Thursday, November 3, 2011

Corporations as Angels

I read an article in the October 2011 issue of CFO Magazine that intrigued me. The title, Just Call Me Angel: Smaller companies in search of cash have a new source: big companies, says it all. According to this article, some corporations have amassed a large horde of cash. And you don't maximize shareholder value by sitting on a pile of cash. You have to do something with it that generates returns for the company. However, unless you are an insurance company, you can't just invest in anything. You have to invest in something that is related to your business.

You can make partial acquisitions of companies in your space who give you something you need - market penetration, access to preferred customers, etc. You can invest in smaller entities that are developing new technology or methodologies...and have them serve as a de facto research arm.

According to the article, corporations are on track to invest their most in a decade, with nearly $1.4 billion in funding flowing out of corporate venture arms during the first half of 2011. (This is NOT to be confused with M&A activity. This is purely investment in smaller entities.) Small companies seeking angel investment can tap into this by identifying larger companies in their industry who may be interested in their technology, market, or service offerings. Then focus on what your company can provide the larger corporation that it doesn't already have. Make sure the company has some cash before you approach it and make the pitch. Another term for this venture funding by corporations: strategic investment. Fancy that. Not quite as new as the article's subtitle implies.

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