VC or CVC? Simpler Investment Relationships Are Also an Option

Robin excerpts the conclusion of an article in the Chinese edition of HBR, ‘成為獨角獸的新路徑：選對大船’ (A New Path to Becoming a Unicorn: Choose the Right Big Ship). Drawing on the preceding cases and literature, we believe small businesses facing obstacles to organic growth or a low growth ceiling can consider proactively choosing a large enterprise as a strategic partner. Greater resources and room to develop can help them attempt to become new industry unicorns. This is becoming another path to unicorn status. On this path, choosing well matters more than effort. How small businesses select large partners becomes critical. Factors to consider include: 1. Shared values. This is the first consideration. If one side takes a long-term view while the other prioritizes short-term gains, cooperation will be difficult to sustain, especially because the smaller company is relatively weaker. When values diverge, it often suffers more. 2. Compatible goals. Common or mutually accommodating goals imply a shared vision. For the smaller company, this can reduce strategic and management conflicts and provide stronger motivation. 3. Mutual trust. When the partnership’s prospects and future management arrangements are uncertain, trust between the small and large companies is particularly important. Without a foundation of mutual trust, deep, lasting cooperation is difficult. 4. Complementarity. More than similarity, complementary strengths can increase each side’s importance to the other, improve overall efficiency, and expand future possibilities: each compensates for the other’s weaknesses. Once a strategic partner has been selected, the smaller company should pay particular attention to the following when negotiating how the alliance will work, to better protect its interests: 1. Is this an exploration alliance or an exploitation alliance? Their objectives and risks differ. The smaller company needs to assess their differences, benefits, drawbacks, and risks from its own perspective. 2. Use formal governance mechanisms and relational governance to reduce the risk of appropriation within the alliance. 3. In commercial negotiations, understand every clause’s obligations and risks. Avoid major dangers and lost financial returns like the earlier example of a founder losing all control because they did not understand a performance-contingent contractual clause. In short, becoming a unicorn does not require fighting alone; choosing a bigger ship is another route. But choosing the right ship requires both capability and discernment from a startup or small business. #Chinese HBR: Win-win strategies—how small businesses choose giants ---- Robin: ‘I will write about choosing VC versus CVC. In the past, the greatest concerns were being labeled and forced to take sides. Another possible risk is that large companies have their own interests and broader, long-term business-development considerations. Alphabet, for example, invested in Uber and Lyft. Its self-driving subsidiary Waymo also litigated against Uber. That makes Google’s relationship with Uber delicate: shareholder, potential competitor, and even litigant. CVC investment aims to generate business synergies. Traditional VC is a financial investor, with discussions mostly centered on financial statements and business performance. CVC, however, will explore integration deeply with the investee. The startup may end up laying almost everything bare for the large company, creating many new risks. Investment involves trade-offs. Keeping the investment relationship simpler is also a choice.’