In total, some $56-billion dollars was invested into the North American startup economy by VCs in 2016 (data is accurate as of October 2016.) Numbers don’t lie and those are big numbers! Venture capitalists are definitely a large part of the economy and, depending on your business’s capital needs, they may just be what the doctor ordered for your business.
Of the billions invested last year, almost a quarter of the deals were signed by corporate venture capital firms. This is significant because in the past, corporate funded firms only participated in select (read: large) deals. Now, it seems like corporate America is becoming more interested in funding startups.
With that said, private VC firms still make up for over three-quarters of the VC investment landscape, so it’s important to know the differences that each offers, to determine if they’re right for your business.
Corporate Investment Firms
There are so many of these out there. Each is connected to an established corporation, presumably with a large amount of cash to invest. Sometimes they’re an independent wing of a corporation or simply a dedicated investment team that resides within the corporation.
These investors look for essentially the same main quality in the companies they invest in as privatized VCs do: High-growth potential companies.
Some examples of active corporate VCs include:
- Google Ventures
- Cisco Investments
- Dell Ventures
- Intel Capital
- Johnson and Johnson Innovation
- GM Investments
Most corporations form these investment models to boost their own growth, reducing the need for extensive R&D and the losses it can create. Many like to use their investment activities as talent recruitment and acquisition tools too.
Private VCs are exactly what the term implies. They’re made up of a combination of wealthy partners with a rather large investment portfolio – usually in the $10 million to $1 billion range. Some VCs are uber-private, consisting of only one wealthy individual: Daymond John is a great example of a VC investor who isn’t part of an investment company, but rather invests his own money in projects that interest him.
These investors also seek out high-growth potential companies that offer high returns of 20% ROI per year or more.
When comprised of a team, not all investors in a private VC firm will be active in searching for and vetting the deals. In most cases, each firm will have designated general partners in charge of running the available pool of money and making the big decisions about where it’s allocated.
Corporate vs Private VCs
While it might seem like each have the same long term objectives (ie., making lots of money), what they can offer a startup is much different.
1. Different Long Term Objectives
Corporate VCs aren’t in the game to lose money. However, they want to help by providing in-depth industry knowledge and marketing assistance, and are willing to stay the course for years if necessary to help the company’s they choose to grow. Usually, they’ll invest in company’s whose goals can compliment their own brand (ie., General Motors invested $500 million in the car sharing app, Lyft).
Private VCs are primarily interested in driving huge profits and accelerating growth however possible. If that growth and the accompanying profits aren’t predicted to happen right away, they’re likely to pass on such deals. Most have more of a “get-in, get-out while the going is good” mindset – the exit plan is paramount in any deal they do.
2. Different Investor Stage
Because they’re more long-term oriented, corporate VCs like to enter at the early-to-mid stages of a startup’s growth (this is good if you have great idea, but no traction yet). Since they look for brands that compliment their own in some way, they’ll start helping with providing and sourcing resources right away, provided its mutually beneficial to them.
Private VCs are all over the place when it comes to the investment stage. Whereas a corporate investor is more likely to try to buy a late-stage startup than fund it, a private VC is looking only at the profit potential in most cases.
3. Different Investment Life-Cycle
Corporate investors have good intentions when it comes to the deals they sign. They want to build your brand up to compliment their own, after all. That is, as long as their leadership remains the same, which so often isn’t the case. This is a major drawback for startups looking to build a relationship with a long-term investor, because even if the money keeps flowing back to the investor; a change in leadership can mean your deal with them can get axed suddenly without warning.
Private VCs are more than happy to make followup investments into a company, so along as the sales and projections keep indicating the type of high-return growth they’re looking for.
4. Difference in Control Level
Corporate VCs will help whenever asked, but do not expect to have a say in how the company’s run. They prefer to sit back, share resources, and offer advice as needed.
Anyone who’s ever watched the Shark Tank knows that private VCs want some measure of control relative to the money they inject into the company. This is because they want to see as big a return on their money as possible. This is neither good nor bad, depending on who you go into business with and their level of knowledge related to your brand.
5. Last But Not Least: Difference in Exit Strategies
Corporate VCs are not looking for a swift exit. There are a great many opportunities they may look for with regard to an exit plan. Corporate VCs may seek to get in business with you, so that in the long term they can: acquire your company, create an OEM partnership, use you as a distribution channel for their products, and several others. Again, none of these are necessarily bad, depending on your own long term goals for your brand.
Private VCs, as mentioned, are in it for the cash. A 20% annual return means they’re happy and their money is working hard for them. Less than that and they’re heading for the door. If you’re making them lots of money, this is great for long term growth since they’ll keep investing. On the other side of the high-profit equation, VCs will typically block your attempts to sell when the gettin’s good too. Obviously, if you’re not making them a profit, they’ll leave you high and dry, sometimes when you need them most.
So, which type do you plan to seek out for your startup?