Couple of friends asked me this question recently, so I thought it may be useful for a wider audience.
Often during a fundraise process at startups, you come across the investment arm of an Operating Company (unlike VC’s who only invest and don’t run companies).
Let’s call them OpCo’s.
OpCo’s typically invest from their balance sheet, and do investments for one of two reasons:
- Strategic Investments (learn a new market, buy-in early into future potential new lines of business, build an ecosystem of partners around their core business, create more stuff to sell to their existing customer base, etc)
- Separate Investment arms [for capital appreciation, not only for (1) above]. In these cases there is often a strategic angle involved, but not explicitly a must-have. In these cases, capital is typically set aside in a fund vehicle.
Critical to know which type of Corp VC arm you are engaging. You can simply ask questions along the lines of (1) and (2) to figure this out.
Strategic investments should typically come with “more than money” benefits. For example: supply chain, distribution channels (sales, user acquisition), unique/early access to tools, and some inside track on enabling you to build an unfair advantage in the marketplace.
To ensure you really (and tangibly) get these benefits, it is important to ensure that you secure buy-in from OpCo Executives who control those assets. In other words, don’t just trust the investment team to be able to deliver on these unless the operating team has bought in. In most cases it helps to make the OpCo Exec your champion within the company in the long run.
Another important question for Strategic investments is to ask about the time horizon for the investor. Typically OpCo’s will have a longer horizon (read: patience), and be willing to back you in future rounds as well as long as their goals are being met. That being said, if their goals aren’t being met, then they can be tricky to deal with.
For Corp VC’s that are setup as separate Investment Arms [(2) above], the best way to evaluate is to look at them just as you would another VC. Ask all the same questions you would a regular VC firm.
The Upsides of Corp VC can often be game changing.
- Getting access to (and locking others out) of proprietary “more than money” benefits can set you apart from competitors fast. It can help you achieve things at lower cost.
- Corp VC’s aren’t as active on your board as a regular VC. So as long as you are hitting broad goals, they won’t get in the way for most operating decisions. This is sometimes a negative too; all good boards help entrepreneurs avoid pitfalls
- Corp VC’s understand their markets & adjacencies fairly well. So, they are what I call more-committed capital, and will invest in adjacencies with deeper conviction than some VC investors (the few who are easily swayed by market sentiment).
Of course, there are potential downsides! … primarily two: Speed and Priorities.
- Speed of getting through internal decision making can sometimes be a challenge. It often also takes longer to turn around documents. Keep in mind, the OpCo isn’t setup like a VC (Monday meetings, standard contract templates etc) so some decisions aren’t as high frequency. Therefore, it also can take longer to get documents reviewed/signed etc. But this a minor thing in the grand scheme.
- Priorities of the OpCo often change from time to time, as they themselves see market transitions and competition in their core business. If you and your company are no longer a priority for the OpCo then you can find yourself in some level of stress. This can mean that the “more than money” benefits may not continue to be available or deliver as much value to you as intended, or the interest in doing follow on investments may not be the same anymore. This is the thing to watch for, and honestly the better way to handle this is to partner only with very strong companies who have durability on their own.
In conclusion, Corp VC’s can be very productive partners in enabling you to build and grow your startup; you just need to be smart about the process of getting to know how to extract the best value for both sides.
Bonus point: in some cases, Corp VC’s also make potential acquirers.