The Good, the Bad and A Fistful of Dollars

The Q2 PwC MoneyTree Report came out last week showing that investment activity by corporate venture arms is on the upswing. Corporate VCs participated in nearly 16% of venture deals in the second quarter.

I have seen corporate VC efforts from a couple of angles. My personal experiences may prove helpful to you if you are considering accepting an investment from a corporate VC.

The Good

CircleLending was a pioneer in the peer-to-peer lending space, with a focus on documenting and services loans between friends and family members. After using an angel round to refine the product and identify marketing levers that would work, we began looking for a much larger round from institutional investors. Early in the process, we caught the interest of Intel Capital.

It was hard to see why Intel would have any strategic interest in P2P lending, but we were very happy they engaged with us. Intel Capital did not at that time take the lead, or even a board seat, so we still needed a VC to lead. Intel Capital worked hard to help us find that lead and was very active in introducing us to venture firms, and worked behind the scenes to help us. We closed the round with Venrock in the lead and Intel Capital making a significant contribution. Existing angels also participated.

As a board observer, Intel Capital focused on adding value. They introduced their portfolio companies to Intel’s corporate partners, putting us in front of firms we would have had great difficulty reaching on our own.

Downsides to working with Intel Capital were minimal. They ran a separate due diligence process but it wasn’t particularly onerous. One institutional investor did tell us that they viewed having a strategic investor like Intel Capital as part of the round as a negative, but not a deal killer.

The Bad

Prior to CircleLending, I founded a software firm called Acentas. At the stage when all I had was an idea and a few PowerPoint slides, I received a very warm introduction to an operating firm that had accumulated a large amount of cash and intended to back several startups. Mine was one of the ideas they funded.

Unfortunately, because they lacked experience as investors, they added no value beyond several million in cash. The two people they placed on our board fought openly. Their main business turned south, they were distracted, and they couldn’t support us when the time came to raise additional capital.

As a first-time entrepreneur, taking capital from this particular corporate investor was my initial, and probably biggest, mistake.

A Fistful of Dollars

I was with a very large financial services firm, and – working with a top-tier investment bank – we were attempting to make a strategic investment in a company that was pioneering a new distribution channel. We wanted to own a majority position because, well, we were a very large financial services firm and this is what we wanted.

This was a cause for concern for our target company’s founder. He liked us well enough, but what would happen to his firm if we left, or were reassigned? What if our company simply decided to change strategy? Would his startup be starved for resources or damaged by meddling? After selling a majority position, what alternatives would he have, and – importantly, from his standpoint – what would happen to the value he’d created thus far?

All good questions, we acknowledged. So we agree to guarantee that the value of his stake in his company would never fall below $50 million. We would put a floor under it, and pay him a fistful of dollars – at least $50 million – if he was let go, or the company failed, but maybe a lot more if the company succeeded.

He thought about it for a day or so.

He couldn’t do it, he told us. He couldn’t surrender control to a very large financial services firm that managed things according to its own whims and needs, where the interests of senior management were not aligned with his own.

I don’t know the value of his stake when he left his firm a few years later, but it could not have been anywhere near $50 million.