Strategics in Seed Round?!?

May 12, 2011 § 1 Comment

I am out raising a seed round and I have recently heard from a number people that the venture arms of large media companies are investing and seed rounds and want to talk. My initial reaction was..”what?”  My second reaction was “those guys don’t belong at the dance.”  But then I cooled down and have been thinking more about the pros and cons of taking money from a company that is not a pure investor this early in the product/company history.

Case against:

I must admit upfront that my bias is to stay (far) away from big companies this early in a product development (i.e. our alpha version is launching in a few weeks). I have a few concerns:

First concern: big companies and entrepreneurs typically mix like oil and water, if not oil and fire.  There are a few reasons for this:

1. Big companies typically don’t get entrepreneurs, and vice versa.  After working at both big companies and start-ups, I believe that the main reason they don’t “get” each other is that the skills it takes to be successful at a big company are diametrically opposite of what it takes to be an entrepreneur.  This is not a knock on either side, just a statement of fact.  Entrepreneurs have to break things.  They have to do things that don’t initially make sense to most people and often don’t have a near term (or clear) monetization plan.  They have to start one way and pivot quickly. Big companies have big brands that most of the time have been around (and consistent) for a long time.  A very different beast.  Here is a test: if you are a person that gets excited about stealing a few points of share by better packaging or a great ad campaign, then you are not an entrepreneur.  You are a great big company executive, which is awesome.  But if you want to disrupt an industry and look at an entrenched incumbent and want to take 100% of their customers and revenue, then you are an entrepreneur.

2. Big companies often don’t have the patience to let the product mature while delaying monetization. They think quarterly numbers are more important than investing in the future.  Which is not to say they don’t think investing in the future is important.  Just of lesser importance.

3.  Big companies have big brands to protect, and thus don’t have the same tolerance to push the boundaries or break things that a venture-backed team has.

When I worked in DoubleClick’s M&A group, we did a couple of these deals.  And I don’t think they ever worked out as desired (for either side).  Simply put, companies optimize for products they own 100% of, and that makes sense.  Big companies optimize for big products that they own a 100% of, and that too makes sense. Heck, big companies often kill their own young, let alone a minority investment.

Second concern: there is also the risk of losing neutrality that could turn off users or potential partners.  Let alone a potential acquirer.

Case for:

I can think of two benefits for taking money from a strategic early on.

1.  They can bring value beyond cash, i.e. potential product integrations.

2.  Typically they add a level of credibility that can help with market validation.

I recognize that my above analysis is heavily text weighted towards the cons, so I would love your thoughts…


§ One Response to Strategics in Seed Round?!?

  • Aaron says:

    I’d agree with your case against taking corporate venture money. After spending some time with a handful of startups in this accelerator and studying much of the venture scene here, for me there’s just not enough value.

    Either they don’t understand your direction and want to take a majority of your company to control where it goes. Or the investment is a nice way of saying, “We want you to work for us, but since you’re starting a company we’ll invest and gradually transition your focus away from the business and on to an internal opportunity”.

    Either way, private money is a better option.

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