How to raise capital from corporate VCs

10 pieces of advice for advanced material and physical sciences start-ups

Tom Whitehouse, Chairman of LEIF (an advisory business) and Contributing Editor, Global Corporate Venturing

  1. Treat capital-raising as a business development exercise
  2. Keep it complicated stupid
  3. Start raising capital from corporate VCs long before you need it
  4. Allocate time efficiently
  5. Don’t limit your exit options
  6. Communicate exceptionally well
  7. Also approach financial VCs and find ‘Sherpas’
  8. Choose advisors carefully
  9. Don’t raise capital unless you need to / want to
  10. Ignore advice – do it your way

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  1. Treat capital-raising as a business development exercise

If you’re going to give a substantial shareholding and say in the running of your business to outsiders, make sure they are able to make a significant contribution to your growth.  In this way, they quickly become insiders.

Corporate venture capital is a fancy phrase for something quite simple; a larger company (call it Y Co) provides a blend of capital, products, expertise and market access to a smaller company (call it X Co) in return for a share of its future growth and use of its technology. What’s the difference between corporate venture capital and plain business development / collaboration (joint development agreements etc.)? Corporate venture capital in the (physical sciences space at least) works best from a start-up’s point of view when it’s done like this:

  • X Co is selling into more than one market, i.e. Y Co is not its only route to commercialisation. So X Co maintains its independence from Y Co, and is a potential acquisition target for other large companies. Thus X Co’s exit options are not restricted by Y Co’s investment.
  • If X Co is subsequently acquired, Y Co gets a return on its investment alongside all the X Co shareholders, i.e. Y Co gets a financial and a strategic win-win (a happy CTO / Chief Innovation Officer and a happy CFO).

Sounds simple? It’s not. It’s complicated.

2. Keep it complicated stupid

If God had wanted term sheets to be simple he would never have created corporate venture capital. Typically, Y Co wants to combine investment with various ‘side agreements’ – such as rights to use/sell the technology in a certain region or with certain clients over a certain time frame, and a stake in ‘process IP’ developed through collaborative development agreements. If they’ve overdosed on caffeine that morning, Y Co might even ask for a right of ‘first refusal’ if and when you are put up for sale (a definite no-no). But these are the type of complications a start-up needs because they are symptoms of growth. (If you don’t want ‘side agreements’, stick to financial VCs – see below).  The trouble with complications is that they take time.

3. Start raising capital from corporate VCs long before you need it and make sure you’re already well-capitalised

The time to start looking for capital from corporate VCs is at least a year from the date when you really need it. Why? Because you need this time to negotiate the side agreements.

“My advice to companies seeking money is that if you want money fast, don’t approach us. A [Bekaert] business unit has to assess a technology before the venture professionals like me can really start our work in earnest.” Nuno Carvalho, head of venturing at Bekaert, the Belgium-based steel wire transformation and coatings business.  

Y Co’s venture team has to speak to the relevant business units to establish whether there is a strategic need for your technology. This takes time.  You may already know the business unit which needs your technology. If so, tell the corporate VC because it’s possible he/she doesn’t. (Yes, communication between a corporate VC and its business units can be imperfect). This will help speed things up. Initially send non-confidential information. Don’t insist that a corporate VC sign an NDA when you’re in the initial assessment stages because it’s unnecessary and it takes time. Sign an NDA once the corporate has shown interest and needs to go into more detail. This will also take time (and it should because you need to get it right).  By now, you’ve probably already been talking to them for 1 – 2 months and you’ve barely begun.

4. Allocate time efficiently

Time is a luxury that only the well-capitalised can afford so the Sherpas of corporate VC deals (that’s you, your family / friends / angels / governmental investors etc.) need to be able and willing to carry the business during the minimum 12 month period you’re talking to corporate VCs.

If you’re not careful, fund-raising can be such a distraction to senior management as to obstruct growth. So be ruthlessly efficient. Do as much research on potential investors as they would do on you. Who really needs your technology? Who is the best partner for market access? Don’t do the classic ‘dog and pony’ road show and speak to a bunch of ineligible investors, many of whom will be happy to meet you because of the free education you’ll provide them on you and your markets.

5. Don’t limit your exit options

If you get a corporate VC on board that ticks your boxes, great.  But be wary of their impact on your brand and on your business development strategy. Most large corporates have very potent brands.  Once you’re in their portfolio, some potential customers and acquirers (i.e. your potential exit route) will see you as a ‘Y Co company’. They might not check the detail.  They may just assume that Y Co will acquire you. Y Co may also inadvertently or deliberately seek to ensure that your management focusses exclusively on developing your business for its markets to the neglect of your other markets, which can lead to one-sided business development. Again, this might limit your exit options.

