SmartAB™ Wisdom #4: Cozy Up To CVCs

I wrote about the benefits of securing CVC investments in the past. And in my LinkedIn posts, I emphasized the benefits of bringing the CVCs onboard - to a young startup. It was all told from a startup’s perspective… 

For example, in “Corporate Venture Capital – The Most Underutilized Factor Endowment Of Corporate Giants”, I said: 

“CVCs should be able to select outstanding business plans they review AND launch strategic ventures out of their own volition, too. All business plans should meet the same rigorous investment criteria. 

With a relatively small tweak – CVCs can spur transformational and disruptive changes to the business development process at their parent company. My recommendations can help “separate the wheat from the chuff” and cultivate the pool of the gifted…   

In the same way, a lot of well-funded startups fail due to a lack of operational expertise and/or managerial talent – the complacency of CVCs could cause some of their parent companies to see their “Kodak Moment”, too. Unfortunately, most will see it in black and white…”

And in “How To Turn Corporate Venture Capital Into A Magnet For Raising CAPITAL” I pointed out the following:  

“Institutional Venture Capital (IVC) firms, as well as Angel Investors, look for 2 things in a seed-funding pitch: the proverbial T&T. It all boils down to “show me your Team & show me your Traction”. No T&T to brag about – better start packing! Without a demonstrable T&T, ideas are worthless to such investors - and even products, are often dismissed with a yawn. 

Guess what: Smart Corporate Venture Capital (CVC) funds could exploit the above situation to differentiate themselves in a crowded VC space. By making a few simple tweaks to their existing strategies, CVCs can draw the attention of smart entrepreneurs - LIKE A MAGNET! By doing so, CVCs could become a de facto Go-To-Place for raising SEED CAPITAL”

However, in “LeanCVC™ - A Match Made In Heaven”, I shifted my focus toward CVCs and their parent companies. And I said: 

“For years, I advocated a simple thesis: CVC should stop imitating VCs! No, you can’t just dab a little bit into a Venture Capital the same way you can’t be just a little bit pregnant! Only a few of my corporate clients understood such a notion before our encounter - most didn’t!” 

I praised Steve Blank for showing how large corporations and their CVC arms are not to fall into the innovation trap - and how such entities could save hundreds of millions while at it. But it can’t be done without the shift from... FORM to SUBSTANCE.

Steve says: “In a startup, 100% of the company is focused on innovation and entrepreneurship. In a large corporation, 99% of the company is focused on the execution of the current business model by building repeatable processes and procedures. And a very small percentage are focused on innovation”. 

So, given the inherent structural difficulties linked to their ability to innovate - what are the industry giants to do? In a single word: a lot - but not in a form of setting up yet another corporate accelerator/incubator as a point activity. And Steve coins it as the “Innovation Theater”: 

“These are innovation activities, not deliverables. The hard part in a company is not getting a demo or setting up an internal accelerator, it’s getting something delivered through your existing sales channel. 

“A good number of companies focus on the easy part, which is, “Let’s have an incubator/accelerator.” The hard part is, “How do we deliver something with speed and urgency?” 

And to drive the message across, I added: “if a company overly relies on incubators - the output flow of deliverables from their innovation pipeline will start resembling a mighty Colorado river - in mid-summer. It trickles down through a Horseshoe Bend outside Page, AZ - without much fanfare. And if you never visited Page in the summer months - think about the river flow... as the dribbling stream of a BPH patient - with an enlarged prostate”…  

The point I was making was quite intriguing and I received a lot of questions and requests for clarifications. In essence, I suggested the following:

“Traditionally, CVCs would invest in startups at various growth stages in exchange for a minority position in the company. In contrast, PE firms would often take a majority position in mature companies in traditional industries.

However, this practice is changing as PE firms increasingly look out for more deals and buy out CVC-backed tech companies. Similarly, CVCs are now open to buying more mature startups - if such companies fit their strategic objectives. If only there was enough money available to CVCs for a pricier acquisition ... So, here it comes:

Instead of spending hundreds of millions of dollars on acquisitions, CVCs can simply focus on “grooming” the startups for PE’s investment!”

CVCs in 2022

 According to CB Insights, CVCs participated in 1,317 deals worth $37B in Q1’22 alone. That’s a lot of deals…

 And in line with my recommendations, I was pleased to see that CVC-backed mega-round funding declines (Mega-rounds’ share of CVC-backed funding falls to 51% in Q1’22). More importantly, CVC-backed mid and late-stage deal sizes are both up more than 10% YoY…

But if the startups think that obsessively focusing on their unique products/solutions in a Pitch Deck is going to get CVCs excited – think again… Unless the Pitch Deck clearly articulates “What’s In It For The CVCs” – the chances of getting funded are slim, at best.

