Every so often, I hear an early-stage venture capitalist warn a roomful of entrepreneurs about the pitfalls of taking money from strategic investors. There's too much influence involved or strings attached, or there are misaligned incentives. The end result is usually lower valuations in the next round, lower acquisition price, lower IPO range, etc.
As a strategic investor, I'm obviously a bit biased, but the warnings against us demand a rebuttal. There are several reasons why strategic investors might be the right fit for you, but first, let's take a step back and get a quick overview of the two main components of the venture industry.
First you have traditional VCs--Kleiner Perkins, Sequioa, Accel, and the like. They typically have a General Partner (GP), Limited Partner (LP) structure. Vastly simplified, the GPs are the ones who do the deals and the LPs are the ones who supply the money (endowments, pension funds, etc). Then you have strategic investors, affiliates of corporations that invest on behalf of their parent company--Peacock Equity Fund (GE/NBC Universal), Time Warner Investments, Comcast Interactive Capital, Intel Capital, and Steamboat Ventures (Disney). (Side note: hat tip to Peacock and Steamboat for creatively toying with their names--"NBC Capital" just doesn't sound right, right?)
With strategic investors, the investment opportunities have to meet two criteria: financial and strategic (I know, one is hard enough!).
The first, financial criteria, are not all that different from traditional VCs (no matter what the Sand Hill crowd will tell you). We have our return hurdles, we have our investment committees, and we have our view of the world. I've heard criticism that we're not as valuation sensitive as traditional VCs, but I can think of 5-10 deals off the top of my head where I'm dumbfounded by the value assigned to a startup by a known, reputable venture firm.
The second, strategic criteria, are more subjective. We spend quite a bit of time with our operating businesses to pick their brains about what they're seeing on the front lines. Sometimes we invest to fill in gaps (i.e., where our corporate parent might see an opportunity to strengthen itself) and sometimes we invest in complementary companies (we can help them grow and vice versa). Every once in a while, we'll make a sector bet--an area that isn't directly related today but is of interest for the future. Usually, it's some combination of all of the above.
So why take money from a strategic then? Here are some of the benefits:
- A seat at the table. We recently invested in rich mobile ad network Greystripe. You can bet that a significant number of marketing or ad sales discussions within NBC Universal will have Greystripe presenting. It's like having an additional new-business pipeline.
- Operating partnership. Some of our investments have significant operating partnerships. Trion is working with Syfy (an NBC Universal cable property) to jointly develop IP for a game. Obviously both parties bring significant assets to the table here.
- Industry expertise. We leverage our investing experience as well as those of our operating businesses to give a view of the media landscape to all of our companies.
There is one sub-group of strategics to which I think the bulk of the criticism may be fairly directed: corporate investment groups that aren't dedicated venture capital arms. If the groups are not aligned to maximize the value of the investment, things can get tricky. That said, some are very good and rational. These should really be considered on a case-by-case basis.
Finally, for the VC's who still cling to old notions of the big bad strategic VCs, let me cite some research--Vladimir Ivanov and Fei Xie, in their thesis titled "Do Corporate Venture Capitalists Add Value to Startup Firms? Evidence from IPOs and Acquisitions of VC-Backed Companies" (2009) show that companies backed by corporate VCs have higher IPO and acquisition valuations than companies backed by traditional VCs.
How you like them apples?
Paul Lee is a founding member and Senior Vice President at the Peacock Equity Fund, a joint venture between NBC Universal and GE Capital. Paul's current Board and Observer seats include 4INFO, Greystripe, and Everyzing. He first started in digital media as a co-founding employee of Click2Asia, a venture-backed online media company. While at Click2Asia, Paul headed corporate development and played a pivotal role in the acquisition and integration of North America's largest online Asian media retailer. Paul entered the venture industry when he joined GE Capital's Technology Finance business. He leveraged his digital media experience and oversaw the growth of the digital media portfolio. Paul received a dual undergraduate degree in Mathematical Methods in Social Sciences (MMSS) and Economics from Northwestern University. In his free time, Paul enjoys competitive BBQ (dry rub only) and practicing mixed martial arts. He hopes to one day to see his beloved Chicago Cubs win the World Series. Follow him on his personal blog or on Twitter.
[Monopoly Photo by Mark Strozier]