In partnership with Venture Atlanta this week, I had the pleasure of co-hosting the 3rd annual tech panel with King & Spalding, during which I co-moderated a panel discussion entitled “How to Attract and Work with Strategic Investors” with the acclaimed Silicon Valley tech attorney, Judy O’Brien. Our all-star panel included a venture capitalist from San Francisco, who traveled from the West Coast to participate in our event, a corporate venture capitalist based here in Atlanta, an Atlanta based venture capitalist and company operator, and two CEO’s of Atlanta based technology companies.
As I did with my post, “Planning for a Tech Exit”, for the Atlanta Tech Village last year, I’m going to share with you some of my key takeaways from this fantastic discussion.
Rimas Kapeskas, Managing Director of the UPS Strategic Enterprise Fund (Portfolio companies include Kabbage, Roadie, and Ally Commerce):
When identifying potential companies to invest, we like to get in early and are looking for areas that we don’t understand well. We look for companies who are still maturing, where the learning curve for UPS is the steepest. Our investment returns are measured in knowledge capital.
Strategics are more complex than traditional VC’s regarding what they want to accomplish. So, transparency and a clear understanding of their goals up front is very important.
In comparison to most traditional VC’s, we consider ourselves to be “patient capital”.
Companies are four times more likely to exit if they have a strategic investor.
Josh Breinlinger, Managing Director of Jackson Square Ventures (portfolio companies include DocuSign, Strava, and Demandbase):
Our goal is simple: to make money. During the early stages, an entrepreneur is learning and may need to pivot the business. A strategics’ priorities can hinder the company in these instances and make for some uncomfortable board meetings. In short, strategics are not a good fit for early stage companies.
If you have to take on a strategic/corporate investor, take at least two so that you can pit them against each other.
Wain Kellum, Venture Capitalist and Company Operator, Canal Partners (also led Vocalocity to its exit to Vonage for approx. $130M in 2013):
The best kind of strategic partnership is one that changes what the company is, that gets you somewhere you were never going to get to before.
You should never do a deal with a first-time strategic investor.
I wouldn’t want to have my biggest customer on my board. At some point, that person would quit being a board member and represent the company that they work for.
Jason Rubottom, CEO of Ally Commerce (recently received an investment from the UPS Strategic Enterprise Fund):
If you can find the right strategic partner, one in which your company’s values and theirs are aligned, you can strike a balance between the pros and cons of each to make a strategic partnership work. In other words, you can benefit from what is potentially tremendously more value than a traditional VC can provide without giving up much control.
Brian Cosgray, Founder and CEO of DoubleNet Pay:
One of the benefits that strategic partnerships can provide for an early stage company is instant credibility.
We have ADP and Comcast partnerships in the works. While neither are financial partners, ADP has connected us with tons of small companies.
I’d like to leave you with a few insights that Judy O’Brien stressed to all the entrepreneurs in the room. Corporations are providing a larger and larger percentage of the capital being invested in start-ups and they are coming in at an earlier stage —sometimes even seed rounds. Having a strategic investor can bring enormous value but also raises concerns around alignment that you don’t face with a VC investor. Founders need to understand issues like control, ownership of IP, board governance and how the companies will work together before they enter into these partnerships. Be sure you have experiences advisers throughout the process to help make it a win-win relationship.