Why raising enterprise risk capital benefits startups
Opinions expressed by Contractor the contributors are theirs.
Fundraising is a critical phase in the life of any startup, but it is also a difficult and difficult task to complete. The truth is, the amount of money a startup raises – and how the startup does it – plays a major role in the company’s future trajectory. There are many sources of capital, from angel investors to traditional venture capital funds, but I’d like to focus on corporate capital in particular.
Fundraising is both a science and an art. The method a startup uses to raise funds helps determine their financial position and the help and advice the startup receives along the way. Startups may initially use personal or family funds to start their business, but crowdfunding has also grown in popularity. Yet venture capital finance is the dominant source and has reached an all time high in recent years; CB Insights reports that US-based venture capital investments totaled $ 130 billion in 2020.
In my experience, many startups raise capital from a single party. However, I think working with a variety of investors, ideally early on, is generally more effective for the startup. This approach allows the startup to get hands-on help from a diverse mix of investors who may offer different perspectives. Diversifying sources of capital is a well-known technique for helping a startup take control of its future growth, combining financial investment with the advice and expertise of experienced investors. We call it “smart money” in Silicon Valley because it combines financial capital with the daily help of qualified investors.
Related: Financing: What Is Entrepreneurial Capital Versus Venture Capital?
Why Enterprise Venture Capital is Popular
One popular way that startups can choose to achieve their growth projections is to raise business venture capital (CVC). It is becoming increasingly popular with startups and several HVAC organizations – including Intel Capital, Microsoft (M12), and IBM Ventures – who have been successful in finding financially positive investments. Global enterprise venture capital, according to CB Insights, hit a record high of $ 73 billion in 2020.
CVCs generally invest with a strategic objective in mind. They want to tap into innovation in all areas related to their current business and roadmap, in addition to achieving positive financial returns. In addition, CVCs aim to create new sources of income through strategic collaborations with portfolio companies. From a startup perspective, the company not only gets funding, but it also benefits from a company’s advice and infrastructure. It can help the startup learn how to grow their business, enter international markets, qualify for new products, and manufacture on a large scale.
In this case, both parties benefit from the HVAC model. Startups benefit from learning from the best, and companies benefit from learning cutting-edge technologies and business models. A good practice is for companies to provide startups with a proof of concept (POC) around a collaboration concept that takes a few months to complete. Based on the results of this POC, companies can invest in startups and explore with them the potential commercialization of a business model.
The CVC approach often gives the startup the kind of revenue history to help with future capital increases and attract new clients. In some cases, the collaboration evolves into a merger and acquisition agreement. Building a CVC relationship at an early stage initially benefits the startup through sound advice, business start-up ideas, and in the case of an acquisition, it helps with post-merger integrations. While Harvard business review reports that 70-90% of acquisitions fail, a strong CVC-startup relationship built through the investment can help overcome this failure rate.
Lately, I have seen several variations of HVAC models, further expanding the opportunities for startups. A small number of venture capital firms, including Pegasus Tech Ventures, invest using the Venture Capital-as-a-Service (VCaaS) model to benefit both businesses and startups. With this model, startups are invited to collaborate with multiple companies, while benefiting from the simplicity of working with a single VC partner. Additionally, startups may receive more funding over time as well as a growing support network.
Related: The Rise of Alternative Venture Capital