Venture capitalists are indeed a necessary part of the startup ecosystem.
Providing innovative entrepreneurs with the funding required to scale their venture to the next milestone is the cornerstone of why so many of our most important technological advances are available to us today.
Sure, the world could still have the great tech giants of today, but at a much smaller scale if they were only to be working from within their means.
Today, the landscape is changing, however.
Corporations are starting to see the benefits of engaging with startups in many ways.
What's more, is that they're slowly realizing that, when harnessed correctly, their effectiveness as a partner and even an investor far exceeds what accelerators, incubators, angel investors and even venture capitalists can produce.
Because of this, venture capitalists are beginning to change their tone.
Realizing that (for now) their deal flow pipelines are significantly stronger than their corporate counterparts, but the strength of potential is in the favor of the corporation, they have begun launching aggressive strategies to have the ear of the unaware executive -- what's more, posing as a trusted advisor or a font of insights.
However, during these interactions, the venture capitalists are taking the role of a salesman and the executive the unfortunate mark -- balancing the fine line between providing enough information to inspire the executive to listen, but not take initiatives into their own hands.
Here's a look at the things they have omitted...
1- Your Dollars Are Worth More Than Theirs
Let's say you're an entrepreneur with a mobile app in the food industry and you have two funding options.
The first, your rich uncle Bob who owns 5 Jiffy Lube franchises offers you a million dollars.
The second, cooking show host Rachael Ray offers you a million dollars. Which would you choose?
The answer is pretty obvious. Rachael Ray has a recognizable brand, experience in the many facets of the food world, connections to major players and a slew of other resources.
Uncle Bob? Not so much.
In the case of corporate-startup engagement, the symmetry remains the same.
Venture capitalists can write checks, and while they occasionally provide some expertise (many venture capitalists were once entrepreneurs themselves) the buck stops there as the saying goes.
Their business model is not anything other than investing in startups, but realizing this and seeing the upcoming wave being a potential threat, they're trying to elbow their way into the strengths of corporations and using it for themselves.
This would be the equivalent of Uncle Bob trying to form a partnership with Rachael Ray before the entrepreneur has the chance to do so.
2- They Only Source From Within Their Portfolio
"Sourcing as a service" has become a common buzzword in the corporate world.
Essentially, this is where corporations pay to engage with a venture capitalist group in hopes that they provide them with cutting-edge startups.
This type of interaction typically goes like this:
Venture capitalist funds a startup, they have a conversation with a corporate executive, they convince the executive that they should be engaging with this startup (even if it isn't based on core alignment).
Alternatively, the venture capitalist will go to the corporation first, secure the engagement and once that is in hand, fund the startup based on the current valuation of the startup -- knowing that it will go up simply by utilizing the strength of the large brand.
Very rarely does a venture capitalist facilitate a connection without having any skin in the game -- even if they're being paid to do so.
What's more, the corporation believes themselves to be plugged into the ecosystem; a term that is beginning to gain momentum as well.
Unbeknownst to them, however, is that they're not building a genuine pipeline, only a small one that is
(a) being curated based on the ability to provide benefit to the VC and
(b) running in opposition to core-alignment and goals.
3- You're Increasing Their Startup's Valuation
The corporation gets a shiny new toy, but the venture capitalist gets a rocket ship.
Pairing with a corporation adds massive benefit to the startup by way of PR, brand recognition, proof of concept and validation.
Depending on the size of the corporation and the stage of the startup, our research through VentuRank illustrated that these types of partnerships could increase a startup's valuation by 35-45%.
Illustrating this example, imagine a startup with a post-money valuation of 5 million dollars.
The venture capitalist who recently funded them owns 25% of that, meaning 1.25M.
After convincing the corporation that this is what they need, a partnership is formed, and a press release goes out, and a licensing agreement is signed for the use of the corporate brand. This body of evidence is massively valuable.
Assuming the valuation goes up by 40%, the startup is now worth 7M, in addition to whatever primary benefit the partnership itself brings.
And our VC friend that was so kind to make this introduction just turned 1.25M into 1.75M (now) on top of the industry multiple in the event of an exit.
