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Finance & Accounting

Is Corporate Venture Capital Right for Your Startup?

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Traditionally, startups have looked to three primary sources for funding: venture capital firms (VCs), angel investors, and family offices. But in recent years, a fourth option has grown increasingly popular: corporate venture capital funds, or CVCs. Between 2010 and 2020, the number of CVCs grew more than six times to over 4,000, and these CVCs inked more than 2,000 deals worth $79 billion in the first half of 2021, surpassing all previous annual tallies.

These corporate investors offer not only funding, but also access to resources such as subsidiaries that can serve as market validators and customers, marketing and development support, and a credible existing brand. However, alongside this added value, CVCs can also come with some risk. To explore these tradeoffs, we collaborated with market intelligence company Global Corporate Venturing to conduct a quantitative in-depth analysis of the CVC landscape, as well as a series of qualitative interviews with both founders and CVC executives.

We found that of the 4,062 CVCs that invested between January 2020 and June 2021, more than half were doing so for the very first time, with just 48% having been in operation for at least two years at the time of investment. In other words, if you’re considering a CVC partner right now, there’s a decent chance that your potential investor has little to no experience making similar investments and supporting similar startups. And while more-experienced CVCs are likely to come with the resources and credibility that founders might expect, relative newcomers may struggle with even a basic understanding of venture norms.

Indeed, in a survey of global CVC executives, 61% reported that they didn’t feel like the senior executives of their corporate parent understood industry norms. In addition, because of their parent companies’ business imperatives, many CVCs may also be more impatient for quick returns than traditional VCs, potentially hindering their ability to provide long-term support to the startups in which they invest. Moreover, even a patient, veteran CVC can pose problems if other existing investors aren’t on board. As one founder we interviewed explained, “We had to turn down a CVC because our existing investors believed that taking them on would dilute exit returns and result in a negative perception on the eventual exit.”

Clearly, CVCs can be hit or miss. How can entrepreneurs decide whether corporate funding is a good fit for their startup, and if so, which CVC to pick? The first step is to determine whether the core objective of the CVC you’re considering aligns with your needs. Broadly speaking, CVCs can be sorted into four categories, with four distinct types of objectives: strategic, financial, hybrid, or in transition.

Four Kinds of CVCs

A strategic CVC prioritizes investments that directly support the growth of the parent. For example, Henkel Ventures is upfront about its focus on strategic rather than financial investments. “We don’t see how we can add value as a financial CVC,” explains Paolo Bavaj, Henkel’s Head of Corporate Venturing for Germany. “The motivation for our investments is purely strategic, we are here for the long run.”  Similarly, Unilever Ventures explicitly prioritizes brands that complement the consumer goods giant’s existing businesses.

This approach works well for startups that require a longer-term perspective. For example, CEO of nanotechnology startup Actnano Taymur Ahmad told us that he opted for CVC rather than VC investors because he felt he needed “patient and strategic capital” to guide his business through an industry fraught with supply chain, regulatory, and technical challenges.

Conversely, financial CVCs are explicitly driven by maximizing the returns on their investments. These funds typically operate much more independently from their parent companies, and their investment decisions prioritize financial returns rather than strategic alignment. Financial CVCs still offer some connection to the parent company, but strategic collaboration and resource sharing are much more limited. As Founding Managing Director of Toyota Ventures Jim Adler succinctly put it, “financial return must precede strategic return.”

A financial CVC is generally a good fit for startups that have less in common with the mission of the parent company, and/or less to gain from the resources it has to offer. These startups are generally just looking for financial support, and they tend to be more comfortable with being assessed on their financial performance above all else.

The third type of CVC takes a hybrid approach, prioritizing financial returns while still adding substantial strategic value to their portfolio companies. Hybrid CVCs often maintain looser connections with their parent companies to enable faster, financially-driven decision-making, but they still make sure to provide resources and support from the parent as needed.

