From our August 9 newsletter. (Don’t get it? sign up here)
So you probably saw the news re Uber and Didi in China. Â Uber will sell its operations in China to Didi and receive 20% of Didi. Uber joins Didiâ€™s board; Didi joins Uberâ€™s board. Â The good folks at Pitchbook had a little visual fun with what this means from a shareholder / stakeholder perspective.
Um, awkward bedfellows. Â Which is a good segue into the subject of todayâ€™s newsletter – strategic investment. And how it can be really awkward.
First, some terminology: what is corporate venture from the corporate investor perspective is strategic investment from the startup perspective. Â The startup has decided that equity investment (not NRE; this is aÂ subject for another day) from a strategic (corporate) investor will have value over and above the cash it would get from a traditional VC: perhaps through distribution, perhaps through imprimatur (i.e., the lift that would come when, say, Google or Intel invest), maybe through reach into an otherwise hard market (like, say, Japan!). Â This is the principle behind strategic investment. Â And it all sounds great. The partner has some skin in the game. Theyâ€™re invested in you. What could go wrong?
Then thereâ€™s the tactical reality. The courtship process with a strategic investor means exposing your finances and plans to a potential customer/partner/acquirer. Some of those secrets will be given away *before* the investment happens – the corporate VC could just walk away. This is more likely than not – a corporate VC probably invests in 1% of all the companies it meets over the course of a year.
Thus, to the entrepreneur, this is a gamble. Â Despite what the VC may say, the entrepreneur should assume information will be shared between the investment arm and the business units. Â Â Which is why a corporate VC needs to tread a delicate balance between doing its diligence and being perceived as on a fishing mission.
In Jonâ€™s past life at Rosum (which had corporate venture investment from Motorola, In-Q-Tel and Disney, and from its ultimate acquirer, TruePosition) there was a certain corporate VC that would come calling every year. Despite our misgivings each year weâ€™d suit up, pitch, and theyâ€™d go away for another year. It was like Charlie Brown and Lucy, and Lucy kept pulling the football away.Â Â Further, each strategic investor had its own wish list. How to address potential n=1 requestsÂ while still scaling? This was an ongoing question, and ultimately we weren’t successful at answering it.
Some strategic investors want information rights; others want observer rights, meaning, they get to be in the room during board meetings though they canâ€™t vote and canâ€™t stay for executive sessions. Others, particularly those that function as lead investors, will have voting rights. So, for the startup, thereâ€™s the question of how much of how transparent are you willing to be? Are you willing to have a strategic investor / partner / candidate acquirer sit in the board room while you candidly discuss opportunities and challenges your company faces? Â If a strategic investor really invested Â in your success? Â Or are they just keeping tabs on a disruptive technology?
These are things the entrepreneur should think about, and conversely they areÂ nuances the corporate investor should be aware of. They are also reasons why corporate venture isn’t as easy as it might seem.
– Team Blue Field
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