Venture Client

What is a venture client?

Venture client describes an established company that uses the technology or product of a young company as a paying customer instead of acquiring shares in it. The English term is also customary in German usage; what is meant is a large company acting as the pilot customer of young providers. The aim is to solve a concrete problem in the company's own operations. The venture client model, also called venture clienting, organises this purchasing systematically: a dedicated unit (venture client unit) looks for suitable providers, manages pilot projects and transfers successful solutions into regular operation.

The model is found above all in business with corporate customers, for example in industry, logistics or insurance. Those involved are the venture client unit, the business department that uses the solution, as well as purchasing, information security and the legal department. The basis is a pilot agreement, followed by a framework, supply or licence agreement. The young company earns revenue without having to give up shares (no dilution). It also gains a reference that helps to evidence product-market fit in a later funding round, that is, the proof that the product finds paying customers in sufficient numbers.

How the venture client model works

The starting point is a problem that a business department describes, for example an error-prone quality inspection or a high effort in claims handling. The venture client unit looks for providers with a suitable solution, compares them and selects one or a few for a pilot project, often called a proof of concept. In practice, the pilot often runs for a few months, is paid and is measured against criteria set in advance, for example error rate, time saved or cost per transaction.

After the pilot, the business department decides on roll-out. If the decision is positive, the solution is transferred through purchasing into a regular contract and extended to further sites or departments. The venture client unit above all shortens the time to the first contract, because it has prepared supplier approval, security review and contract templates for young providers. The young company earns the largest part of its revenue only with roll-out in regular operation.

Pilot agreement and contract design

The pilot agreement determines whether the project can become a lasting customer relationship. The following points shape its value:

• Success criteria and follow-on: measurable criteria and a rule on the prices at which and the scope in which the solution is rolled out on success.
• Remuneration: a fee for the pilot that at least covers the costs. Unpaid pilots tie up capacity without evidencing the customer's willingness to pay.
• Intellectual property: The rights to the product and further developments remain with the provider; the customer receives a right of use. Otherwise the product can no longer be offered freely to other customers.
• Exclusivity: if at all, limited in time, restricted to one use case and coupled with minimum purchase commitments.
• Data protection and security: where personal data is involved, a data processing agreement, plus the group's security requirements.
• Termination and change of control: Termination rights of the customer for the case that the provider is sold act directly on a later sale process.

Large companies often work with long payment terms. For a provider with a short financial runway, a successful pilot can therefore tie up liquidity at first before it brings any. Payment terms therefore belong in the negotiation just as much as the price.

Venture client and corporate venture capital

In corporate venture capital, a corporation acquires shares in a young company through an investment unit and combines a financial return with a strategic benefit. The venture client, by contrast, buys a service. It does not become a shareholder, receives no shareholder rights and bears no investment risk. Its benefit lies in applying the technology in its own operations, not in the appreciation of shares.

Both approaches can follow one another. A successful pilot is often the starting point for talks about an investment, which are then conducted under the rules of a funding round. For the provider, this sequence is favourable: the customer knows the product from its own use, and the commercial relationship exists independently of the investment. If a customer becomes a shareholder at the same time, however, it receives information rights that other customers or competitors may view critically.

Significance for funding round and valuation

Investors distinguish strictly between revenue from pilot projects and recurring revenue. A pilot fee is one-off project revenue. Only an ongoing licence or subscription agreement counts towards annual recurring revenue (ARR), which is at the centre of the valuation of software companies. Informative are therefore the rate at which pilots convert into regular contracts and the time this conversion takes.

In due diligence, the thorough review before the investment, customer contracts are read in full. Reviewed are terms, termination rights, exclusivities, most-favoured-customer clauses, under which the customer always receives the lowest price, and rules on change of control (change of control). In addition there is dependence on individual customers: if a large part of revenue comes from one corporation, investors regard this as a concentration risk.

Practical example: venture client pilot in industry

A software company for the predictive maintenance of industrial plants achieves EUR 1.2 million of annual recurring revenue. A mechanical engineering group commissions it through its venture client unit with a pilot at one site.

• Pilot over four months for EUR 80,000, measured by the number of unplanned stoppages
• Follow-on agreed in advance: roll-out at twelve sites at EUR 25,000 per site and year, that is, 12 × EUR 25,000 = EUR 300,000 ARR
• Exclusivity: The group demands 24 months for its entire industry; twelve months are agreed for the specific use case against a minimum purchase of eight sites
• Change of control: right of termination only if a direct competitor of the group acquires the company
• ARR after the roll-out: EUR 1.2 million + EUR 300,000 = EUR 1.5 million; the group's share EUR 300,000 / EUR 1.5 million = 20%

In the subsequent Series A, the first larger funding round with professional investors, the EUR 80,000 pilot fee does not count towards ARR. The framework agreement, by contrast, shows that the solution works in the regular operation of a large company. The investors ask about further customers, because a share of 20% from a single customer makes the plan vulnerable.

Distinction: venture client, corporate venture capital and accelerator

• Corporate venture capital: The corporation acquires shares and becomes a shareholder. The venture client buys a service and remains a customer.
• Accelerator: a time-limited support programme for young teams, often against shares. Corporate accelerators of large groups often organise pilot projects and thereby come close to the venture client model.
• Contract research: A company has something new developed, and the results usually belong to the client. The venture client uses an existing product, and the rights to it remain with the provider.

Common mistakes

• Unpaid pilots. A free pilot does not evidence willingness to pay and ties up development capacity that is then missing for paying customers.
• No agreed follow-on. Without success criteria and a price rule for roll-out, a pilot is often followed by another pilot instead of a contract.
• Exclusivity without consideration. An unlimited or industry-wide exclusivity shuts out customers who count as growth potential in a later round.
• Further developments at the customer. If the rights to customer-specific extensions lie with the corporation, the product can no longer be developed and sold uniformly.
• One-off build instead of product. Extensive bespoke development for one customer shifts the business towards project services, which investors value lower.
• Pilot revenue shown as recurring. If project revenue is presented as ARR in the pitch deck, the presentation for investors, it costs credibility in due diligence.

Frequently asked questions

Is a venture client an investor?

No. The venture client buys a service and does not become a shareholder. The young company receives revenue instead of equity and gives up no shares.

Can a venture client project turn into an investment?

Yes. After a successful pilot, talks with the customer's investment unit often follow. The purchase decision and the investment decision are made in separate procedures.

How long does a pilot project last?

In practice often a few months. Less decisive than the duration is a decision on roll-out agreed in advance at the end of the pilot.

Does pilot revenue count towards ARR?

No. Pilot fees are one-off project revenue. Only ongoing, contractually recurring fees count towards ARR, for example from a licence or subscription after roll-out.

Is the model suitable for providers in consumer business?

Hardly. The model presupposes a company that uses a solution in its own operations. Providers for private customers work with corporations rather through sales or marketing cooperations.

The Roemer Capital view

In the financial model for a Series A, we strictly separate pilot fees from recurring revenue. We show how many pilots have turned into regular contracts and how long that took. This conversion rate is often more informative to investors than the number of well-known names on the customer list.

We read customer contracts with corporations together with the company's law firm for clauses that affect a round or a later sale: exclusivities, most-favoured-customer clauses, termination rights on change of control and rights to further developments. If such clauses stand out, we address them in the equity story ourselves before an investor finds them in the data room. We present customer concentration openly, together with the plan for how it falls.