In the ever-evolving world of deeptech startups, the quest for early-stage funding often leads entrepreneurs to explore investments from the venture capital arms of corporates operating in target industries. These “strategic” investors bring a mix of opportunities and challenges to the table, some of which we dive into below:
Accelerated Learnings: Imagine having a partner who not only funds the vision but also brings valuable insights from the frontlines of the industry. Furthermore, a strategic investor that's also a potential customer might offer invaluable guidance on what tweaks are necessary to transform the product or service into a must-have for their ecosystem.
Route to Market: The market reach and resources of a strategic could catapult an innovation to a broader audience, smoothing the path to widespread adoption. A strategic acting as a channel partner could be the ticket to a product or service becoming a whole solution, and “Crossing the Chasm” from early adopters to the mainstream market.
Technical Expertise: The wisdom gained from years of innovation in a similar sector can help a startup avoid some of the pitfalls all companies face during a technology development programme. And when roadblocks do arise, a strategic might be able to offer the necessary technical support to work through it, turning your startup's challenges into opportunities for growth.
Market Insights: A multinational corporate with an extensive network and resources to continuously monitor the market can provide invaluable insights, enabling you to better outmanoeuvre rivals and stay one step ahead.
Corporate Red Tape: Strategic investors, being extensions of their parent companies, might suffer from slow decision-making due to convoluted layers of approval, business unit ‘buy-in’ and corporate bureaucracy. You might find yourself waiting for support on crucial matters, impeding your agility.
Owner-like Behaviour: Despite being minority investors, some strategics might struggle to plan a supporting role, particularly if the necessary direction does not align with their corporate strategy. Maintaining your startup's vision while benefiting from their input becomes a fine balancing act.
Shifting Priorities: Picture this: the parent company of your strategic investor changes course, and your once enthusiastic investor loses interest. This scenario could leave your startup high and dry, particularly in a market downturn, scrambling for engagement and support just when you need it the most.
Detracting potential customers: In some sectors, your target customers may not wish to engage with you if they know that one of their competitors sits on your cap table, and possibly in your board meetings. If you are going to take money from a CVC, maybe ask some of their competitors if this might impact your commercial relationship with them. You never know – this may also incentivise them to invest!
Impact on an exit: Think clearly about whether having a corporate investor on your cap table might impact your exit options. A corporate investment doesn’t always lead to a subsequent full acquisition, and other industry players may be put off acquiring if you have an existing relationship with their competitor.
When might the benefits outweigh the risks?
Relationship Type: Is your strategic investor a potential customer or just a channel partner? The distinction matters, as valuable customers' feedback from strategics might not come until later in the game, when a certain scale is reached, whereas a channel partner can expedite time to market and help you get to scale.
Funding Source: Is the strategic investing solely from their parent company's balance sheet or set up as an arms-length investor and tapping external LPs? Balance sheet-backed investments can more-closely hinge on the parent's strategic shifts, whereas an arms-length structure and external LP funding could suggest a more disciplined and consistent approach, not as susceptible to market cycles.
Alignment and Intent: Is the strategic an eager acquirer or merely dabbling in "horizon scanning"? Ensure your startup's interests align with their near-term strategic priorities. Is their investment more than just a token gesture for longer-term privileged insights?
Walking the Tightrope to Success:
Round-by-Round Assessment: Don't fall into the trap of relying solely on strategic support. Reassess the strategic value of investors with each funding round. Be ready to pivot or dilute with new investor support if the relationship no longer aligns with your startup's goals.
Diverse Financial Backing: A strategic investor is just one player. To secure your startup's long-term financial stability, ensure a diverse mix of financial investors, reducing dependence on any single source.
In the fascinating world of deeptech, strategic CVCs can be both allies and adversaries. While their resources, insights, and networks can supercharge your growth, and act as a crucial source of funding during wider market downturns, the strings attached must be carefully examined. Approach strategic investments with clear-eyed caution, recognising the potential for mutual benefit and the need to safeguard your startup's vision. The strategic dance begins, and it's up to you to lead.
By Andy Bloxam, Managing Director of Venture Capital at Foresight Group and team lead of the Foresight WAE Technology (“FWT”) Partnership, a strategy focused on early stage deeptech companies, those commercialising breakthrough science and engineering innovations in the UK. FWT combines decades of smaller company investment management experience of Foresight Group with the technical engineering expertise of WAE Technologies (formerly Williams Advanced Engineering, originally born out of Williams F1).