Month: May 2021

Venture Capital

Dividends and Preferences: Should You Take Corporate Venture Capital?

Corporate Venture Capital is seemingly everywhere — from Intel’s venture capital arm ranking as the #1 venture capital firm for funded deals over the last decade, to the massive hoopla surrounding Google forming a 100mm venture capital fund last May to invest in virtually any sector they see fit. In the current economic environment where 1) VC money is tight and 2) the IPO market (although marginally improved) is still quite bad, startups are increasingly taking a serious look at corporate venture capital as a fund raising solution, especially if it is the only money available to them. Anecdotally, over the last six months a large percentage of my VC-style deals have been driven by corporate or strategic VC.

Venture

For example, I helped one large “consumer goods” business seed four different high technology start-ups last quarter and also helped a different corporate VC untangle a purchase option its baby company was no longer happy with. Right now, I am working on raising a new $100mm VC fund that is targeting LPs among large companies in a particular sector and that is designed to give these large company strategic LPs a first look at its portfolio companies and their technologies. Below I give more details on the pros and cons of taking corporate venture capital. Large companies are intrigued by the siren call of venture investments. It allows them to “outsource” their R&D efforts without having to get in bed with the innovators they are seeding. They look at the relationship more as a strategic partnership then a financial play. You could say that the focus is on “partnering” rather than “venturing.” The big companies are focused on finding synergies – how can the baby company with the promising technology fill some gap in our product portfolio, or accelerate our time to market? The value to the big company is not calculated purely in terms of hard cash – rather it is also calculated in terms of the overall business proposition. The big company investor will often expect an option on the company it invests in or on the technology the target is developing. However, they typically do not want “control” of the baby companies at the outset. They prefer to make minority investments – and often will couple these with a license right or purchase option. By making a minority investment and not actually acquiring the baby company, the big company may be able to avoid or delay having to consolidate the baby company’s financials with its own – depending on its analysis of FIN 46.That the big company does not want to acquire the baby company outright can be a good thing for the owner’s of the baby company. For one thing, they may get to defer the sale of their company until a later date when, presumably, they will have hit their milestones and will have a much higher valuation. Also, it allows the baby company to have a champion – hopefully, in an industry or sector that the baby company can really use a champion.

Corporate Venture Capital

I have seen this work very successfully in the biotech space and also in certain hardware sectors – knowing that you have someone at big pharma already interested in your company can give you some peace of mind and allow you to focus on your clinical trials. The flip side of this is that you may end up discouraging any other potential partners from coming forward – which will not only seriously chill any auction process for the sale of your company or technology, but might also be an impediment to basic business success. Close ties with one big client can hurt a baby company if the partnership with big company A will prevent you from doing business with their competitor, big company B. Another thing to keep in mind is that the terms of your technology license or purchase option with the big company will typically be locked in at the very beginning. The terms of this arrangement may seem great when all you have is an idea; however, once you have traction and have hit several milestones, you may not like the pre-established price or the terms of the license. Maybe you could do better in the open market? Maybe you don’t want to sell at all anymore and the big company is exercising its purchase option? These are certainly perils. A baby company has few legal options at this point and may end up with the Hobson’s choice of taking the deal that is available or taking none at all – and potentially killing the company. A final thing to consider is that big companies are typically slower than independent VCs in cementing their deals. In a sector where speed to market is very important – such as consumer e-commerce or social media – this is a serious disadvantage. Corporate venture capital is not without its risks, but for the right baby company, can be the right choice.

Retirement Number

Retirement Number Information

A lot of people wonder how old they will need to be to retire successfully. Well, there is no “one size fits all” solution when it comes to how much you should have saved going in to retirement. It really depends; Lifestyle, income and life expectancy are but a few of the determining factors.

There are some ways to determine your progress toward a successful retirement, ways to determine your ‘Retirement Number’ – the age at which you might leave the workforce. It may be the case that your current financial trajectory is not on track with your retirement expectations and goals. Here are a few guidelines for tracking your progress toward saving for retirement:

Retirement plan

When do you want to retire?

We are living longer lives, indeed. This changes the landscape of retirement, employment and our society at large. I overheard my mother, at 61, say “I don’t know when I’ll be able to retire.” It seems to be a voice of the majority. We all chase that number – the age when we can sit back and rest on our life’s work, but that number changes. Things happen. Expenses arise. With some foresight, you can adjust your lifestyle to better proportion your income to savings to meet your retirement date expectations. It is also important to consider whether you are willing to continue working part-time for a period before stepping out of the sphere of employment altogether. Building a nest egg to support yourself entirely for 25 years is much different than a nest egg that aims to supplement part-time income for 10 years and fully support you for an additional 15.

What sort lifestyle do you expect in retirement?

Most of us begin considering retirement as soon as we enter the workforce. “That’ll be the day,” we imagine. Normally there’s a slightly wrinkled version of our current selves on some beachfront property wearing a silly hat and drinking a cocktail as part of that dream. Those visions, whatever they may be, set the stage for the kind of expenses we can expect in retirement. By crunching the numbers that take in to account your goals, be they hobbies, travel or other goals, you will be better suited to determine the amount of income you will need to suit that lifestyle.

What income streams can you rely on?

What types of income can you expect upon retirement? The most fortunate among us can expect a pension. Most of us can expect some social security payments. You may own a rental property or other assets that will generate income. Every retiree will need to develop a plan to support their lifestyle by pulling money from their investment portfolio. If your savings and investments aren’t adding up, you might consider working part time for a period to supplement before going in to full on retirement mode.

Will you have debt?

Debts have a huge effect once you switch from a state of generating new income to relying on existing investments. Heading in to retirement with a debt load will certainly impact your cash flow, and how much you can use for day-to-day, month-to-month needs. In the ideal scenario, retirees succeed at paying off significant debts like mortgages before they transition to retirement. Otherwise, you will have to factor in those debts when determining how much income you need for retirement.

Retirement

The 4% Rule

The general rule of thumb from financial advisors is that retirees should withdraw no more than 4% from your retirement portfolio each year. So, a $1million portfolio would offer an annual income of $40k. The important factor here is knowing how far that $40k will get you during a year of retirement. This is a function of lifestyle. What is your cost of living? Will you have mortgage / car payments to worry about, still? Compare your debts to reliable income streams. From there, you can gain a better understanding of what you need to have invested in order to make your annual expenses make ends meet with the 4% rule.

Prioritizing retirement lifestyle over current desires is what it often takes to segue in to a successful retirement plan. Your retirement goals determine your need for savings. The earlier you start to prioritize, plan and pursue a savings plan that encompasses the retirement lifestyle you imagine, the better off you’ll be and the sooner you will be able to determine your retirement number. A nest egg that starts early and is able to accumulate decades of interest often means additional retirement income, years off your retirement number and weight off your shoulders at a time when you will need it most.

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