VC = Value Collaborator

Hi Friends,

My recent project led me down a rabbit hole of research into corporate venture investments and sparked a deeper reflection on the role of Venture Capital in the startup ecosystem and the broader economy.

Initially, I held onto the traditional stereotype that venture capital firms like Sequoia simply pour money into startups at different stages, from seed rounds to series ABCD, hoping to cash out during an IPO or when the firm's share price skyrockets. But as I delved deeper and spoke to friends entrenched in the startup ecosystem, I discovered that VCs and accelerators have a much more involved role in nurturing their startups. In fact, it's almost akin to parenting—an incubation program that goes beyond just financial backing. (credit to Kir from Arb for giving me the analogy!)

Traditional VC vs Corporate VC

To make the structure a bit clearer, let’s take a quirky approach. On one side, we have the traditional VCs and incubators, such as the renowned Sequoia Capital and Y Combinator. These powerhouses have played a pivotal role in shaping the startup landscape. They're like the cool parents who provide guidance, resources, and a network of connections. There's a sense of excitement and adventure in their relationships with startups, as they help them navigate the challenges of scaling up and becoming successful.

On the other side, we have the venture arms of corporate giants, like Google's G Venture and Samsung's Next Venture. Imagine corporate venture arms as the strategic masterminds of the startup world. They invest in startups not just for financial gain, but to create powerful synergies with their existing businesses and construct a strong ecosystem that aligns with their strategic plans.

Take Mercedes-Benz, for example. Their corporate venture arm seeks out startups that can enhance their manufacturing capabilities or strengthen their supply chain. By investing in these startups, Mercedes-Benz can tap into innovative technologies and gain a competitive advantage in the automotive industry.

Similarly, companies like Tencent and Samsung Next Venture are focused on creating a robust ecosystem that complements their core businesses. They invest in startups that can synergize with their platforms, such as WeChat or Samsung products, to create a seamless user experience and drive customer engagement.

What might traditional VC got to offer beyond Money

1. Strategic guidance: Picture venture capital firms and incubators as your startup's trusted advisors, helping you navigate the exciting but challenging road of entrepreneurship. These folks have been there, done that, and even written best-selling books about it. Take Peter Thiel, for instance, the co-founder of PayPal and author of "Zero to One." With his venture capital firm, Founders Fund, he's all about sharing his expertise and guiding startups towards success. So, when you're feeling lost, these experienced entrepreneurs have your back! The strategic advise thing might go even further for Venture Arms of Consulting Firms like Bain Capital, which they will obviously leverage their management consulting capabilities to guide the growth of the startups within their portfolio.
2. Partner connections: Imagine VC firms and incubators as matchmakers, introducing startups to potential partners who can take their business to new heights. They've got an impressive Rolodex of contacts, including big corporations and industry leaders. Need cloud services for your startup? They can hook you up with Microsoft or AWS, providing free cloud credits to get you up and running. And if you're in the hardware field, they'll play Cupid and connect you with the perfect manufacturers. It's like a dating service for startups and partners!
3. Resource support: VC firms and incubators are like the fairy godmothers of startups, waving their magic wands to provide resources and support in every direction. They've got connections in legal, finance, human resources, and marketing. Need a talented team? They'll sprinkle their fairy dust and connect you with platforms like "Cake Resume" to find the best talent out there. Plus, these networks are full of high-potential leads for future collaborations. With their help, you'll have a whole arsenal of resources to conquer any challenge that comes your way!

Revolutionizing Investment: Unleashing the Power of Manufacturing

Then, I would like to highlight an interesting new investment model called "manufacturing as investment”. It's specifically tailored for hardware startups that struggle to transition from initial prototypes to large-scale manufacturing. This alternative approach caught my attention in an article on Zhihu, written by a renowned thought leader in the Chinese Venture Capital Field.

Now, here's the challenge: traditional venture capitalists and financial institutions often lack an understanding of manufacturing and hesitate to invest in the risky business of large-scale production for technology products. But here's the twist—manufacturing companies themselves understand manufacturing inside out. So, what if a manufacturing company or expert could assess whether a technology company's product has what it takes for successful factory construction and take a calculated risk by assisting the technology company in building the factory externally? The expectation is to recoup the investment later on.

This "manufacturing as investment" approach brings several advantages for both technology and manufacturing companies. Let's dive in!

Firstly, it helps technology companies overcome the manufacturing challenge and achieve mass production. Picture this: technology companies often lack funds but possess immense growth potential. By joining forces with manufacturing companies, they can exchange their future growth potential for immediate mass production capabilities. This means they can generate revenue and profit through product sales, accelerating their path to going public. Plus, having their own production capabilities increases their valuation in the capital market, as they have tangible assets in the form of their own factories instead of relying on contract manufacturers.

But wait, there's more! This collaboration is a game-changer for manufacturing companies too. In the past, as contract manufacturers, they could only take on one project at a time. Once the project was completed, the collaboration would come to an end, leaving them with little to show for their efforts. However, with the "manufacturing as investment" approach, their interests become intertwined with technology companies through financial ties. By helping technology companies build factories, they gain the assurance that the technology company will acquire them in the future after going public. This means they get to share in the profits generated by the technology company's rapid growth. It's a win-win situation!

Now, here's the secret sauce: this approach cleverly utilizes a timing difference to facilitate collaboration. Technology companies often have low early-stage valuations but sky-high growth potential. On the other hand, manufacturing companies have substantial asset values but relatively lower growth potential. Acquiring shares before mass production would significantly dilute the technology company's equity, which is a big no-no. So, the master plan is for manufacturing companies to help technology companies build factories, achieve mass production, and then acquire shares once the technology company's valuation has soared. This way, excessive dilution of equity is avoided, and everyone comes out a winner.

I hope this sheds light on the innovative "manufacturing as investment" model and how it transforms the startup game. It's truly a fascinating approach that bridges the gap between technology and manufacturing, creating new opportunities and fostering mutual growth.

And that's a wrap for this week's newsletter! Stay tuned for more exciting updates, fascinating insights, and inspiring stories as we continue to explore the dynamic world of startups and venture capital. Don't forget to share the newsletter with your friends and spread the entrepreneurial spirit! Cheers to innovation and success!

P.S. Great thanks to two of my great friends Kir from Arb and Mic from @hangulstudy contributing to the analogies and structure of the article.

Things that I found interesting this week (also crediting to my amazing friends Kir and Mic):