From finding new investors to scouting potential acquirers, here is advice for ending investments in startups that don't work out.
It is hard to be the bearer of bad news, but in venturing it is often a big part of the job: to let a founder know that the CVC can no longer invest in their company.
Most often it is because the company isn’t performing well. The failure rate of startups is high. New companies often pivot, too, and their revised strategy will sometimes not fit with the CVC’s goals.
But it can become trickier if the unit has to end an investment because the parent company shifts focus. This can sometimes happen when a new senior manager comes along with different views of venturing, or the parent decides to take a different strategic direction.
In today’s economic downturn and high inflationary environment, the need to terminate investments may become a more regular occurrence.
Here are six tips on how to best manage ending further investments in startups from two veterans of corporate venturing: Tony Cannestra, director of corporate ventures at Denso, the Japanese car parts maker; and Ken Bronfin, senior managing director at Hearst Ventures, the CVC of US media and business information company Hearst Communications.
1. Help the startup find new investors or customers
If your parent has pivoted direction and the investment your CVC has made no longer makes strategic sense, introduce the founder to new investors or other potential customers. “The worst thing you could do is turn your back and go silent on the startup,” says Cannestra. “You are still an investor in that startup and are invested in that startup’s success. If I can make customer introductions, even if it is to competitors, I will do that and expect my team to do that.”
Only a small portion of Denso Corporate Venture Capital’s investments had to be terminated because of a shift in the parent company’s strategy, says Cannestra. He recalls two instances when that happened. “It can be painful. But it was not a death decision for the startup,” he says. “It narrowed their market opportunity a bit. In both cases, we acted as technology reference to help the company with other investors that were still interested in that technology.”
2. Communicate quickly and transparently with the founder
It is best not to dither if the parent changes direction. “If I hear from colleagues in Japan about a change in strategy, I don’t want to wait six months for that to be confirmed. I need to pick up phone to the CEO and say that we may have a shift in priorities that may have an impact on you,” says Cannestra.
Recently, a Denso subsidiary, which was working directly with a startup, was closed down by the company and staff went back to work at the parent. While there was still interest in the startup’s technology, the reorganisation led to a slowdown in the partnerships it had with the startup.
“I called up the CEO and said you are going to have a six- to 10-month lag in your relationship with us, so please reconsider your business plan, especially if there are things you were counting on Denso on the business side,” says Cannestra.
3. Don’t sit back and watch a startup flounder
If an investment is going to be terminated, the corporate investor should have put in a large amount of effort to help make the company a success beforehand. The end of the investment should never come as a surprise.
“If I am going to withdraw from a company, it is well known to all well in advance. I would have been working for months trying to resolve the issues that confront the company,” says Bronfin.
“You need to be transparent with the company, let them know what challenges you see in front of them, and give them options to find a path that will work for you and the other investors,” he says.
4. Encourage startups to find potential acquirers
Even if a portfolio company isn’t likely to succeed, there can still be value in the business – whether that is the technology it is working on or the team.
“Since you didn’t just wake up and realise you have a problem, the investors and advisers should be thinking months in advance about where there is a home for the technology or the team. We encourage all our companies to get to know potential acquirers very early on,” says Bronfin.
5. The board should all agree the company isn’t going to succeed
It is a sign of a poorly run board if one investor believes a startup isn’t going to succeed but the other investors want to continue committing capital. It can cause a lot of tension in the boardroom and can make a withdrawal more difficult than it needs to be.
All investors should be on the same page, advises Bronfin. “Most of the time, when you have a collaborative shareholder base, the major investors are in sync regarding the health of the business. That is, when a business is failing and unlikely to recover, they have all come to the same conclusion that action must be taken.”
6. Money should be returned to investors
This is more of a tip for startup founders. If your company has to be shut down because of poor performance, then own up to it early and return the money to shareholders. This will help maintain good relationships with the investment community, which comes in handy if you want to raise money in future.
“We have had situations where smart entrepreneurs who have wanted to maintain good relations with investors have said we they will shut down the business and return money to investors,” says Bronfin.
