Corporate investors provide a meaningful portion of the total capital deployed in early to late stage companies today. “In 2015, corporate venture groups participated in 17% of all North American deals, accounting for 24% of the total venture dollars deployed to VC-backed startups” according to data from CB Insights in an article by Rita Waite of Juniper Networks, one of the corporate investors (Click here).
Corporate and institutional investors often differ in motives and styles which Rita Waite summarizes.
In our experience, these differences may be dramatic and may be in conflict as these points illustrate.
Corporate investors may pay a higher value because the candidate may enhance the corporate investor’s business, therefore, return on the investment isn’t solely dependent on the candidate’s performance.
The corporate investor may bring to the investment knowledge, contacts, assets or other advantages while an institutional investor typically brings only capital and less specific synergy.
The corporate investor may require some “hook” in the investment agreement to give it a special right to buy the candidate in the future, perhaps at a favorable price or to prevent the sale to a competitor.
The high corporate valuation may dissuade financial investors thereby making the candidate dependent on the corporate investor for capital.
Corporate investors may exert influence to keep the candidate focused on whatever is the business most valuable to the corporate investor, regardless of other opportunities which may present themselves.
Corporate investors typically want to avoid having the candidate consolidated for financial accounting and, therefore, structure the investment to be a minority interest with essentially no operating influence.
Since institutional investors want the opposite, commonly wanting control in both value and major decisions, so teaming corporate with institutional investors can be complicated.