Michael Ajamian
SC Moatti of Mighty Capital.
- Startup founders looking for investors periodically turn to large established firms to help finance their growth.
- Private equity and venture investors aren't exactly shy about their opinion of the practice, which tends to rise and fall significantly depending on market conditions.
- Rachel ten Brink of Five Four Ventures and SC Moatti of Mighty Capital say that corporations aren't effective partners for startups, and that founders who accept corporate investors too early are more likely to fail.
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When a large corporation needs an innovative business idea, it faces a simple choice: develop it in-house, or buy it from a smaller company.
To stay competitive in an increasingly tech-oriented marketplace, some legacy firms are betting they can see better results from investing in early-stage startups than from developing new ideas from scratch.
In particular, companies like Procter & Gamble, Mars Inc., and Stanley Black & Decker have launched their own venture accelerator initiatives to keep pace with fast-growing competitors.
For startups in need of capital to grow their business, corporate venture capital can seem like an alluring option. However, Rachel ten Brink of Five Four Ventures and SC Moatti of Mighty Capital say founders should think twice about accepting strategic investment financing.
"I hope it ends as soon as possible, because corporations are not private equity firms," Moatti said during a panel discussion in New York last February.
Moatti and ten Brink are each former founders who are now investors in Silicon Valley and New York, respectively. Mighty Capital focuses on Series A and later startups, with investments in companies like Airbnb, Digital Ocean, Amplitude, and MissionBio. Five Four Ventures emphasizes earlier stage startups and features an incubator and accelerator to match business ideas with leadership teams.
The pair shared their insights as founders-turned-funders at the third annual AlleyCon, hosted by Columbia University's business school, which convened students, industry executives, and guests to discuss the future of business leadership
Ten Brink said she recently spoke with a company that felt that its strategic investors weren't well equipped to deal with the agility of startups.
"The whole point of startups is the fact that you can test and innovate and iterate really, really fast," she said. "And that is the complete opposite of what the strategics do, so it stagnates that process."
Moattie agreed with that assessment.
"When they come into a deal, they really sort of skew the discussion," she added. "And once they're on a deal, especially if they're on the board, they create a lot of disruption."
Both investors said there is a place for corporate and strategic finance for later-stage startups with a more proven track record, not for early-stage startups still searching for a winning business model.
"More often than not, founders who have taken money from strategic investors before they are ready for it end up failing," Moatti said.
Of course, traditional VC-backed firms also fail. Roughly one in four go out of business, and three in four fail to make a return to investors, according to a pair of studies from the National Venture Capital Association and Shikhar Ghosh of Harvard Business School, respectively.
To founders who are seriously considering a partnership with a corporate or strategic investor, ten Brink had the following advice: "You better be sure that it's a path to acquisition, and that it's going to happen."
If the deal ends up falling through, she added, "that puts the founder in a very difficult spot."