How To Turn Corporate Venture Capital Into A Magnet
For Raising Startup CAPITAL
Smart Corporate Venture Capital shouldn’t ask: “What Can This Startup Do For Me?” — but rather “What Can We Do For This Startup?” — Oleg Feldgajer
Overwhelmingly, Institutional Venture Capital (IVC) firms, as well as Angel Investors, look for 2 things in a seed-capital pitch: the proverbial T&T. It all boils down to: show me your Team & show me your Traction.
No T&T to brag about — better start packing! Without a demonstrable T&T, ideas are worthless to such investors — and even products, are often dismissed with a yawn.
Guess what: Smart Corporate Venture Capital (CVC) funds could exploit the above situation to differentiate themselves in a crowded VC space.
By making few simple tweaks to their existing strategies, CVCs can draw attention of smart entrepreneurs — LIKE A MAGNET! By doing so, CVCs could become a de facto Go-To-Place for raising SEED CAPITAL
In my previous post entitled: Corporate Venture Capital — The Most Underutilized Factor Endowment Of Corporate Giants, I spoke about CVC’s painful realities. Although large corporations utilized CVC for many years, most CVC investments are often of a “tag-along” kind, and CVC’s are seldom acting as a lead-investor.
I proposed a number of tactical steps that could lead to CVCs’ differentiation. I even mentioned the best framework around — to do so. Over the last 10 years, many large & small enterprises successfully adopted Blue Ocean Strategy — and so could CVCs!
You can find a great summary to history of CVCs, described in cbinsights’ post. It dates back to 1914. In spite the fact that modern CVC has been around for over 100+ years, in terms of numbers — CVCs still represent only 1/5 of total VC investments. Although the number of CVCs with a strong track record is growing steadily, many seed-stage entrepreneurs are still wary of partnering with CVCs.
To embark on meaningful transformation, CVCs must first understand their problem. Jack Welch once famously described GE’s misguided practices of: “having faces oriented towards CEOs and asses toward the customers”
By problem, I mean ENTREPRENEUR’S PROBLEM, not CVC’s! Only by focusing on addressing the pain of Seed-Entrepreneur walking through CVC’s door — a unique CVC brand can be built.
In general, looking at the big picture, and asking yourself the following questions — may help:
However, drilling down for specifics, one can narrow-down the problem to ITT topics, namely: Ideas, Team & Traction.
Angel Investors, as well as IVCs, care very little about your ideas. Even if some ideas are close to their existing expertise — building a successful business from an idea-stage, is a lot of work! So instead, they opt for making 2 other educated guesses about: Team & Traction.
Demonstrating past wins looks good not only on your resume, but also in front of VCs. Serial entrepreneurs are bringing a dose of respectability to new ventures — even if their previous successes are linked to different markets. Solid technical skills and experience in marketing, sales & branding — a big plus!
In simple terms, Monthly Recurring Revenue, or MRR — is the most important metric that VCs and Angel Investors are looking for. Especially, if you’re pitching subscription business model. And since your MRRs are usually quite recent, challenges such as retention and churn — seldom apply.
Over the last 10 years, seed rounds are decreasing, while the amounts being raised are growing steady. With an average seed-round at ~$2.2M — the Traction becomes a sticking point. Therefore, the only meaningful solution to Traction difficulties — is linked to the formation of Micro-VC funds, offering pre-seed capital.
Yet even Micro-VC funds quickly adopted the notion of Micro-Traction — so the saga continues. And if seed-stage entrepreneurs are tired of parading in front of seed-stage VCs and Micro-VCs, like the Harlots parading on a recent BBC TV series — perhaps, they should give CVCs a try?
SOLUTION — CVC TO THE RESCUE!
Good CVCs understand the power of radically different & unconventional idea. Especially, the ones who openly embraced McKinsey’s Three Horizons (3H) of Growthrecommendations. It elegantly explains how companies sustain growth by managing BOTH: current performance & future opportunities.
And since new ideas can fit any corporate horizon, a good CVC could also assess new ventures — under the same 3H framework:
Represents core businesses that provide the greatest profits and cash flows. The focus is on improving performances, increasing sales, reducing costs, and maximizing overall value
Encompasses emerging opportunities linked to substantial expansion of the existing business models — which could require considerable investment
Contains ground-breaking ideas for exploring emerging opportunities that could cannibalize existing business, but also reposition the company — for the future
It’s often overlooked that successful CVCs are constantly looking for fresh ideas. And since over the last 40 years, the average “staying-in-business” tenure of Fortune 500 company shrank, from 60 to 15 years — they better be!
No startup can match the depth and breadth of functional know-how at CVC’s parent company. It includes technical, marketing, sales, production & distribution expertise — that CVCs can tap into, at a moment’s notice. If CVC likes your idea, any major gaps in the composition of your management team — can be overlooked. Who knows, perhaps even some of the corporate managers may join your venture on a temporary, or even permanent basis?
This is the most overlooked and the most promising attribute of CVC’s value proposition. No matter how are you going to slice & dice MRRs, what EVERY startup needs is SALES!
CVCs can easily guarantee immediate sales to a startup — by INTRODUCING set-a-side provision. For example, if 10% of the $1B CVC fund MUST BE USED to generate Purchase Orders for goods and/or services offered by a startup — we are talking about $100MM in guaranteed sales! In turn, this could significantly help ANY startup, raising Series A, B and C!
The benefits of set-a-side rule cut both ways. It also helps CVC thinking long and hard about what kind of products, or services, it will purchase from the startup. After all, such goods must meet the needs of its corporate parent, and they must fall within H1–3 horizons!
And since imitation is the sincerest form of flattery, let’s remember that existing U.S. Small Business Administration set-asides programs “are a powerful tool for helping small businesses compete for and win federal contracts. Every year, the federal government purchases approximately $400 billion in goods and services from the private sector. Such opportunities are “set-aside” exclusively for small business concerns”
Congress created the Small Business Administration (SBA) back in 1958 and mandated small business contracting goals ever since. So could CVCs!
THE BOTTOM LINE
As with so many other industries, Corporate Venture Capital needs to rethink strategies driving future growth of their parent organizations. In a highly competitive market of seed-capital, there is a rising need for CVCs to pursue differentiation from Angel Investors and Institutional VCs.
To stand apart in the overcrowded VC market, CVCs need to be creative, and properly articulate their value proposition to seed-stage entrepreneurs.
ITT’s Factor Endowment of CVC shouldn’t aim just at out-performing the competition at seed-stage financing.
It can make the competition IRRELEVANT!
Oleg Feldgajer is President & CEO of Canada Green ESCO Inc. Oleg is positioning the company to become a leader in financing AI enhanced green energy projects and ventures. CGE’s mission is to guide DISRUPTIVE businesses in ENERGY & TRANSPORTATION toward profitable business models. Oleg is passionate about such mission, and firmly believes that without AI based innovation, we will all prematurely choke on polluted air and dirty water. CGE delivers 100% financing (levered and unlevered) to its clients — and utilizes large equity pools, and non-recourse debt. Oleg offers creative, fresh ideas to open-minded businesses — that embrace both: logic AND opportunistic intuition. CGE stands against mediocrity & its modus operandi is quite simple: If CGE is not invited to join your BOD, or Advisory Board — we failed!