Although many coastal venture capital funds are getting bigger and doing large deals, many smaller or midsized funds — particularly across the Midwest — have fully deployed their available capital. In short, there are fewer doors to knock on for VC funding than there were even a just a few years ago. This has created a widening “Series A gap” that threatens many young ventures right when they are poised to accelerate growth.
Growth of corporate investing
Fortunately, there is a promising trend in the form of corporate or “strategic” investors. In fact, corporate VC is booming. The number of corporate venture funds worldwide has doubled in the last five years and the National Venture Capital Association reports that CVC investment topped $5 billion in 2014, the strongest level of activity by far since 2000.
Although these national statistics are driven by large corporate venture funds run by the likes of Google, Intel, Verizon and Comcast, there is evidence the trend is spreading. For example, last year, Northwest Ohio agribusiness corporation The Andersons Inc. launched Maumee Ventures — a fund that will invest from seed-stage up to $5 million in startups making technological breakthroughs in agriculture.
What’s in it for corporations?
From a corporate perspective, investing in startups can be game changing. As big companies get bigger, staying agile and innovative can be challenging. By investing, corporations get an inside perspective on novel technologies and business models.
When investment leads to acquisition, the acquirer not only gains a financial asset, but also realizes a valuable infusion of innovative know-how and entrepreneurial talent.
What’s in it for entrepreneurs?
While traditional VC funds are laser-focused on maximizing investment returns as quickly as possible, corporate investors are thinking largely about the long-term strategic benefits of their investments.
For entrepreneurs, this can translate into attractive deal terms, like higher pre-investment valuation or access to corporate assets to help drive sales, distribution or development activity. It’s not that corporate investors are “easier” on deal terms than VC investors, just that they view the value of the investment differently. And since corporations often invest with acquisition in mind, CVC deals can include a built-in exit model for entrepreneurs.
Top firms like Intel, Microsoft and Google are highly experienced when it comes to VC investing. However, many other corporations are just beginning to try their hand at it. Luckily, Venture Development Organizations like JumpStart are in an excellent position to help connect these corporations with regional entrepreneurs.
For corporations looking to make strategic investments, VDOs can provide introductions to promising entrepreneurs with high-potential technologies. For entrepreneurs looking to raise capital, VDOs can help increase visibility, build important connections with corporate investors and prepare young ventures for the scrutiny and negotiating that comes along with the cash.
Jerry Frantz manages the entrepreneurial services and investing team at JumpStart Inc. and has helped provide advisory support to more than 75 portfolio companies. Contact Frantz by email at [email protected]. For more information, visit www.jumpstartinc.org
Connect with Jerry Frantz on LinkedIn www.linkedin.com/pub/jerry-frantz/4/b15/a89