the years. This helps startups avoid the common mistakes that entrepreneurs usually make. By doing so, they can leapfrog the competition and benefit from the knowledge of their corporate investors.
Partnering for Mutual Success
In my experience, these corporate-startup partners are a win-win. The corporation benefits by becoming more innovative and finding new ideas, without having to invest in its own innovation organization. And the startups receive funding, and perhaps more important, they benefit from their corporate investors’ knowledge, network, customer access, and mentorship. It’s by working together that both parties can drive creative ideas forward that will benefit consumers and businesses around the world. After all, isn’t that the benefit of entrepreneurship in the first place?
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.
