Issues To Consider When Adding A Corporate VC To Your Fundraising Syndicate

Since 2008, cash has been king, and as the traditional VC market constricts, Corporate VCs have become an appealing source of capital and expertise for young biotech companies. Below I discuss issues to keep in mind when considering adding a Corporate VC to your syndicate.

Disclaimer: Please consult an accountant expert for more information as these rules are complex and change frequently. I am not an accountant.

1.       Ownership constraints – Historically, many corporate VC’s could not own ≥ 20% of your post-financing fully diluted shares outstanding or their parent BioPharma would have to absorb a portion of your P&L expense onto their income statement. In recent years, the accounting rule FIN 46 has lowered the 20% ceiling further, especially if board seats or special voting rights are involved. The rule could potentially require the parent BioPharma to consolidate all of your financials onto their books every quarter and is a logistical nightmare for their finance group. The same may hold true if the Corporate VC contributes the majority of the cash in the round.

2.       Leading rounds – Many corporate VCs will not lead rounds despite their strong enthusiasm for your company.  The reason again has much to do with accounting. Parent BioPharma’s have to justify to their external accountants that they are paying fair market value for your stock. This is easier to do if a stand-alone third party VC sets the price. This is also one reason corporate VCs will be more hesitant to pay a premium for your stock (among other reasons) as they may have to immediately expense a portion of it. This same may hold true for all elements of the financing terms including liquidation preferences, anti-dilution provisions, conversion ratios, etc.

3.       Strategic relationship – There are both pros and cons to adding a Corporate VC to a syndicate. On the one hand, many Corporate VCs work closely with their parent Company to provide valuable expertise regarding clinical trial design, regulatory interactions, research tools, commercial assessment, etc. This expertise is often impossible to duplicate using external consultants. On the other hand, there are implicit signals sent to the world when you forge a formal relationship with a BioPharma company. These signals can provide validation and help you fill out your syndicate, but can also make other BioPharma’s feel that the invested Company will have the upper-hand when it comes time to partner.

4.       Motivation – Many Corporate VCs have different agendas then their Financial VC counterparts. Afterall, they are “strategic” investors who are using VC investing to ultimately help fill their parent’s product portfolio down the road. The people running the shops may have slightly different backgrounds and approaches to an investment. This can manifest in slightly different behavior than you are used to from a VC.

No two Corporate VCs are identical and they come in a variety of corporate structures and personnel flavors. Some are separate operating companies with their own balance sheet. Some are run off the parent Company’s books. That being said, in BioPharma there are less than a dozen major players, so getting a feel for each one does not take long. Overall, if done correctly, a Corporate VC can be a valuable addition to your syndicate.