7 Signs You Should Look for (Corporate) Venture Capital Investors Instead of Bootstrapping
One decision that you have to make is whether your primary funding strategy should be bootstrapping, whether you should seek a venture capitalist or angel investor, or even approach the corporate venture capitalists. Every entrepreneur should bootstrap in the beginning to prove their resolve and show that you have as much skin in the game as your next investor. And I have been burned investing into amazing people that lacked the pressure to succeed (at least twice, fool me once...).
However, most startups, at least those we are interested in knowing, are attacking a growing market whereby the cost to survive is growing faster than the market itself by taking market share from incumbents and expanding the pie. Unfortunately, growth requires cash in advance of revenue, even profitable ones.
A Quick Recap of Venture Capitalism
There is a difference between corporate venture capital and institutional venture capital. The latter are specific managed funds that invest in companies with high growth potential. Institutional VCs are measured purely by how much cash they return to their investors (true cash on cash returns).
Corporate VCs, on the other hand, are part of a larger company, generally with a strategic plan to invest in companies that work within the same industry (or new evolving ones) and can help drive both relationships and technological development. Their goal is more than just making money. Besides the return of capital, CVCs have another lever — deploying an investment's technology into its business to:
- Decrease costs
- Reduce emissions
- Strategically position the company into new markets, and
- Send signals to existing and new investors about future intent
All of these can have a dramatic impact on a company's valuation both today and tomorrow.
Fred Wilson is WRONG (I have so much fun saying this...someday I will be face to face with Fred and will probably be unable to speak...Brad Burke, it's time to invite him to a Rice event. Let's do this). I cannot judge his position on CVCs regarding their impact/value on his portfolio. But I can attest, at least in energy (both traditional and clean), that most startups need CVCs to validate and deploy their technology.
Bootstrapping, of course, has its own advantages. That includes keeping complete control over your company and its finances. However, there are some signs which indicate that you should go with venture capital — ideally, corporate venture capital — for your clean energy startup:
1. You Can't Invest Money You Don't Have
Let me be Dutch (I am 1/2 Dutch so I give people direct feedback only 1/2 the time): if you do not have enough money to start this company, I am going to question your ability to be a good steward of your own finances. If you cannot manage your own money, why can you manage mine? If you are starting an energy storage company for the marine industry, then maybe personal finances can get you started, but you will require scale and a lot of working capital. How can you outgrow your competitors without a war chest?
2. Worrying About Funding Is a Distraction
Some people can still work while worrying about money. And if you find one, please post.
If you have a venture capitalist helping you with funding, then you can spend more time and effort on focusing on the core product and growing your business. It can also reduce stress, which is proven to lower productivity and reduce innovation. You may or may not be able to hire somebody to worry about the money for you.
All entrepreneurs need to know themselves, and if tight cash flow affects your ability to focus and work, then it is best to seek funding which can help smooth out the bumps. Raising money takes time, effort, and hair loss. But if you're successful, it is much less painful than opening your own bank account app on a daily basis to manage cash flow.
I can attest that credit card financing is NOT fun.
3. This is Your First Time Starting a Company and You Lack Experience
Bootstrapping a company requires knowledge, hard work, and contacts. That's not a good fit if you have a really good idea but you're not sure what you are doing. An experienced venture capitalist can and will act as a mentor. They will introduce you to people, help you grow as an executive, and connect you to key customers, advisors, and investors. A good VC will work with you as a partner, act as an advisor and be your advocate.
All of this can help accelerate your company's growth and ultimately speed up your exit strategy (if you have or want one). Their institutional knowledge can essentially give you large company benefits as a small company. Corporate venture capitalists often provide additional benefits due to their strategic nature including (i) knowing the industry, (ii) being your target customer, (iii) and have the deep technical know-how to help your product development.
