I wrote this prior to the Covid-19 meltdown but feel that it applies now more than ever.
If you have invented an energy game-changer… how do you get that technology into the marketplace? Where do you get the funding to further develop and fine-tune that innovation, let alone the test environment to ensure it works on a large scale? What if the market for your clean idea isn’t in your country — how do you gain access to those markets? Can you even get funding in the US if your customer base is largely in Europe?
That’s a lot of questions. But each problem is something you can solve — you just need to know how to approach corporate venture capitalists (CVCs) with global reach, excitement about entrepreneurs, and an interest in changing their industries. And that’s easier than you think, as long as you read up and plan ahead.
VC or CVC — What’s the Right Fit?
Traditionally, entrepreneurs get started by bootstrapping and seeking funding from angel investors. Once you have a little traction, you usually seek funding from venture capitalists. VCs thrive on investing in disruptor ideas, and what’s more, they don’t expect to make money on most of their projects. VC is the poster child for the needle in a haystack business model. That’s not an opinion: as an industry, they lose money or break even on a whopping 64% of their investments. That said, if you’re the VC guy who thought that an op-ed app limited to 140 characters seemed like a good idea and put money into Twitter, it’s okay to lose some cash most of the time — as long as you know where to find the needles.
CVC is an entirely different animal. If VC is your slightly dissolute cousin who’s always up for a good time, CVC is your rich uncle or aunt (the one who attaches conditions to birthday checks). Of course, that rich uncle didn’t get that way — or keep his money through the dot com and real estate crashes — without having some wisdom to impart. So, maybe it is valuable to take his advice. If you’re looking for serious (in more ways than one) money, along with industry-specific advice and access to a strong customer base, it’s absolutely worth it to consider Uncle CVC for your funding.
CVCs are part of a given corporate structure writ large. Energy-focused CVC groups offer entrepreneurs two things beyond the financial resources and advisory capability of the traditional VC. One is, as the commercial says, priceless: you gain access to the investor’s expertise, markets, and customer base for further developing, testing, and fine-tuning your product. Watch the latest interview with a colleague of mine discussing how a CVC can help deploy your technology!
Two, and here’s where you can assign a value amount eventually, you are building a relationship with the best potential buyer for your company. This is actually happening in the new energies race.
How does this translate in the real world?
When you partner with a CVC, they can be your largest customer. Even better, numerous CVC’s have internal sales teams to expand your technologies into their businesses. They will work with you in developing a more effective technology or finding other uses for it (which has happened more times than I originally imagined) and can integrate your product or service seamlessly into the brand.
The downside? Working with a multinational CVC means that you need to be ready to accept the risks of working with the largest and most innovative energy companies.
CVC as the Rich Uncle
If a CVC invests in your company, your product not only has the resources and strategic benefits that come with being a part of a large customer and leading investor (In energy, the CVC’s are the most active investors at this time, even now). It also has the advantage of the brand. Rich Uncle CVC has another trick up his Savile Row tailored sleeve: access to the R&D departments that include many of the most innovative and forward-looking scientists and engineers on the planet.
When R&D is working with you to develop and execute a world-class technology, it signifies and validates that you’re offering an authentic value proposition: you have a passion for solving a customer problem, and they should be willing to pay for it at the scalable quantity necessary to turn a profit.
CVCs exist because the corporation has excelled in an industry. They have expertise in that domain, but they recognize that their overall structure is too conducive to the status quo. That’s why we need entrepreneurs like you to develop cutting-edge innovation.
But there are rumblings that things are changing, that the way people have done business for decades is evolving, and nobody is entirely sure how this is all going to happen. Energy is ground zero for this evolution. Demands for clean, renewable, and sustainable energy are growing, and the dependence on fossil fuels is decreasing — at least globally, if not in the US.
Climate change is something that all energy companies — oil, gas, electric, and nuclear — are searching for feasible solutions to address. The entrepreneur that comes up with the best way to provide carbon-neutral energy wins.
Be Prepared to Show Your Work in Great Detail
So here you come, the disruptor, to convince the CVC group that your clean energy startup is the game changer they didn’t know they needed. It’s the unknown unknown, as the B-school profs say. They are natural skeptics, and they are reluctant to part with shareholder cash. It’s your job to convince them that their investment will yield not only money but long-range benefits that will set the company up for a changing environment.
Now, back to those conditions attached to the proverbial birthday check. Energy CVCs, or any CVC, will demand a more thorough paper trail than the fly-by-the-seat-of-their-pants VC (in full disclosure, most of the energy VC’s are as thorough if not more than many CVC’s since they talk to numerous customers during due diligence). Be prepared with extremely detailed due diligence, research, data that backs up your technology, and more. These CVC guys didn’t spring up from the ground ready to innovate; most of them cut their teeth on M&A. Be prepared to show your work and defend your thesis, your technologies, how your product will change the company and the world, and how you are good at managing cash!!! By then, they should see how you can lead them into the future. This process is going to take several months, from your initial elevator pitch to the term sheet to signing on the dotted line.
Negotiating the Best Price You’ll Pay
What’s the price you’ll pay for all this funding, expertise, and resources? Why, no more than a few pounds of flesh — a percentage of your company, and a seat or two on the board. The more radical and disruptive your product is, the more likely the CVC is going to want a larger stake of the business, stronger governance, and a more influential advisory role. Your job is to educate them on why Uncle should not smother the young — that you’re the entrepreneur, and, while you welcome limited participation, everyone’s interests are best served with limited involvement on their part. After all, you’re the one who has illuminated the “unknown unknown” and demonstrated how you flip that to a “known known” — the clear solution to the problem they didn’t know existed.
One of your jobs is to assure the CVCs that they are best served by taking a limited role in your company. They are welcome to sit at the table, and they can certainly offer advice, but that they need to be cognizant of their own corporate limitations.
Understand Your Exit Strategy
All good things must come to an end, and so it is with your CVC partnership. Unlike a VC relationship, which functions sort of like a bank robbery — get in, get the job done, get out — CVCs plan for a longer relationship with no expected end date. This kind of evergreen affiliation can last for years, from the initial seed money investments, through additional rounds of funding as your company grows, to the final stage. That final stage might be a bridge stage, when your company is ready to go public with an IPO, be absorbed into the company through an acquisition, or be bought (recapped) by a private equity firm.
CVC’s in energy have different objectives. Be knowledgeable and understand if there is an alignment of your growth and exit strategy.
There Are More Rich Uncles on the Horizon
CVC’s can be like the Pied Piper. Once Uncle Rich CVC invests in your company, more rich uncles are likely to want in on the action when you seek further rounds of funding. Although the risks for CVCs can be lower than VCs due to having a large customer as a partner to increase chances of success, most start-ups do fail. When a large customer invests in your company, it’s like the Good Housekeeping Seal Of Approval. Somebody else has assessed the risk and found it to be acceptable (as both an investor and customer), so now all the other kids want to come play.
Now Pick Your Strategy
You’re an entrepreneur — you innovate, create, and have the potential to change the world with your ideas. It’s okay if you’re not Wharton-level corporate finance savvy. But as the owner of your company, you do need to know the various routes to funding your company for real growth (GoFundMe isn’t really going to get you that far) and which one is best for you. Talk to me if you have your clean coal proof in hand or if you want to weigh in on the role of CVCs.