First right of refusal · Fundraising

Downside and upside of accepting financing from a corporate venture arm?

Nidhi Verma Test Team Lead

August 27th, 2017

There seems to be a lot of corporate players entering the VC space. My cofounders and I see some of them as potential strategic partners for building and scaling our business.

My big concern when it comes to corporate venture arms is the fact that sometimes they put a right of first refusal which really limits your exit scenarios as you can not create a bidding war and drive up momentum on price when a M&A opportunity opens.

From your experience, what are the downsides and perhaps some of the upsides involved in receiving financing from a large corporation?

Arthur Lipper Chairman of British Far East Holdings Ltd.

August 27th, 2017

Corporate venture units are a far better investor than VC’s. Of course, they are prompted tp invest in companies of potential interest to their companies. It is the terms of a ROFR which determine its degree of toxicity. As with most entrepreneurs you will need an attorney to get the best deal. I favor going to the venture arms of potential acquirers for a read of their interest if nothing else.

Jeff Badovick I'm an inspirational business coach and I help people achieve major breakthroughs in business.

August 27th, 2017

Hi Nidhi,

Its quite possible to negotiate terms such as a right of first refusal provision. The other party may be willing to forgo such a provision if they have opportunity for upside in some other form. Think creatively and negotiate firmly.


In my experience, the upsides outweigh the downside. Having the working capital is one of the pillars of building and growing a successful business. Large corporations may be able to offer resources beyond capital, and can be a gateway to new relationships.


A corporate investor may want to have a active role in your business. The impact of this can be a positive or negative, depending on their approach and/or how you accept it. This is a good issue to understand and establish up front.

Arthur Lipper Chairman of British Far East Holdings Ltd.

August 27th, 2017

Understand the venture units of corporations seek windows of opportunity and they have little likely ability to positively impact their company’s bottomline. Also they are unlikely to have an interest in playing any role in the investee company. They are simply screening potential acquisitions and that is not bad for the company getting a credibility adding investor. Of course, I believe that early stage companies are far better advised to use royalties rather than equity as the means of capital solicitation.

Anonymous

August 28th, 2017

Through skills

Arthur Lipper Chairman of British Far East Holdings Ltd.

August 29th, 2017

The overall experience of the business owner is likely to be far better with the venture unit of a corporation than with a VC. The corporate units are typically seeking acquisition candidates and the VC's profits, all too often at the expense of the entrepreneur.