When Getable founder Tim Hyer raised outside capital last year, he ended up getting a chunk from a source he never pitched: his big-company customers. "I was blown away," says Hyer of the industry interest when he casually mentioned Getable was raising its Series A round. Ultimately, 20 percent of the $5 million Hyer raised in 2015 came from construction companies and others that were using Getable's online platform for heavy-equipment rental.
The number of big companies putting money into startups is reaching new highs. Research firm CB Insights counts 321 companies that did some form of venture investing in 2015, up 16 percent over 2014 and more than double 2011 levels. JetBlue, Campbell Soup, and Sesame Street producer Sesame Workshop have launched new funds this year, joining longtime corporate investors like Google and Qualcomm. And while VC funding in general has slowed down in early 2016, corporations have continued to pour into deals. They participated in 26 percent of all funding rounds in the U.S. in the first quarter of 2016, up from 24 percent for all of last year.
Big-company investors rarely offer huge sums but can give you advantages that traditional venture investors can't, says Evangelos Simoudis, a traditional VC who advises corporations on how to invest in, incubate, or acquire startups. For one, they are often customers of the startups they fund, or have some other type of actual or potential business relationship. That means industry expertise, proprietary technology, and access to networks that can juice your firm's growth. Such backing is also a credibility boost. For Getable, it's "proving to be much more valuable than just getting money," says Hyer.
And corporate investors may be nicer. Kathy Leake, co-founder, CEO, and chairwoman of Qualia, which has gotten more than $16 million in venture funding, says her Verizon Ventures investors are "less aggressive" than typical VCs, in part because they don't have limited partners to satisfy.
So, should you take the money? Weigh these benefits and pitfalls when deciding.
1. Define what you want from a big-company investor.
Some corporate investors will drop the money and run. Others want to be intimately involved, perhaps even join your board. Once you decide what you want, interview portfolio companies to gauge how well you match. Aimee Kandrac, co-founder of care coordination platform WhatFriendsDo, has raised money from several angel investors and knows that, "in our next round, we need smart money that is going to help us see where to move." As corporate venture groups reached out to her, she interviewed founders of their portfolio companies, and took one corporate investor off the list when founders said it was too hands-off.
2. Consider potential conflicts.
Hyer decided early on that Getable would take money from customers (contractors) but not suppliers (equipment manufacturers or dealers), because he didn't want to appear biased toward any one brand. Carefully weigh the benefits of a corporate investor against the potential hit to your credibility with customers.
3. Don't give up too much control.
Vyopta, which monitors and analyzes video and communications data on enterprise networks, rejected a sizable investment from a large customer a couple of years ago. Co-founder Alfredo Ramirez was worried that the customer--which asked for a board seat--might influence acquisitions or other opportunities involving its competitors. Now that Ramirez has funding from a traditional VC, he is more open to a corporate investor as long as it takes a minority position and doesn't want a board seat. "We're in a better position to negotiate," he says.
Tech giant Salesforce is one of the most active corporate investors of the past few years, with more than 150 companies passing through its portfolio. Matt Garratt, VP of Salesforce Ventures, works with a team of four others to scour the startup landscape. He explains which companies catch his investor eye.
- What does Salesforce Ventures require from companies it invests in? Most companies we invest in have products that are built on our platform and are typically at the Series A, B, or C funding stage. We occasionally invest earlier or later, depending on the strategic value of the company. We primarily invest in firms that are already in our ecosystem, mainly via our AppExchange program. Occasionally, we look for companies with a talented founder and team who we believe will build successful businesses in the enterprise cloud space and provide a valuable solution to a broad set of our customers.
- You generally require that companies already have an institutional investor on board. Why? We complement institutional investors. For example, we typically don't take board seats, so we look to institutional investors to fulfill that for our portfolio companies. On the flip side, we offer portfolio companies things an institutional investor can't, like firsthand industry experience, access to executives, a product road map, and more.
- What helps a company rise to the top? A company's product needs to be broadly strategic to our customer base, rather than fulfill a niche use case. We require a Salesforce executive sponsor for every investment. If the sponsor believes your company will have a strategic, unique, and broad use case, your firm will likely rise above the rest.