Business Week has an interesting story on non-VC companies acting like VCs. There’s nothing radically new in the piece, but plenty of facts, figures and quotes. I’ll highlight some of the good stuff then we’ll go through an example, you be the judge of whether this is smart or not.
Some quotes:
Companies that aren’t full-time investors pumped $1.3 billion into 390 venture capital deals in the first half of 2007, up 30% from the $1 billion invested in about 350 deals a year earlier, according to an Aug. 30 report by PricewaterhouseCoopers and the National Venture Capital Assn. (NVCA), based on data from Thompson Financial. That’s the most invested since 2001, just before the bottom fell out of the tech industry.
I’ve frequently mentioned that I am baffled at how little investing media companies do with regards to startups (read: The Math: What Media Firms Should Do with Video).
While media companies have the most to lose from these startups, it’s technology companies that are taking the risks:
The big spenders include Intel, which invested $112 million in U.S. startups in the first half of 2007, vs. $79 million a year earlier, and Motorola, which invested nearly $30 million in the first half of the year and says its overall 2007 investments should top the record set in 2006.
This is pitting technology companies against VCs, who historically financed the technology companies that are now their nemesis in the successful-startup-spotting-financing-stakes.
The incursions don’t sit well with many VCs. Combined with the predilection on the part of many entrepreneurs to fund their own ventures, investments by Google and other corporations leave even fewer opportunities for VCs to take big, early stakes. That’s especially problematic when venture firms have raised record amounts of cash and need to find places to invest it (see BusinessWeek.com, 2/5/07, “Venture Capital’s Growing Aspirations”).
With more financing options on the table, entrepreneurs are getting the upper hand:
“There are a lot of entrepreneurs who aren’t making the trip to Sand Hill Road,” says Ray Rothrock, managing general partner at Venrock Associates, referring to the Menlo Park (Calif.) thoroughfare that is home to many venture capital firms. “They’re going elsewhere.” Venrock, which funds Web startups including women’s blogging site BlogHer and search engine ZoomInfo, is considering launching a startup incubator as a way to counter corporations’ ability to buy the same companies it wants to fund.
Of course, the value creation cycle has accelerated, and that means that even the youngest tech firms, like Google, are getting into the fray:
The zeal for dealmaking at Googleplex mirrors an increase in corporate venture investing to its highest level in years. “They’re back, like the swallows returning to Capistrano,” says Paul Maeder, a managing general partner at Highland Capital Partners. “We’re in a wave now where corporate venturing is increasing again.”
Read the article here. So, what’s the bottom line?
I think that as an entrepreneur, you can reduce some of the risk in your company by getting in bed with a strategic investor. That helps quite a bit with R&D, sales, marketing etc., but the flip side is that you curtail the potential exits.
Do you? Let’s see.
For purposes of illustration, say Google invests in you and gets a first right of refusal, on the one hand, if you are onto something of value, then Google is sending a message that they will buy you no matter what, so other parties might not even want to consider getting their lawyers, accountants and dealmakers involved because it will be a waste of time if Google is going to buy you. Of course, that can be turned into a positive, because if Google’s competitor Microsoft wants to hurt Google, then they will unleash a battalion of M&A gurus around your company in the hope that they make you more expensive. Some would argue that this is what MSFT did with DCLK, though MSFT had no stake in DCLK.
The flip side, of course, is that if Google does not exercise its first right of refusal and doesn’t buy you, what kind of signal does that send?
The VCs, despite all of the bad reps they get, will generally push you to build the largest and greatest company you can… a strategic investor will make you build the greatest and best asset you can for them.
In life as in business, there are pros and cons to every option… it’s all about how you can manage these.
Subscribe:
September 4th, 2007 at 2:42 pm
Corporations getting into venture capital is also a good sign of being near a market top? Typically corporations have acted as late-cycle entrants to these parties and have produced miserable returns. Intel, SAP, Applied Materials have all tried this game without a whole lot to show for.