I recently attended an informative event held by the Corporate Development Society of TAG (Technology Association of Georgia). The event featured a panel discussion with representatives of four major corporate venture funds: UPS, HP, Assurant and AFLAC. This was an enlightening event, since many companies that are pursing funding don’t realize the number and size of corporate venture funds. Corporate venture funds are a bit under-the-screen at times, but there are more than nine hundred such funds in the US today and they currently account for one-third (!) of all venture capital investment by dollar invested.
All of the panelists were highly informative, but I found the comments by Rimas Kapeskas, the head of UPS’ venture fund, especially interesting. A few facts that he highlighted about the UPS venture fund:
- They have been in existence for twenty years, which makes them one of the more established players in this space;
- UPS has an enormous amount of data based on the huge number of transactions processed; their estimate is that 6% of US GDP is moved through its system;
- They were an early investor in Kabbage, a leader in online lending. This investment made sense based on UPS having a capital division and being able to learn from Kabbage’s strong connections into the SME business segment.
One subject that the panelists discussed that should be of special interest is the issue of competitive controls requested by corporate investors. The issue is that a major corporation doesn’t want to provide assistance through its investment to a company that will aid its competitors – understandably so. However, this concern runs counter to the entrepreneur’s need not to be restricted in its potential business partners, whether its customers, suppliers, distributors, or others.
I have seen this issue arise in deals I’ve handled for my clients. I recently closed a deal where I represented a tech start-up that was receiving funding from a small corporate venture fund. One of the conditions of the deal is that post-closing the investor’s approval will be needed to license the company’s software to a competitor of the investor or to distribute its products through a company that is a competitor of the investor. This was a huge hang-up in the deal and caused substantial heartburn for my client, as it should have, but ultimately my client decided that it made sense to agree to these restrictions as a price of getting the investment done. The lesson here is that corporate investment often has strings attached beyond those requested by stand-alone VC firms, and at times those additional conditions can be problematic.
So what did this panel have to say on the subject? The answers varied but not by much. All of the panelists said that their minimal requirements are typically board observer rights, information right, and notification rights for major transactions such as sale of the company, all of which are very reasonable and non-burdensome. They also said that they routinely ask for a right of first refusal on major transactions, but that the ROFR is typically not a deal-breaker. A ROFR could be reasonable, but as is often the case, what seems reasonable on the surface may be less so after investigation. This is especially true given that the investor and their counsel will likely ask for very broad definition of “major transaction.” This gives further support for the fact that any company in discussion with a strategic investor should raise this issue early in the process. Will the investor be the UPS/AFLAC type that asks only for non-onerous terms, or the type that insists on approval rights for transactions with competitors or other more burdensome terms? The only way to find out is to discuss with the investor and review draft terms sheets carefully!