4. You Need Connections to Market Your Product
A corporate venture capitalist can be, potentially, a customer. They also know potential customers and can introduce you to people who might be interested in your clean energy or cleantech product. As many of these products are business to business, rather than being aimed at consumers, it is vital to establish contacts with future customers and clients. A good corporate venture capitalist will already have those connections and will know who is worth talking to and who is a waste of time. They will also have a stronger idea of your potential competition.
A corporate venture capitalist with contacts outside your industry can be even more valuable. They give you potential access to customer types a small company might not otherwise be able to reach. They will also improve your credibility. The very fact that a CVC is interested in your product can be enough to attract customers, especially early adopters. I will share stories in future posts.
5. You May Be Able to Leverage a Guaranteed Exit Strategy
If your plan is to run a company for life, then you may not want to go with venture capital at all if you can avoid it. But if your plan is to establish the company and then retire or move on to the next project, then you should have a day one exit strategy (there is more to this; however, that is another post).
Although nothing is ever guaranteed in business, there is always a chance that a CVC may eventually lead to the larger company making you a good offer for your startup. By working towards this from day one and by building a relationship with them and their colleagues, you make it much more likely that you will be able to sell the company. CAVEAT: I am still with Warren Buffett. In his 1996 letter to shareholders, he writes, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” This applies to you as well.
Remember, CVCs are strategic investors with their own objectives.
They may even have the ultimate goal of acquiring your product for the right price. One in five Cisco acquisitions is a company that gained ground because Cisco invested in them. Especially in innovative and risky technologies such as cleantech, having a solid strategy is the best way not to get stuck.
However, some companies will make a minority investment specifically because they are not going to be in a position to acquire the company. So this is not something you can count on.
6. You Have a Physical Product You Need to Make
[NOTE: I love hardware because it is tangible and usually cool. However, I really do not like hardware when I need to return cash to Limited Partners...forecasts are always short, prototyping despite new software enabling it to happen faster takes longer and more money than ever expected, and testing it is an order of magnitude more complex than software. However, sometimes, it is required especially when there is no modern infrastructure]. Producing physical goods is challenging. Having access to manufacturing plants or distribution channels requires having a lot more money than most companies can provide at the start.
In some cases, CVCs may give access to part of their operational capabilities as part of the deal. This may give you the ability to create more of your product faster and thus not end up in the back order trap, where customers are not receiving their product and telling everyone else they are not receiving it. Even large companies can end up there.
With a CVC, you may also learn from their business practices, which are, of course, proven. This is more likely to happen if you are working with technology they plan on exploring themselves. In these relationships, they are essentially letting you take some of the risk. Microsoft, for example, is specifically looking for companies that can help with Internet services architecture.
7. You Need the Confidence to Pursue Your Idea
Again, entrepreneurs need to know themselves very well. Some people may have difficulty believing that their idea is going to work out. Creative people are particularly vulnerable to imposter syndrome — that is, the belief that you do not belong where you belong or deserve what you are getting.
Knowing that a large company thinks your idea or product is worth investing in can help you overcome imposter syndrome by telling yourself that, if they believe in it, it may actually be good. In areas such as cleantech, entrepreneurs tend to fall into that creative mold, to be the kind of people who have "blue sky" ideas that may or may not work.
A CVC can give support and confidence
At the same time, seeking capital and failing may tell you if the idea you have is not ready for prime time and you should move on to something else. Having confidence is vital to success. If you do not believe in your product, you will not be able to sell it to others.
The benefit of attracting a corporate venture capitalist goes beyond merely attracting funding. While it is not the right course of action for everyone, it is a vital source of funding for innovative companies working in high-tech environments. Tech giants are constantly looking for companies that might be able to provide products they can use or which increase sales of their own products. Because of this, they can be easier to attract than institutional venture capitalists, who care only about direct return and are prone to trying to acquire more and more of your company.
Essentially, while it may be possible to start your company without outside funding, that is very rarely the case in the clean energy and cleantech field. The best solution for many companies is to seek venture capitalist investors, especially CVCs, who can help you establish and develop your product.
If you have a great idea, please reach out to us and tell us more about how you are solving the world's energy problems.