Why should you take investment money from your customer? Read this article by Master Teacher Ed Perry to find out.
With current economic conditions, banks have become very strict making it really tough to get loans. Venture capital (VC) has become scarce, and angel investors are cutting way back on their activity. Where else can you look for growth capital?
A surprise source is your customer.
Corporate Venture Capital (CVC) is the venture investment arm of major corporations. CVC has been around for over 100 years. Most current CVC companies have been in business for over a decade. Though they’ve reduced their levels of investment, too, they are currently investing more aggressively than traditional VC.
The latest studies by Ernst & Young and the National Venture Capital Association (NVCA) show that the vast majority are located in the US, and they invest most heavily in Information Technology, Healthcare, Business Services, and Energy. But there are CVCs in almost every industry.
Who are they?
Most CVC executives are full-time investment professionals like whom you’d find in a VC firm. They’re measured by the same criteria as traditional VCs: primarily the overall financial performance of their portfolio of investments. Some are also measured by how their investments create great partnerships and alliances for the parent corporation.
And they have a lot of money to invest: The average CVC fund size is approximately $200 million.
Why would you take investment money from your customer? Certainly, one key factor is that a CVC can make a great difference in how successful you are in harvesting your investment. A greater percentage of CVC investments have successful IPOs than traditional VC. IPO valuations tend to be higher for CVC backed companies than those that are purely traditional VC backed – as much as 35-50% more. That’s good for you, the entrepreneur!
Often, the parent corporation is the exit by buying the remainder of the company. In fact, there are some CVCs that invest with this as their plan for recovering their investment.
Though most CVCs passively invest, i.e., do not become active in the management of operation of the firm, all CVCs become great sources of information and advice on how to successfully grow within an industry. In fact, their advice could be the difference between success and failure in tight economic times.
If it’s this good, why would you not take an investment from your customer? Just as one of your customers might make an excellent partner for harvesting your company, there may be others. Taking an investment from one customer might prevent others from being interested. Do you want to limit the options you have?
There’s the perception that taking investment from one customer might prevent other customers from doing business with you, that somehow information that you gain from doing business with them will “leak” to your investor-customer. Keep in mind that almost all major corporations are well aware of the severe consequences of any unfair business dealing. Generally, they are careful to put the safeguards in place to insure that no information ever leaks between the operation of the business and its reporting to all investors.
How do you get started? Simply ask your customers if they invest in partners. If so, find out whom you should meet to discover more. If you’re unsure whom to approach, look for information available from online sources like the NVCA, Dow Jones VentureSource, Ernst & Young Venture Capital surveys, and companies’ web sites.
Learn all you can and make the best decision for your company, but remember to consider approaching your customer for investment capital.
Ed Perry is a Master Teacher at Acton. He has also been the founder, CEO, president or managing director of nine successful companies in the areas of engineering, consulting, enterprise software and venture capital.
Photo courtesy of 4pizon.
Tags: Customers, Ed Perry, Raising Money, Teachers
Posted in Entrepreneurship, Featured Entrepreneurs