4- You Could Have Better Deal Flow Than Them
Startups want to work with you.
Well, not always you specifically, but sometimes.
How do you go about taking advantage of the billions of dollars put behind growing your brand, your products, and your message to roll out the proverbial red carpet?
It takes two simple things.
In the current landscape, most corporations are missing a straightforward element to amplify and narrow down their pipeline efforts: a single access point for these types of interactions to occur.
That is the first one.
Think of it as a door with a welcome mat and a sign in the window saying "We're Open."
Most founders, being unable to find this type of entry on a company's website, begin to think that these kind of connections are unwelcome and potentially burdensome to the recipient.
What's more -- without the access point in place, startup founders find themselves in a sales role, not only having to convince the corporate connection, generally chosen at random from LinkedIn, about the value of a possible partnership, but also the culture of startups in general.
Because of this, they tend to gravitate towards people who understand startups: the people that spend their time investing in them.
So what is the second one?
A startup person.
Not a person who you shifted from one role into a new division, but a person you brought in with startup experience that can engage with these founders.
In sum: A red carpet, an open door, and a familiar face with similar experiences.
5- They Don't Care if It "Fits"
A venture capitalist has a call with an executive:
"These guys are great."
"They are going to completely transform xyz."
"A total game changer. You guys should be partnering."
"They are on the fast track, and I would work with them if I were you."
"You have to see their new technology. It's incredible."
Notice how these conversations aren't about the needs at your corporation?
They're not diagnosing your specific problems or searching for areas of innovation.
Consider if you were looking for a wife.
One man says "Here are my five daughters. Choose whichever one you like".
The other man says "Tell me about yourself, and I will scour the world looking for your best match."
In both cases, if the goal was marriage -- you could get it done, but which one do you think would produce a better result?
A venture capitalist has a singular goal of a return.
In this goal, they push the startup outward as opposed to receiving the corporation inward.
Unbeknownst to the corporation, who likely expressed unknowledgeable brevity along the lines of "Find us startups in the FinTech space," they go on believing this startup is the cream of the crop -- because that's what they're being told.
6- You Helped Them Raise Their Next Fund
Just like entrepreneurs, venture capitalists have to raise money as well.
Sometimes during their pitches, they focus on their returns of previous funds but more often than not, it is the tertiary elements that get people with checkbooks most excited -- especially when they don't understand the ins and outs of venture capital.
Things like "We just added an ex-Google employee to our management team," and "brought on an entrepreneur-in-residence from Facebook," and "Secured Partnership With Coca-Cola," all work as eye candy for would-be investors in the fund.
And why?
Because these brands add a psychological air of credibility to any event.
Who cares if the guy from Google worked on Google Glass.
That the Facebook guy ran the partnership with Cambridge Analytica.
That the Coca-Cola partnership was for just for free soda cups in the office.
These things aren't important, right?
Conclusion
There's a lot of good reasons for corporations to engage with members of the startup ecosystem.
However, keen executives should be sure that they're accessing the widest pipeline, partners, and platforms that align within the corporation's interest, not the interest of others.
The absence of such metrics simply allows corporate resources to be an additional tool within someone else's toolbox. In addition, startups are always seeking opportunities as long as the result is a win-win relationship.
Creating mechanisms that facilitate these opportunities is key.
About the Author: Anthony W. Richardson is Founder and CEO at Gearbox.AI. In his prior life, he was a hired gun for venture capitalists, an author, a speaker, an entrepreneur and an advisor to global accelerators with a focus on growth, finance, and scale.
About Gearbox: Gearbox.AI provides the leading corporate-startup engagement solutions designed to help innovation leaders, corporate development professionals, and strategic partnership executives master the art and science identifying and aligning with what's next. Through a unique combination of a membership community, AI-driven software, and cutting-edge expertise, Gearbox is focused helping corporations keep pace in an ever-changing digital world and providing startups with new avenues for growth. The result for modern innovators is unprecedented agility, risk management, and superior results.
Headquartered in St. Louis, MO with offices in Denver, Chicago, and Los Angeles, Gearbox serves as a pivotal partner to large corporations and a champion to innovative startups.
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