Corporate VC – do the risks outweigh the benefits?

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It’s a tough market out there for startups looking to raise. Many have diminishing runways so are busy pitching to potential investors in what continues to be a slow funding climate.

Denis Shafranik, Managing Partner and Co-Founder, Concentric, explains the with fewer options to choose from, founders may have to be more flexible regarding the terms they agree on, and the type of investor they partner with. For some, this will mean weighing up the pros and cons of corporate VCs.

Corporate venture funds have flooded into the startup sector in recent years, attracted by access to new ideas, technologies, talent, and the chance to gain a competitive advantage as digitisation accelerates across sectors. According to Bain, corporate venture capital almost doubled between 2010 and 2021, from 11% to over 20% of all VC funding, with a compound annual growth rate of 31% over the same period.

However, I would advise startups to approach corporate venture with caution. While it can work in some cases, several of our portfolio companies have raised rounds involving corporate VCs in recent years, and it hasn’t brought as many benefits as we had hoped, and in some cases has been detrimental. It is critical to enter negotiations and any deal with your eyes wide open, and a good understanding of the risks.

Beware conflicting priorities

Corporate VCs differ from traditional VCs in that they invariably have a strategic agenda behind why they’re investing, which may not necessarily involve maximising the value of a business. So, if your goal is to build the biggest business you can, you could be faced with a conflict of interest, and pressure to make decisions that get you to profitability faster, but at the expense of reaching a higher valuation or growth. Founders need to be particularly wary if a corporate investor doesn’t have a separate venture fund, which means the startup P&L goes on the balance sheet, impacting your autonomy to do what is best for the business.

Investors may lack expertise and influence

Many founders expect a corporate VC to provide some business development value, in the form of introductions to clients, or access to their sales and marketing machines. But this may not play out in reality. Corporate venture professionals are working within large organisations, amid numerous conflicting priorities and internal politics, and they may not have the power or influence to create opportunities across the business.

Furthermore, corporate VCs are usually not from a VC background, so have limited operational, or hands-on experience supporting early-stage businesses, translating to limited added value for their portfolio. Founders should therefore be aware that they are unlikely to get a great deal of support from corporate VCs. At best they will be passive investors.

Set your expectations and mitigate the risks

There are some instances where accepting funding from a corporate VC makes sense and there can be advantages. For example, in industries such as insurance where startups rely on larger companies to provide capacity for them to operate, it can work well from a strategic perspective. It can look good on the cap table to have a large influential corporate on board and, in some instances, pave the way for an acquisition, if that is a route that a business wants to go down.

However, it’s critical to weigh up the pros and cons carefully, set your expectations for the value you are hoping to get from a corporate deal, and take steps to minimise the potential downsides. For example, try to limit corporate investors’ information and voting rights, to avoid misalignment and ensure that they don’t have too much control.

Prioritise dedicated, hands-on VCs

More funding is always a good thing, particularly in the current climate when some startups face an uncertain future. However, funding shouldn’t come at the expense of losing control over the direction of the business and should ideally bring added value beyond financial support. Traditional, dedicated VC firms are experienced at working with startups, bring specialist expertise and extensive networks, and will defer to the founder to decide on the best strategy for the business. For most founders, they should be the first port of call for achieving their business ambitions.