Who will invest in your startup? [Part2]
It’s possible you’ve already attracted funding. Now, however, you are widening your search to some of the more sophisticated players within the venture finance ecosystem. What are some of the later stage, less dilutive and innovative opportunities that exist to help you extend your runway and get access to the capital you really need to grow and scale your venture?
Traditional Venture Capital Firms
With the emergence of more and more angel, super angel and micro-VC firms participating in the pre-seed and seed stage financings, more traditional VC firms have shifted their investment focus further up the capital structure to Series A and beyond. These traditional VCs are institutional money — limited partner investors, with general partners compensated through a management fee and carried interest. These firms invest other people’s money, and are simply another type of fund manager, specifically, an alternative asset manager.
With the rise of tech startup ecosystems in many different cities and countries around the world, more and more traditional VCs are comfortable operating beyond their home base. The result is that more international deals are getting done with a partnership between traditional VC players providing growth capital, with a combination of FFF, angels, accelerators, micro VC and other sources of funding providing pre-seed and seed stage capital.
In addition, the total value of funds raised by VC firms has been increasing rapidly over the past decade. In Europe, for example, the total value of funds raised increased by 4X from 3.5 Billion Euros in 2010 to 14.8 Billion Euros in 2019. The average VC deal size worldwide has increased from $2.2 Million in 2012 to $8 Million for early stage VCs in 2019, and from $5.9 Million in 2012 to $10.3 Million for later stage VCs in 2019, respectively.
In the current market, outside of certain industries such as biotech, companies that do not already have product/market fit and are not already at a point where they are legitimately growing and scaling with a proven business model are unlikely to fit the investment parameters of, or attract capital from, most traditional VC firms.
Corporate Innovation Units and Corporate Venture Capital
Another important player in the innovation ecosystem are corporate innovation units and corporate VC (aka “CVC”) funds. Corporations have learned the hard way that at any given time there is likely more than one startup somewhere in the world that has the potential to significantly disrupt their business model or make them irrelevant. Accordingly, corporations want to monitor and engage within the startup ecosystem, generally more for offensive and defensive strategic reasons than purely financial return on invested capital.
One of the ways corporations can engage with startups is to set up innovation challenges with prize money for entrepreneurs and companies to collaborate and co-create new products, services or business models. Another way corporations engage is by sponsoring one or more internal or external business accelerators. Finally, some corporations have taken the initiative to utilize corporate funds to invest directly in external startups. This may be directly from the corporation’s balance sheet or through a dedicated entity or fund. (Note that CVC is not an investment made through an external fund managed by a third party.) In addition to providing capital in exchange for an equity stake, the corporation may also provide some form of expertise or distribution capability with a view towards gaining a specific competitive advantage. Whether it is through a corporation innovation unit or corporate VC fund, the basic objective is to engage in structural collaborations with external ventures or parties to drive mutual growth. It also provides corporations with strategic corporate intelligence and insights in areas of interest and concern, particularly regarding transformative, disruptive and even incremental innovations.
Corporate innovation units and CVC are important players that can be extremely valuable to startups and the startup ecosystem generally. On the other hand, these initiatives can be difficult to staff, manage and measure, which can lead to unintended consequences for startups if not structured and managed correctly.
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