While certain startups will benefit from a purely strategic or financial CVC partner, hybrid CVCs generally have the broadest market appeal. For example, Qualcomm Ventures offers its portfolio startups substantial opportunities for collaboration with other business divisions, as well as access to a wide array of technological solutions. It isn’t constrained by demands for short-term financial returns from its parent company, allowing the CVC to take a longer-term, more strategic perspective in supporting its investments. At the same time, Qualcomm Ventures still values financial returns, having achieved 122 successful exits since its founding in 2000 (including two dozen unicorns — that is, startups valued over $1 billion). As VP Carlos Kokron explained, “We are in this to make money, but also look for startups that are part of the ecosystem…startups we can help with product or go-to-market operations.”

Finally, some CVCs are in transition between a strategic, financial, and/or a hybrid approach. As the entire investor landscape continues to grow and evolve, it’s important for entrepreneurs to be on the lookout for these in-transition CVCs and ensure that they’re aware of how the potential investor they’re talking to today may transform tomorrow. For example, in 2021 Boeing announced that in a bid to attract more external investors, it would spin off its strategic CVC arm into a more independent, financially-focused fund.

Picking the Right Match

Once you’ve determined whether you want to work with a strategic CVC, a financial CVC, or something in between, there are several steps you can take to figure out whether a specific CVC is a good fit for your startup.

1. Explore the relationship between the CVC and its parent company.

Entrepreneurs should start by speaking with employees at the parent company to learn more about the CVC’s internal reputation, its connectedness within the parent organization, and the KPIs or expectations that the parent has for its venture arm. An outfit with KPIs that demand frequent knowledge transfer between the CVC and parent company might not be the best match for a founder looking for no-strings-attached capital — but it could be perfect for a startup in search of a hands-on corporate sponsor.

To get a sense for the relationship between the CVC and parent firm, ask questions that explore the extent to which the CVC has managed to convey its vision internally, the breadth and depth of its links to the various divisions of the parent, and whether the CVC will be able to offer the internal network you need. You’ll also want to ask how the parent company measures the success of the CVC, and what sorts of communication and reporting are expected.

For example, Tian Yu, CEO of aviation startup Autoflight, explained the importance of in-depth interviews with employees across the business in guiding his decision to move forward with a CVC: “We met the investment team, the key employees from business groups that we cared about, and gathered a sense of how a collaboration would work. This series of pre-investment meetings only raised our confidence levels that the CVC cared about our project and would help us accelerate our journey.”

2. Determine the CVC’s structure and expectations.

Once you’ve determined the CVC’s place within its larger organization, it’s important to delve into the unique structure and expectations of the CVC itself. Is it independent in its decision-making, or tightly linked to the corporate parent, perhaps operating under the umbrella of a corporate strategy or development department? If the latter, what are the strategic objectives that the CVC is meant to support? What are its decision-making processes, not just for selecting investments, but for giving portfolio companies access to internal networks and resources? How long does the CVC typically hold onto its portfolio companies, and what are its expectations regarding exit timelines and outcomes?

For example, after Healthplus.ai Founder and CEO Bart Geerts delved into the expectations of a potential CVC investor, he ultimately decided to turn the funding down: “We felt that it limited our exit options in the future,” he explained, adding that CVCs can be more bureaucratic than VCs, and that for his business, benefits such as greater market access weren’t worth the downsides.

3. Talk to everyone you can.

Ultimately, the people are the most important component of any potential deal. Before moving forward with a CVC investor, make sure you have a chance to speak with key executives from both the CVC and the parent company, in order to understand their vision and culture. It can also be helpful to chat with the CEOs of one or two of the CVC’s existing portfolio companies, to get an inside scoop on issues you might not otherwise uncover.