Would You Like To See An Example?

 Nothing drives the message across better than the relevant examples. Hence, when Vrilock Psionic Metaverse (VPM) recently approached me and asked for fundraising advice – I was quick to respond.

 Truth be told, AR/VR investor pitches are not new. They were made for many years. But the greatest financial gains occurred in the gaming industry. It is a huge industry, perpetually hungry for new content and innovation.

 While many investors see it as too competitive and overly dominated by deep-pocketed tech giants – I advised VRilock Psionic Metaverse (VPM) to view the gaming industry as a great opportunity for startups to bring new and compelling content to gamers around the world. And to do so, by cozying up to the tech giants’ CVCs.

 And as a result of my efforts, VPM is now convinced that the deep-pocketed tech giants and their CVCs bring unique opportunities to startups such as VPM. Hence, the company now plans to tap such a symbiotic relationship to its fullest…

 VPM’s growth plans can be summarized in a single statement that is well understood by the investment community: “Standing on the shoulders of giants”.

Such a metaphor describes leveraging the successes of major players within the gaming industry, including: 

·      Meta Platforms Inc. (FB)

·      Sony Group Corp. (SONY)

·      Microsoft Corp. (MSFT)

·      Alphabet Inc. (GOOG, GOOGL)

·      Apple Inc. (AAPL)

·      Unity Software Inc. (U)

·      Nvidia Corp. (NVDA)

·      And many more…

Not only companies like Amazon. Microsoft, Apple, Google, and Facebook sit on more cash than the entire VC industry – they are also further incentivized and motivated to see the metaverse founders as the great adopters of their platforms.

Be it Azure by Microsoft, or AWS by Amazon – nobody thinks that Amazon acquired The Whole Foods only because Jeff Bezos loves organic green onions…  

And I encouraged VPM to emphasize that aggressive CVCs can invest in startups early and benefit from low valuations. At the same time, they can also license their platforms back to their investees. 

So, for example, a CVC Platform company makes a $5MM or $10MM investment in a startup and then collects the license fees for its Cloud, AI, NLP, Metaverse, and any other SaaS services. The startup uses the CVC software, effectively - and sells more of its products and services to its customers.  

And chances are, that in 3-4 years, the license fees alone make the initial equity investment break even… This is not a bad IRR of 30% to 40% - even without considering CVC revenues from equity stake on exit. 

By porting all the existing VPM products and developing new products using one of the CVC parent’s platforms – VPM offers an Irresistible Value Proposition to CVCs. Such CVCs and their parent companies will benefit from: 

·      VPM’s use of their Cloud/AI/SaaS/NLP Platforms and API toolkits

·      Revenues from VPM sales of their Cloud/AI/SaaS Platform components imbedded inside VPM products;

·      An optional ROFR Guarantee - while VPM embarks on future Joint Ventures with third parties;

·      Revenues from CVCs’ equity stake on exit

 In addition, CVC investments can offer invaluable revenue smoothing to the parent companies. And in some cases, cases, VPM can effectively prevent the parent company from losing billions in volatile markets...

Recently, I contacted a large Metaverse company after its market cap dropped by 37% in one day. Such a huge setback (measured in billions) happened only because the company reported $320 million in revenue in the current quarter, while analysts expected $322 million…  

Regardless of if you agree or not with my opinion, such unprecedented volatility is completely unwarranted. And I can’t even imagine the disappointment the company’s CEO and CFO must have felt…

But it could have been prevented. This is exactly why I contacted the company and explained that even a small CVC investment can generate a multitude of new and untapped revenue streams for the parent company.

After all, if companies like VRilock Psionic Metaverse license companies’ platforms and buy companies’ products – even just a few such investees could have delivered the required revenue smoothing and prevent the CVC’s parent company from losing billions, overnight…

Heck, if I was running the CVCs, I would have insisted on having a “set-a-side” provision mandating the startups to maintain a certain cash reserve. Such reserves could have been used to issue revenue smoothing Purchase Orders (POs) to the CVC’s parent company when needed.

And in a case of emergency, the additional POs could have made all the difference. After all, in the above example, we are talking about a miss of only 2 million… Surely, 5 or 10 investees could have risen to the challenge?

For More Information

 Please see my additional posts on Linkedin, Twitter, Medium, and CGE’s website.

AI Boogeyman

 You can also find additional info in my book on amazon: “AI Boogeyman – Dispelling Fake News About Job Losses”, and on our YouTube Studio channel… Thank you.

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