To avoid these dangers you need a strong board, ideally with more than one corporate VC represented (for balance), and/or an experienced financial VC that can hold its own with corporate VCs. You’ll certainly also need an independent Chairman with proven expertise in managing a talented and lively board.

It’s imperative also to make sure that the commercial deal with your corporate VC is not your only route to commercialisation and that a trade sale is not your only exit option.

“I generally recommend that our portfolio companies focus on commercialising a product where they actually can penetrate the market and/or hold the “juiciest peach” for themselves … It is also important that there be a real possibility for the company to survive as a profitable stand-alone company, ideally with a credible (or even initiated) path to IPO.” Keith Gillard, Managing Partner, Pangaea Ventures, Canada-based advanced materials investor

NanoH20, the Californian water treatment company, now LG Water Solutions, is a great case study in this regard. It had Total Energy Ventures and BASF Ventures (two potent brands) among its shareholders alongside experienced financial VCs.  Many in the market assumed that NanoH20 would be bought by BASF, which had previously acquired Inge, another water treatment business from the BASF Ventures portfolio.  But LG bought it (and all investors, corporate and financial, got a decent return). NanoH20 had good balance.

6. Communicate exceptionally well

Sorry for the cliché, but you only get one chance to make a first impression. Get your story clear and strong. Make VCs life easier by hitting them hard between the eyes with a clear statement of how your management team and technology solve big problems profitably. VCs are different from you.  They look at hundreds of companies, whereas as you’re mostly preoccupied with a few (your company, your current and potential customers and your competitors).  So in the early stages of your fund-raising campaign, which is actually a longer-term business development campaign (see above), make sure you are very good at being superficial! And make sure that your communications are consistent across all media – website, LinkedIn, twitter, press etc.  If your website says you sell bananas, but LinkedIn says you sell apples, VCs are entitled to feel confused and conclude that you’re confused.

But be ready for VCs to get into deep detail very quickly. If this were a medical examination, you’d have your tongue examined and pulse checked, and then you’d immediately be stripped naked and readied for endoscopy (not quite, but you see what I’m getting at).

You’ll have to explain why you and your technology is superior not just to easily identifiable incumbents and has-beens, but to other start-ups lurking stealthily in the mist and the start-ups that could emerge in the next few years (i.e. during the lifespan of the VC’s investment in you). “We’re much better than Kodak” won’t wash.

7. Also approach financial VCs and find ‘Sherpas’

After those hours spent on side agreements with corporate VCs, a financial VC focused exclusively on financial returns might be a relief.  But remember that it’s a financial VC’s job to be impatient. “We need to make 10 X our investment and we need to do it fast,” one told me recently with admirable honesty. But if you’re still at a relatively early stage of development, you probably require patience.  So look to other groups of investors (angels, super-angels, angel syndicates etc.). When doing your research, look closely at corporate VC investments in companies you like and on the shareholder register you’ll find the unacknowledged Sherpas of corporate venture deals – those who carry you from the foothills to the summit (or summit base camp). I like the look of Real Ventures, a Montreal-based early stage investment company staffed by entrepreneurs. Real took  an early interest in Wiivv Wearables, the Vancouver-based 3D printing-meets-wearables-via­-chemicals business, that raised money from Evonik Venture Capital over the summer of 2015.  Find a Real Ventures near you. They’re out there.

8. Choose advisors carefully

Establish what your needs are before you appoint advisors.  Establish exactly the gaps you need to fill and then fill them.  In my experience, early stage IP-rich businesses often underestimate their need for advice on IP development and protection, which is absolutely crucial when you’re engaged in business development across multiple industries. So get a good lawyer with expertise in IP. You might be surprised by how little they will charge in the early stages of your development.  (They want the fees at the IPO or trade sale).  And beware of advisors pretending to be investors. Ask: “Do you have funds under your direct management?”  If an investor has no funds under management, he’s not an investor, he’s an advisor.  

9. Don’t raise capital unless you need to / want to

 “I love the independence of owning 100 percent of the shares, of having to think only about the products and not to worry about shareholders. In that sense, we’re completely free.” Sir James Dyson (Founder, Dyson)

External investors will want control over, and a say in, your business. If you’d rather have complete freedom of manoeuver / not be told what to do, then do everything you can to stay alone (beg and borrow from trusted friends and family, get grants from governments).  You might grow more slowly, but if independence is what you want, then this will be a sacrifice you’re going to have to make.

10. Ignore advice – do it your way

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