To be sure, it can sometimes feel uncomfortable to ask for meetings beyond an investor’s typical due diligence process — but these conversations can be pivotal. For example, one entrepreneur explained that their team “loved the pitch from a potential CVC investor, there appeared to be a great match between our strategic objectives and theirs. We got along well with the CVC lead, but meeting the board (which was not intended to be a part of the process) was an eye-opening experience as their questions highlighted the risk averse nature of the company. We did not proceed with the deal.” Don’t be afraid to push beyond what’s presented in a pitch and ask the hard questions of a potential partner.

As CVCs become more and more prevalent, entrepreneurs are likely to be faced with a growing number of corporate funding opportunities alongside traditional options. These investors can bring substantial value in the form of resources and support — but not every CVC will be the right fit for every startup. To build a successful partnership, founders must determine the CVC’s relationship to its parent company, the structure and expectations that will guide its decision-making, and most importantly, their cultural and strategic alignment with the key people involved.

Authors’ Note: If you have experience engaging with CVCs, please consider contributing to the authors’ ongoing research by completing this survey.

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Finance & Accounting

4 tips to find the funding that fits your business

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The facts are clear: Startups are finding funding increasingly difficult to secure, and even unicorns appear cornered, with many lacking both capital and a clear exit.

But equity rounds aren’t the only way for a company to raise money — alternative and other non-dilutive financing options are often overlooked. Taking on debt might be the right solution when you’re focused on growth and can see clear ROI from the capital you deploy.

Not all capital providers are equal, so seeking financing isn’t just about securing capital. It’s a matter of finding the right source of funding that matches both your business and your roadmap.

Here are four things you should consider:

Does this match my needs?

It’s easy to take for granted, but securing financing begins with a business plan. Don’t seek funding until you have a clear plan for how you’ll use it. For example, do you need capital to fund growth or for your day-to-day operations? The answer should influence not only the amount of capital you seek, but the type of funding partner you look for as well.

Start with a concrete plan and make sure it aligns with the structure of your financing:

  • Match repayment terms to your expected use of the debt.
  • Balance working capital needs with growth capital needs.

It’s understandable to hope for a one-and-done financing process that sets the next round far down the line, but that may be costlier than you realize in the long run.

Your term of repayment must be long enough so you can deploy the capital and see the returns. If it’s not, you may end up making loan payments with the principal.

Say, for example, you secure funding to enter a new market. You plan to expand your sales team to support the move and develop the cash flow necessary to pay back the loan. The problem here is, the new hire will take months to ramp up.

If there’s not enough delta between when you start ramping up and when you begin repayments, you’ll be paying back the loan before your new salesperson can bring in revenue to allow you to see ROI on the amount you borrowed.

Another issue to keep in mind: If you’re financing operations instead of growth, working capital requirements may reduce the amount you can deploy.

Let’s say you finance your ad spending and plan to deploy $200,000 over the next four months. But payments on the MCA loan you secured to fund that spending will eat into your revenue, and the loan will be further limited by a minimum cash covenant of $100,000. The result? You secured $200,000 in financing but can only deploy half of it.

With $100,000 of your financing kept in a cash account, only half the loan will be used to drive operations, which means you’re not likely to meet your growth target. What’s worse, as you’re only able to deploy half of the loan, your cost of capital is effectively double what you’d planned for.

Is this the right amount for me at this time?

The second consideration is balancing how much capital you need to act on your near-term goals against what you can reasonably expect to secure. If the funding amount you can get is not enough to move the needle, it might not be worth the effort required.

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Banking

Overdraft Protection: What It Is and Different Types

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Overdraft fees can be a major drain on your finances. Some banks charge more than $30 per overdraft and potentially charge that fee multiple times per day if you keep making transactions that overdraw your checking account. If you want to avoid these fees, you can typically opt out of overdraft coverage with your bank. It can be useful, however, to set up overdraft protection instead of opting out so you don’t find yourself unable to pay for something urgent.

What is overdraft protection?

