Paul Graham’s article last week on why companies shouldn’t talk to CorpDev* made a bold suggestion (the headline, “Don’t Talk to CorpDev,” is a pretty good summary).
Coming from a part-time gig in CorpDev in my previous life and working with many CorpDev folks as a venture capitalist, I’d like to add to this conversation by saying that founders take the call from CorpDev because of fear. Yep, fear. Some founders may say that it is also to build relationships, but you’d only want to do that if you fear you need that relationship if you fail. Founders, being hustlers , want to have a Plan B option, or as I like to call it, a “What if?” option.
Founders don’t seek out a “What if” option because they want an option to sell now or even want to get an idea for how much the company is worth right now. Instead, they do it because they’re thinking, what if the company isn’t doing well a year from now and I want to have the option to sell or know what the process looks like?
Building relationships before you intend to sell
In a world where networking is given so much importance and there’s a belief that your network can save you in times of need, it’s tempting to make that connection. In fact, one of the strengths of Silicon Valley is that your network can help you get your first few customers (YC story), or get you a good valuation, or trust you and invest in you without a product, or continue to trust and invest in you even when you don’t have perfect growth metrics, or help you find a salvageable exit when the time is right.
When you are surrounded by that thinking, you tend to take that call — especially if you aren’t doing that great yet as a company. You tend to entertain CorpDev to build that relationship for the future even if you don’t intend to sell. You think that making that connection might help you in the future when you DO plan to sell. At that time, if you have a relationship inside Google or Apple or wherever, you don’t have to start cold; you have an advocate within the company who might root for you. Well, take that step with caution. It may backfire! Let me tell you why.
What is CorpDev thinking?
Oftentimes, CorpDev reaches out to do competitive analysis on the industry. So basically they are talking to you and your competitors and piecing information together. They are creating market maps on industries that might be of interest to their company, and the more you talk to them the more information you are giving away that might work against you. You might end up sharing the data that brings more competition to your space or even seals a deal for another company, not yours.
Additionally, as Graham says, talking to CorpDev can be a distraction. It’s endless conversations that divert you from finishing your marathon. In addition, it takes a toll on your company. Each time you make an additional slide, pull new data for new metrics, or schedule a meeting with the tech team, you’re losing time you could have been focused on your own success. And these demands can go on for months. This means you have to involve other people from your company into the process. As a young startup, even the waste of day can cost you a lot, let alone weeks or months. Getting the team involved not only wastes their time but gets everyone’s hopes up, which can be discouraging for company morale if the outcome isn’t desirable.
Lastly, even if you’re just trying to forge a relationship or make inroads to start the acquisition conversation later, that can come back to bite you. Once you are in the company database, you are not novel. They have your information, deck, numbers, and you are not hot or mysterious. If you are in the system, you must have been up for sale before and something must have happened for someone to reject you. CorpDev is a revolving door of people who come and go once they have enough experience. That means the person you forged your relationship with might be gone, and the new person isn’t your buddy — in fact, since you are already in the database that new person might not get the credit for “sourcing” a deal with you, so he/she might actually be incentivized to avoid you.
For this new person it might be harder to go to bat for you because that requires them to demonstrate to their team that a lot has changed since the company last spoke with you. They have to convince the company to consider you again. There is always another hot new startup out there to distract the company, so revisiting old friends isn’t that appealing.
There can be an exception to this if you are very valuable to the company and loosing you to a competitor would hurt the company, but if that’s the case, you are on their minds already.
So engage with CorpDev with caution, and know what you are getting into. At some point, I might write about how to navigate this conversation and turn it into a positive one. Until then, stay focused!
Shruti Gandhi is an investor, entrepreneur, and engineer. She was previously with True Ventures, Samsung’s Early Stage Investment Fund and three other funds where four of her companies had successful exits in less than three years. She invests in passionate entrepreneurs that are working hard to solve problems in today’s world of work. She is a co-chair of the TiE San Francisco chapter and on the Marketing & Technology Committee of the San Francisco Ballet. Follow her on Twitter @atShruti.