Raising Strategic Capital
The Dos and Don’ts of raising investment from Corporate-VCs
I recently ran a twitter poll asking the audience what topic they’d like me to write about and “raising from corpdev/strategics” won out. Lucky for me, I do have a lot to say on this. While I spent most of my career as an product / engg / BD guy, the last few years @Google I worked closely with our M&A team on various investment and M&A deals. Not much has been written about this from a strategic’s POV, so startups default to provocative generalities — e.g. Paul Graham’s “spoiler-alert-titled” post: Don’t talk to CorpDev.
It is true that if you don’t know when, how, and, most critically, whom to talk to at CorpDev, you would just waste time. However, M&A has generated over $1.2T of wealth globally since 2010, so clearly this is a path for many.
The When
Rule of thumb on when a corpdev or strategic investor makes sense are:
- M&A: You are either actively looking to exit your business for a bevy of reasons, or you want to raise capital that’ll facilitate an exit.
- Fund-raise: You want a lot more than the traditional trifecta of “capital, counsel, and connections” that a typical VC offers. For example, you want deep product/tech or GTM/sales integration to succeed in your market and the strategic will do it only if you accept capital.
We do not see a lot of early stage startups engaging w/ strategics mostly because it’s unusual for a large strategic to find a lot of value in engaging with a small startup. Raising capital from a strategic too early in your journey may also carry a “signaling risk” that needs to be actively managed. VCs may think you are prepping your company for an early exit. Having a strategic might also cap the overall market you can sell to for reasons I discuss further below.
The Whom:
A lot depends on who you speak to at the CorpDev team. Often they are not empowered to create their own deal flow but are acting on behalf of a P&L owner. Usually, a VP of Product or Engineering would say “who can we acquire to get the best vernacular content data-set” or “who is offering a cloud-based strongly-consistent DB”. The M&A team will do a “sponsored study”, recommend a list, and engage with them to kick-off a “transaction”.
1. At this stage, get a feel for whether this is a VC-led or a Engg/Product-led investment. You always want the latter. Some things to consider:
- Are product teams excited to partner? Are they showing up to meet?
- Do they have plans on what they’d like to do together? Roadmap?
- Are they offering generic (“we’ll put your logo here” etc) or specific (“co-brand a healthcare solution ‘powered by your startup”)?
- Who are the product/engineering folks involved? Long-timers vs new folks who just want to dip toe? Do they have authority over roadmap?
- Is Sales/Marketing involved? Without their buy-in, you won’t win. Is Engg/Product involved? Without them, your roadmap will gather dust.
- Are the people who need to do the ground work taking responsibility for the items? Ask yourself: “who will get fired if this doesn’t work out”?
The Why:
As mentioned earlier, there are many reasons to raise from a corporate, chief of which is a large commercial deal attached to the investment which could really accelerate your journey and put you far ahead of the competition. However, there are opportunity costs with lining up to a large brand too early. You want to control your destiny as much as possible while still squeezing the commercial benefits of this deal.
2. Do some more homework on who you might alienate, if at all, by lining up close to this large corporate . Are their other large partners / customers that do not want you siding up to a large competitor? What T&Cs are damaging to you?
- Steer clear of any T&C that mentions “MFN — most favored nation” clauses. These are typically inserted so the corp-VC’s parent arm gets the best commercial deal with you e.g. preferred pricing.
- If you are selling via channel partners, check if they are also selling products from your investor’s direct competitors. You’ll likely lose channels that rely almost exclusively on a competitor’s product.
- If the investment T&C include “ROFR — right of first refusal” it usually indicates that the parent corp is protecting its interest in you by retaining the rights to veto any acquisition by a direct competitor. You want to negotiate this down to “ROFN — right of first notice” so you can pursue deals with competing corporates with a due notice. An even better outcome is “ROFN with a named list” so you only notify the parent corp if pursuing a deal with one of a pre-negotiated list of corporates.
- Source-code access on liquidation event. This is a tricky one. It means if you liquidate (bankruptcy, etc), the parent corp gets access to your source-code and can build something new with it. This sounds predatory but it is actually fairly standard — it’s unreasonable to expect a large corporate to put in $Ms into you only to have you file for bankruptcy once you’ve launched a bunch of inter-twined products that can no longer be supported. You want to negotiate this down to only the IP that is generated solely by you and the parent corp so that you can pursue deeply integrated products with other partners without having them worry that their IP will get taken over by the investing corporate should you liquidate.
The How
Once you align on the high-level details above and are clear there is a deal to be done, start focusing on maximizing outcome and minimizing downside risk and loss of control. Each deal is bespoke but at a high-level focusing on the following T&Cs has been useful in my experience:
3. Get more clarity on what the commercial angle tied to the investment TS are / would be . Examples are:
- Move 75% of your cloud spend to Google/Azure by yr2, 100% by yr3”?
- Any kind of most-favored-nation clauses or exclusivity of any kind for any commercial product you offer? See above for explanation.
- Any control over product roadmap and/or governance thereof via quarterly exec meetings, etc. You want some of this for oversight, but not 1-way control.
- Any desire to get perpetual license to anything from you.
4. Push them on contractual terms that allow interesting things for you, e.g.:
Marketing:
- Co-branding: You want the corporate to take a stand with you. For example, healthcare portal by Google “powered by your startup. Retain your logo in all joint collateral at equal footing (same size, etc).
- Content: Logo right exchanges, blog posts (2–3 /yr) hosted by corporate and you on your blog, event-booth rights (1–2/yr), joint PR, and executive-level quotes on major announcements, etc. More = better.
Sales
- Featured access: prominence in their marketplace vs you being one of 100s listed. Marketplaces follow power-law outcomes — only a small number of companies listed there will find it useful; make sure you are one of them.
- Quota: Mutual quota retirement: e.g. if their sales team sells 1M of their product + 1M of your solution that is using their underlying product, they get to retire 1M + a portion or all of the 1M of your product they sold. Note, they’ll ask for reciprocal rights; usually not a bad idea to give them.
- Sales Collateral: you’d want all of the corporate’s sales battlecard and pitch decks to include your collateral.
- Sales MBR/QBR: ask for a monthly sync of regional sales teams and once a quarter sales VP sync formally where you review health of the partnership.
5. If this is a cloud provider and moving you to their cloud is part of the deal, ask them why, and get more info on how they are going to be a better partner than your current cloud provider. Some questions:
- What are their capabilities vs others, and limitations?
- Can they help you enter new markets? How?
- Are they compliant with the specific regulations needed in your industry. E.g. if you are in healthcare, what are the data/privacy and healthcare-specific regulations everywhere this corporate’s cloud locations are?
The above covers much of what I think is critical to get a handle on. Raising from corporate is a much slower and windy process than raising from an institutional VC and navigating to the right person is going to be a big part of the challenge. Knowing answers to the above questions will help you weed out the tire-kickers early. Good luck!
