Since 2009, corporate participation in the 100 largest VC deals by year has increased substantially. Love them or hate them, will tech VCs have to work more with corporations to get access to their balance sheets?

Fred Wilson of Union Square Ventures isn’t a big fan of corporate venture capital recently saying he’d “never ever ever ever do” a deal with corporate VCs. Since such straight talk is generally frowned up in VC-land, he subsequently did acknowledge that some of them do not suck including Google Ventures and Intel Capital.

Wilson’s distaste for corporates centered around his view that the “corporate strategic investor’s objectives are generally at odds with the objectives of the entrepreneur, the company, and the financial investors.”

Of course, Fred Wilson is not the only VC with a view of corporate investors.

Keith Rabois, partner at Khosla Ventures, recently suggested via Twitter that Google Ventures is able to lead rounds in high profile companies because it is

much easier to lead rounds if you don’t care about earning a return

Google Ventures

The reality if you’re a tech VC, whether you agree or not with Wilson or Rabois, is that you will probably have to work with corporate investors because of one thing – their balance sheets.

It is well-documented that LP commitments to VC funds have been lackluster in the recent past (in line with VC returns) and that the money is being concentrated in the hands of fewer investors as the VC asset class, overall, shrinks. The challenge this inevitably presents for VC firms is that as portfolio companies with promise need financing to scale, traditional venture capital funds may not have enough in their coffers to fund these companies on their own. And so, it is at these times, it would seem that corporates with their cash could become an increasingly common partner. Note: the top 30 public tech companies (by market cap) have $180 billion of cash on their balance sheets.

Based on CB Insights’ venture capital data, the rise of corporates is not something to watch out for.  It has already begun to occur.  An analysis of the 100 largest tech deals of the last five years which had participation from at least one traditional venture capital investor highlights the huge increase in corporate participation over time. In fact, while corporations or CVCs participated in just 22% of the largest tech VC deals in 2009, corporates participated in nearly 40% of the largest 100 tech deals in 2012 and the rate is slightly up in 2013 year-to-date as well.

It will be interesting to see how this changes the dynamic between corporate investors and financial VC investors.  Since tech VCs seem to be increasingly involving corporate participation in the largest tech transactions, does this suggest corporations have more leverage in these deals than they may have had in the past?  And will they use this leverage to command better terms for themselves?

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  • elliottdahan

    “Wilson’s distaste for corporates centered around his view that the
    “corporate strategic investor’s objectives are generally at odds with
    the objectives of the entrepreneur, the company, and the financial
    investors.”

    All early stage companies need both Funding and Validation.

    VCs provide funding, hand holding, rolodexes, team building . . . . . . . .

    Corp Dev provides Validation.

    The VC success metric is $$ at the Exit.

    The Corp Dev success metric is finding talent, technology and product for an internal operating division.

    Of course VCs and Corp Dev have different objectives – and, of course, the early stage company needs both.

    VCs report that 75% of their projected liquidity events
    will be with public or private companies – partners.

    Over 50% of corporate development and corporate venture
    respondents said that it was “extremely important” for them to source
    companies that “support their existing business” and “provide a
    window on new technology.”

    The solution to Fred’s concern is serving the self interest of the VC and the Corp. Dev. If it is good for me, I will do it. If it is good for you, you will do it. If it is good for both of us, we will collaborate – time and time again.

    The solution is also found in bifurcating the Corp. relationship with the startup into a Financial document and a “Side Letter” which describes, in great detail, the working relationship between the Corp. & the Startup.

    The solution is having a truly representative Board of Directors where no one Director assumes the role of “gatekeeper” and terms such as “fiscal responsibility” mean something.

    Ultimately, the solution is in building a global marketplace for early stage funding and partnering which serves the self interests of all members of the early stage community: Sponsors, Companies, Partners and Funders.

    It is counterproductive, at best, and destructive, at worst, to take Fred’s view that this inherent “conflict of interest” means that there is only one winner.

    Building a strong startup is not a pissing match between VCs and Corp Dev. There is no “I win / You lose” here.