Overdraft protection is a checking account feature that some banks offer as a way to avoid overdraft fees. There are several types of overdraft protection, including overdraft protection transfers, overdraft lines of credit and grace periods to bring your account out of a negative balance. Some other overdraft coverage programs might be a combination of these features.

Before you opt out of overdraft protection altogether — which means your bank will decline any transaction that would result in an overdraft — consider how you might need overdraft coverage in an emergency. For example, maybe you’re using your debit card to pay for gas on a road trip. You need enough fuel to get home but don’t have enough money in your checking account. Instead of dealing with running out of gas, you may want to deal with an overdraft.

How does overdraft protection work?

Here are more details about the main types of overdraft protection that banks tend to provide.

Overdraft protection transfers. When a bank allows you to make an overdraft protection transfer, you can link a savings account, money market account or a second checking account at the same bank to your main checking account. If you overdraft your checking, your bank will take the overdrawn funds from your linked account to cover the cost of the transaction. Many banks allow this service for free, but some banks charge a fee.

Overdraft lines of credit. An overdraft line of credit functions like a credit card — but without the card. If you don’t have enough money in your account to cover a transaction, your bank will tap your overdraft line of credit to cover the remainder of the transaction. Lines of credit often come with steep annual interest rates that are broken up into smaller interest charges that you keep paying until the overdraft is paid back. Be aware that a line of credit could end up being expensive if you use this option to cover your overdrafts.

Grace periods. Some banks offer grace periods, so instead of immediately charging an overdraft fee, the bank will give you some time — typically a day or two — to return to a positive account balance after overdrafting. If you don’t do so within that time frame, your bank will charge you fees on any transactions that overdrafted your account.

Other coverage programs. Some banks are taking a new approach to overdraft protection by offering what’s basically a free line of credit with a longer grace period for customers to bring their account to a positive balance. One example, Chime’s SpotMe® program, allows customers to overdraft up to $200 with no fees. The customer’s next deposit is applied to their negative balance, and once the negative balance is repaid, customers can give Chime an optional tip to help keep the service “free.”

Chime says: “Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank or Stride Bank, N.A.; Members FDIC. Eligibility requirements and overdraft limits apply. SpotMe won’t cover non-debit card purchases, including ATM withdrawals, ACH transfers, Pay Friends transfers or Chime Checkbook transactions.”

4 ways to avoid overdraft fees

  1. Set up low balance alerts. Many banks offer an alert option so you’ll get a text, email or push notification if your account drops below a certain threshold. These alerts can help you be more mindful about your balance so that you can put more money into your account or spend less to avoid an overdraft.

  2. Opt out of overdraft coverage. If your bank doesn’t offer overdraft protection — or if its only options cost money — you may want to opt out of overdraft coverage, in which case your bank will decline any transactions that would bring your account into the negative. Keep in mind that this option could put you in a sticky situation if you’re in an emergency and can’t make an important purchase because you don’t have overdraft coverage.

  3. Look for a bank that has a more generous overdraft policy. Many banks are reducing or eliminating their overdraft fees, so if overdrafts are an issue for you, do some comparison shopping to see if there are better options available.

  4. Consider getting a prepaid debit card. Prepaid debit cards are similar to gift cards in that you can put a set amount of money on the card, and once you run out, you can load it with more money. The prepaid debit card can’t be overdrawn because there isn’t any additional money to draw from once its balance has been spent.

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Business Ideas

Startup Business Grants: Best Options and Alternative Funding Sources

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Startup business grants can help small businesses grow without debt. But if you want free money to start a company, your time may be better spent elsewhere. Competition for small-business grants is fierce, and many awards require time in business — often at least six months.

Some grants are open to newer businesses or true startups. And even if you don’t qualify now, it can pay to know where to look for future funding. Here are the best grants for small-business startups, plus alternative sources of startup funding to consider.

