Corporate Vs Institutional Investors

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

The Good

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 Bad

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.

The Good

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.

The Bad

Since institutional investors want the opposite, commonly wanting control in both value and major decisions, so teaming corporate with institutional investors can be complicated.

Microcap Funding Twist

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

Raising equity capital for smallcap companies, defined as companies with market values $2 billion or under, has gotten easier because of techniques like shelf registrations which permit overnight offerings and ATMs or at the market dribble out financings.

However, raising capital for the microcap end of the public market, defined as companies with market values of $100 million or less, hasn’t gotten much easier, in my opinion. 

It could be several factors, fewer microcap investors, generally lower liquidity or other causes.

This is a problem because many microcap companies need capital to grow.  If capital is too expensive or not readily available, it stifles their growth.

Therefore, when my firm helps microcap companies to raise equity, we often include less conventional sources of capital in the mix.

In addition to the hedge funds which have been the main source of capital for microcaps, we often approach three additional sources:

(i)                strategic investors,

(ii)             private equity crossover funds and

(iii)           wealthy individual investors.

These sources may not be as speedy but they may offer better terms.

First, strategic investors.  Many large companies have lots of cheap capital available but need growth.  This has opened the door for microcap companies to obtain capital from strategic investors.

What strategic investors want from the investment will vary, maybe it’s a co-marketing arrangement or a technology license, but they typically don’t want to consolidate the microcap’s performance in their financials.   

The key point here is that the strategic investor is expecting to get a return in ways other than those of traditional financial investors.  This creates some interesting opportunities.  For example, I’ve seen several recent strategic investments made at a significant premium to market.

The second group of investors are called private equity crossover funds.  Because the competition among private equity groups is so intense, some private equity funds have taken to making investments in public companies.

It’s important to distinguish these private equity crossover funds from classic hedge funds.  These crossover funds look at different metrics.  They look at IP position, capital efficiency and size of addressable market, and less at current profitability and liquidity.

Private equity crossover funds take a longer term view more in sync with corporate management.

The third group is wealthy individual investors.  These are the ones who survived the Great Depression with capital so they’re savvy investors, survivors.

They seem to come in two types, passive or active. 

The passive investors know they don’t have time to closely monitor their investment so they may appoint or hire someone to help them.  In a recent example, individual investors selected a representative to review documents and serve as their eyes and ears.

The other type of individual investor, the active investor, may serve as a board member and company mentor.  The active investor’s perspective is that he provides capital and advice, combined.

I suppose I should mention that we may see a return of the old style passive individual investor, investing very small amounts of capital in higher risk situations.  The recent crowd-funding legislation may spark the return of that style where an individual investor’s stake is so small in relation to his net worth that the complete loss is not too painful.  We’ll see how the new rules are drawn and what develops here.

In summary, we think it pays to include these less conventional capital sources to get your capital on the best terms.

Please contact me to help your company raise equity or debt or complete an M&A project.