Raising capital from corporate VCs could kill your startup. Here’s why and how to avoid the death spiral caused by most CVCs.
I’ve personally raised capital from corporate VCs and barely made it out alive, saved by acquisition. Most of what I’m sharing isn’t just my personal experience but the combination of several startups I’ve advised or worked with.
If you’re early stage or haven’t raised a Series A yet, this is for you. Companies building tech that gains the attention of the Fortune 500 are very exciting. However, if you give too much attention to your big corporate partner(s) before you’ve gained notable traction, you could be shortening your runway with no escape. Here’s my advice to avoid death by corporate partners.
- Don’t do anything for free:
When you finally get someone interested at a Fortune 500, it’s exciting to want to have their logo on your pitch deck/website. However, given the red tape of corporate procurement, you might not be ready for an enterprise account. Most founders offer to collaborate for free as a sign of goodwill and to land a contract in the future. Don’t make this mistake; it will give you nothing and cost you time, money, runway, missed opportunity, etc. Set clear expectations of a paid engagement from the beginning. Your time should be spent on the contract and not doing the actual work for free. - Don’t solely rely on your “Hero” on the inside:
Every startup has its “Hero,” the person championing them internally and trying to rally support. They’re your biggest cheerleader…don’t trust them. Sometimes your hero might be the internal VC, sometimes a department lead, but often your hero is middle management trying to make a name for themselves off your startup. They have limited control and influence and can’t always deliver on what they say. It’s the nature of big corporations, no fault of the individual. Always proceed with caution and set clear goals and boundaries with your hero to avoid being led in the wrong direction. - Paid POCs are good but don’t undersell yourself:
Work with your hero to find out what’s the max budget the department can spend without involving procurement or senior management approval. It’s higher than you think and allows you to move quicker. Work towards getting an agreement signed and money paid upfront. Anything less will make it difficult for you to survive. - Talk to their biggest competitors to keep them honest:
If you’re working with Verizon, then go talk to AT&T or T-Mobile. This immediately lights a fire under your hero to move things faster internally in fear of losing you to a competitor. This is a must in any engagement, and without this, time is on their side, not yours. - The Corporate VC team likes you, now what:
Often, CVCs can’t lead rounds, putting you in a difficult spot. They won’t give you a term sheet to shop or agree to terms until you get a lead. Make sure you know what the Corporate VC investment restrictions are before you engage. Several founders fall prey to the "Our corporate VC will totally invest in you,” and they work on a deal with the understanding the money will be there when they ask for it. That is far from the truth. You still need to raise a traditional round before the CVC takes further action. Make sure you leave enough runway for a 3-6 month fundraising cycle from when you start generating revenue/traction.
This advice is only applicable to founders wanting to build the next unicorn. If you’re comfortable selling out early for <$25M, my advice is not 100% valid. Many deals get done for sub $25M behind the scenes and make founders notably wealthy, but not their investors or employees in most cases. If this is your desired path, stack your team with incredible tech talent and work with multiple corporate partners to create competition.
If you’re looking to connect with corporate VCs or VCs in general, check out Thunder.vc to see if your startup matches with any. You can upgrade to Premium Access to unlock your matches and contact them directly, leveraging Thunder as a means to a warm intro. Link in the first comment.
If you're looking for some additional guidance or advice on your particular situation, feel free to book a consultation with me here.
