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Thriving Under Corporate Clout - Page 2

Pluses and minuses of corporate venture capital

For a small company, the major benefit of getting a corporate venture fund as an investor is that you get much more than cash. In addition to showing you the money, corporate partners will show you the way: They will give you free advice on everything from how to develop a product to how to sell it.

Finally, there's the cachet that comes from working with an established company in your industry. Having a corporate investor is like having the Good Housekeeping seal on your product. "It doesn't hurt to attach a large name from an established company to yours," says Canouse.

Take the sweet deal that Chicago's viaLink struck with Palo Alto, Calif-based Hewlett-Packard. In addition to $6 million in financing, viaLink got free hardware (HP servers), as well as consulting services from HP and Ernst & Young, says viaLink's Fischer. "There's value to our relationship beyond the money that HP has given us. They've been a good partner," he says.

When Oracle said it would invest in the second round of financing for Portera, a Web-hosted application and e-business service firm in Campbell, Calif., the executives running the Oracle Venture Fund promised to provide marketing and technical help - and kept their word.

"They've co-marketed with us at trade shows, helped us with direct marketing, and given us technical assistance on the product line and a discount on Oracle software," says Kevin McDonald, Portera's vice president of marketing. "We've got hundreds of (their employees) recommending our service. Now, every time I drive by Oracle, I think how we have their entire staff helping us."

The Nature of Corporate Venture Capital
The differences that set corporate venture capital apart from the funding that start-ups receive from established VC firms include:

Larger Investments. Although a corporation can invest any sum of money - Lucent Venture Partners, for example, invests anywhere from $2 to $5 million in a company - most corporate players tend to stick to larger investments in later-stage companies.
More Than Just Bucks. Since the corporate venture fund is investing in the company for strategic reasons in addition to attempting to make money with the investment, such funds may offer more in the way of advice and access to distribution channels. "We have hundreds of people at Oracle or at their systems integrators recommending our service," says McDonald. "Oracle has even put us in their last two annual reports."
A Less Hands-on Approach. Because a corporation is already in business for itself, chances are its fund manager will not be trying to micro-manage the company's investment. For example, while most venture capital funds will require a voting seat on a board, most corporate venture capital funds will make do with an "observing" seat, if that. "They don't have the time to meddle," says McDonald.

And the Minuses Are ...
If corporate venture capital sounds like manna from heaven, in many ways, it is. But there are disadvantages as well, although those on the corporate dole are not likely to point them out. These include:

More Time. Because of the bureaucratic layers in a major corporation, reaching an agreement takes time. "It takes a little bit longer to strike a deal because of the strategic nature of what's involved," says Greg Gum, vice president of ishoni Networks, Santa Clara, Calif., which has received several million dollars from Lucent Venture Partners to develop a broadband gateway platform. By contrast, traditional VCs are generally small firms with 10 or fewer partners and can thus move more quickly.

More Red Tape. Although companies that have successfully gotten venture capital from corporations downplay the downsides of such investments, others say that working with a corporation, instead of a traditional VC firm, can get a small firm ensnarled in red tape. "There are levels of bureaucracy to everything," Canouse says. "It's not just the levels of bureaucracy to get to the money or how to spend it, it's the constant updates that they want. It can smother the entrepreneurial sprit of a company."

Getting Boxed In. The biggest minus is that the big corporate partner will try to throw its investment weight around and bully the little 90-pound weakling start-up it has invested in. Intel, which has a venture arm, would probably not be happy to have an investor using computers without an Intel chip inside, for example.

Next page: Going the long-term ROI route

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