We read more and more about big companies investing into startups in Africa. VC4Africa member Sean Ndiho Obedih, Founding Partner of UK based Corporate Venture Capital advisory firm Sobek Ventures, gives key tips for companies who engage in Corporate Venture Capital in Africa, both from a startup and corporate perspective. Also see the interview VC4Africa had with Sean last week.
When a large company takes an equity stake in a small innovative or specialist firm to gain a specific competitive advantage we speak of Corporate Venture Capital (CVC).
How to evaluate Corporate Venture Captital? I believe in the following best practices. Let’s start with some key points from the startup perspective:
1) Understand the corporate investor’s motivations
Understand the best you can the motivations of the corporate investor. Both from the standpoint of the corporate parent, but also the individual representing the investment. For example, how is the individual compensated?
2) Understand the terms
Money is great, but only if you are willing to bear the price! Beware of the terms such as a right of first offer, a board seat or an exclusive customer contract. They can seem like a great validator of interest, but can really halt subsequent M&A interest from others potential purchasers.
3) Do background research
Evaluate what else the investor can bring. Not all public companies are equal. Some are respected, and some are not. The same way that VCs leave footprints in the sand, corporate investors do too. The last thing you want is an investor that others cannot stand. Find out how sophisticated the corporate investor is early on. The same way that Angels can vary in sophistication and therefore their ability to negotiate a fair deal (including terms), corporate venture capital investors can vary widely. Understand if they want to lead or follow terms.
4) Do you have to give out stock?
Try to structure corporate investments as non-dilutive. If they want access to your business, make them a customer rather than an investor whenever possible. If they want stock, sell it to them at a higher price than private investors, since they are interested in your company for reasons other than making money. You should try to get some benefit from this difference. Manage your cap table.
5) Stay in the driver’s seat
Don’t let a corporate equity investment become an inadvertent acquisition. Allowing a corporate investor to shape your company’s strategy is a sure way to reduce your attractiveness to other acquirers, or make you too reliant on a single customer.
6) Stay independent
Understand that a corporate investment is a path to an acquisition. Therefore, structure your deal so that you have sufficient independence to be able to keep your partner honest. But, don’t take the money unless you would like to work with the investor. You are making a public statement of association, and your company’s future will be shaped in a significant part by how that relationship grows and develops – i.e. whether the corporate parent buys you or not.
As for the corporates I would advise the following:
1) Focus on start-ups which can help the corporation
Often companies start corporate venture capital programs with a “one size fits all” approach. However, corporate venture capital investments should be an opportunity to do things differently because of the deal sizes and their ability to leverage resources that they already own, such as IP patents and infrastructure that are often useful to the startups. A good example of this is the recent collaboration between GE and Quirky.
2) Get in early
Unfortunately, Corporate Venture Capital has tended to follow the much larger venture capital market, albeit with a lag. Why the lag? Get in early and stay in! Outsource hedging investments. Focus on capability leveraging and upgrading investments. Engage the main stakeholders in the process: the business units. Be bold and aim to build the ecosystem.
Want to react? Please share your additions, reactions and own experiences in the comments below!