How Much Do You Need?

with Fundera by NerdWallet

Government startup business grants and resources

Some government programs offer direct funding to startups looking for business grants, but those that don’t may point you in the right direction or help with applications:

Grants.gov. Government agencies routinely post new grant opportunities on this centralized database. If you see an opportunity relevant to your business idea, you can check if startups are eligible. Many of these grants deal with scientific or pharmaceutical research, though, so they may not be relevant to Main Street businesses.

Local governments. Lots of federal grants award funding to other governments, like states or cities, or to nonprofit economic development organizations. Those entities then offer grants to local businesses. Plugging into your local startup ecosystem can help you stay on top of these opportunities.

Small Business Development Centers. These resource centers funded by the Small Business Administration offer business coaching, education, technical support and networking opportunities. They may also be able to help you apply for small-business grants, develop a business plan and level up your business in other ways.

Minority Business Development Agency Centers. The MBDA, which is part of the U.S. Department of Commerce, operates small-business support centers similar to SBDCs. The MBDA doesn’t give grants to businesses directly, but these centers can connect you with grant organizations, help you prepare applications and secure other types of business financing.

Local startup business grants

Some local business incubators or accelerators offer business grants or pitch competitions with cash prizes. To find these institutions near you, do an online search for “Your City business incubator.”

Even if you don’t see a grant program, sign up for their email newsletter or follow them on social media. Like SBDCs and MBDAs, business incubators often provide business coaching, courses and lectures that can help you develop your business idea.

Startup business grants from companies and nonprofits

Lots of corporations and large nonprofits, like the U.S. Chamber of Commerce, organize grant competitions. Some national opportunities include:

iFundWomen. iFundWomen partners with other corporations to administer business grants. You can fill out a universal application to receive automatic notifications when you’re eligible to apply for a grant.

Amber Grant for Women. WomensNet gives two $10,000 Amber Grants each month and two $25,000 grants annually. Filling out one application makes you eligible for all Amber Grants. To qualify, businesses must be at lesat 50% women-owned and based in the U.S. or Canada.

National Association for the Self-Employed. Join NASE, and you can apply for quarterly Growth Grant opportunities. There are no time-in-business requirements for these grants of up to $4,000, but you’ll need to provide details about how you plan to use the grant and how it will help your business grow.

FedEx Small Business Grant Contest. This annual competition awards grants to small-business owners in a variety of industries. You can sign up to receive an email when each application period opens. To be eligible, you’ll need to have been selling your product or service for at least six months. Be mindful, though, that each grant cycle receives thousands of applications.

Fast Break for Small Business. This grant program is funded by LegalZoom, the NBA, WNBA and NBA G League and administered by Accion Opportunity Fund. You can win a $10,000 business grant plus free LegalZoom services. Applications open during the NBA season, which runs from fall to early summer each year.

Alternative funding sources for startups

New businesses likely won’t be able to rely on startup business grants for working capital. The following financing sources may help accelerate your growth or get your startup off the ground:

SBA microloans

SBA microloans offer up to $50,000 to help your business launch or expand. The average microloan is around $13,000, according to the SBA.

The SBA issues microloans through intermediary lenders, usually nonprofit financial institutions and economic development organizations, all of which have different requirements. You can use the SBA’s website to find a lender in your state.

Friends and family

Asking friends and family to invest in your business may seem daunting, but it’s very common. Make sure you define whether each person’s money is a loan and, if so, when and how you’ll pay it back. Put an agreement in writing if possible.

Business credit cards

Business credit cards can help you manage startup expenses while your cash flow is still unsteady. You can qualify for a business credit card with your personal credit score and some general information about your business, like your business name and industry.

You’ll probably need to sign a personal guarantee, though, which is a promise that you’ll pay back the debt if your business can’t.

Crowdfunding

If your business has a dedicated customer base, they can help fund you via crowdfunding. Usually businesses offer something in exchange, like debt notes, equity shares or access to an exclusive event.

There are lots of different crowdfunding platforms that offer different terms, so look around to find the model that works best for you.

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