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February 15, 2021

Large companies have always been interested in small startup companies, but some use M&A and others use venture capital. In this article, we will be learning what corporate venture capital is, the biggest challenges, and how to make it work. Helping us understand this matter is John Orbe, Associate General Counsel of M&A at Emerson. 

“Any company, at the stage in their growth process, that is considering M&A, should also warrant looking at the VC initiative.” - John Orbe

What is Corporate VC?

Let’s start by defining what corporate venture capital is. Most people would be familiar with the traditional venture capital firms who invest in small start-ups seeking financial gain. Corporate VC, on the other hand, is a larger company making the same investments as part of their strategy. 

For a large company, there is a lot of advantage of getting involved with start-ups. One of the primary goals is to get a front seat at innovation as your company tries to adapt and evolve.

Other advantages would be achieving commercial synergy, access to a new market, combining your products to their products, and developing a potential M&A pipeline by getting involved in the company early. If they turned out to be successful, you could potentially get a discount or even block a competitor from acquiring them. 

But just like everything else, you need to know your why. You just can’t throw money every time there’s a new shiny object. You need to have a clear investment thesis and investment rationale. 

What are the Resources Needed?

First things first, you need to build your team. If your company already has an M&A team, you need something similar but smaller. Your typical team should consist of: 

  • Lead development person
  • Good Lawyer
  • Finance expert doing financial and tax due diligence
  • Legal Expert doing corporate due diligence
  • IP expert since this is around innovation
  • HR on employee-related diligence on the target company

Keep in mind that your mission is to do a very light touch on due diligence as you move in with your team. This is not an acquisition; therefore, your concerns will be different. You are not aiming to control the target company and still need to function like themselves to continue to be successful.  

Also, as a large company, you need to figure out where you will get the investment funds. If you are meeting quarterly or annual goals, you need to figure out how does this investment fit into that. 

Venture Capital vs. Corporate VC

Aside from the venture capital firms’ primary goal of gaining financial returns mentioned above, there are other differences. Because of the financial concerns of the VC, they will be negotiating harder on their exit scenario. Whereas a Corporate VC wouldn’t because they have longer strategic goals for the target company. 

VCs are typically more aggressive. They are willing to invest in the earlier stages, unlike a corporate VC would. VC is also likely to take a higher portion of the startup company to ensure that they have a seat at the board. They want to have a say on what the company is doing, which won’t be the case on a corporate VC.

On the other side, corporate VC can offer more credibility to the target company. A small startup backed up by a fortune 500 company looks really good from the customer’s perspective. Also, being a large company, they have many experts who can help grow the business.

Biggest Challenge

The biggest challenge in dealing with startup companies is their nature. While it’s normal that they are focused on their growth, they’re not paying attention to corporate formalities that lawyers obsess over. You need to check through the light touch diligence if everything is going well because not everything will be polished. 

“You need to balance out getting the deal done in a quick and effective manner with the right amount of diligence, but not overwhelming the startup company.” - John Orbe

Negotiations can also be difficult because no matter how brilliant they are in their field, they’re not M&A people and they won’t understand some of the terminologies that are being negotiated. Being a startup company, they also won’t have dedicated teams to accommodate your venture capital deal. You need to make sure that you avoid disrupting their business as they try to grow it in the process. 

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