Venture capital firms aren’t the only ones keen to invest in the next big tech startup. Corporations are increasing their venture capital (VC) investments, as well. Corporate investments grew threefold between 2011 and 2016, and 75 of the Fortune 100 companies have entered the VC game.
Corporate venture capital (CVC) deals also aren’t exclusive to any one sector. Companies as varied as Google, Intel, Qualcomm, Johnson & Johnson, and Pfizer have launched CVC arms. CVC funding can be used to develop competitive technologies for the parent company or to prime portfolio businesses for future acquisition. As a portfolio company of Intel Capital, the enterprise cloud business Virtustream was able to test and refine its product through the larger company. Intel also helped Virtustream validate its product with the former’s customers, and the smaller business was eventually acquired for more than $1 billion.
However, corporate venture capital investors must exercise caution before approving startup deals. Unless they understand the commercial potential of an idea, they can’t know how it will impact their bottom lines.
Investing to win
The recent spike in CVC investing comes after many years of corporate reluctance to get involved in the space. Many corporations have lost money on startups that did not deliver the expected ROI or failed altogether. CVC investors should heed the lessons from the past and make sure they are funding companies for the right reasons.
If your company is considering a move toward CVC, the following checklist will help you evaluate prospective deals and decide whether they are a good fit for your company:
1. Founder and management team
Before investing, it’s important for corporations to assess whether a startup has an innovative founder and experienced team. But beware—this criteria is not the end of the world. And the implosion of Theranos is a perfect example of why. Elizabeth Holmes, the founder of Theranos, recruited well-known and bright board members to join the team. Then, she was able to convince investors to commit hundreds of millions of dollars into a technology that was never verified independently—and come to find out it did not exist. Hindsight is 20/20, but scientific verification of the technology your company is investing in should no longer be an option. If it continues to be, then corporations might find out a technology never existed when it’s too late to back out.
2. SWOT analysis
A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis provides a comprehensive view of a startup’s viability. What are its strengths? What is unique about its core value proposition, and how does that translate to your market? For instance, blockchain has stoked a fire of interest and the technology appears to have limitless innovative applications. But for many individuals, it is still difficult to understand and even startups struggle to recruit developers with deep knowledge of the technology. Potential investors also struggle to grasp the technology they are assessing themselves to make informed decisions about how it can align with their own goals.
What are the opportunities this startup and its technology will open for you? Are there any potential threats you foresee? Will it compete or take away market share of your core products and services? Assessing as many potential threats possible will help you strategize the most optimal plan.
Who are the other players in the space? If there are few competitors, you will want to conduct an even more thorough analysis. Is the market big enough or does it exist yet? A startup could have a product so new, it will be able to capture massive market share before other companies have a chance to catch up.
But on the other hand, is it too early for adoption? A lack of competitors may indicate a misalignment between the concept and the market’s needs. Has anyone else tried this idea and failed before? Perhaps this startup had a way to make the concept work, but not enough funding, which would give your company a significant competitive advantage and know-how. Hindsight is 20/20.
4. Patent potential
Finding out whether a startup invention has a patent or patent potential can also give you insight into the deal. Patents are awarded to ideas that are unique and potentially groundbreaking. If a company has a strong case for patenting something they have created, chances are they could become market leaders. By partnering with them, you may significantly increase your own value proposition. Either your company will profit as investors, or you may opt to bring the startup in-house to apply their invention to your own product offerings. Whatever the structure of the deal, having a protected asset can lead to significant benefits for all parties.
While a patent can be a great asset, it is also important to verify that the product, processes, and/or services a company wishes to deliver based on the patent does not infringe on patent rights of others. Particularly for biotech and pharmaceutical companies, it is important to consider a Freedom to Operate (FTO) analysis. This is a legal opinion that can minimize the risk of your business model. If you have a patent that does not have FTO in a certain geography or market in which you wish to sell your product, you may have no business at all.
Justify every deal
The components listed above are important for evaluating prospective partnerships, but the most critical question is, “What does your company hope to gain from a particular investment or deal?” It is tempting to dive into the venture capital arena when so many other companies are doing the same. But the most successful deals are built on a strong foundation of shared goals and benefits. When you have defined what a successful partnership would look like and what you intend to gain from a deal, you will be able to justify your investments and maximize your returns.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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