Corporate Venture Capital is growing, and while traditional VCs aren’t all fond of the trend, startups are. New investors bring friendlier term sheets for growing startups as competition increases in the early-stage investment landscape. Now CVCs just have to make sure they don’t develop a negative reputation in the startup ecosystem. Is it too late?
Corporate Venture arms are tasked with financial and strategic objectives. Financially — return the money plus some. Strategically — invest in ideas or companies that serve our mission. The financial side is more of the same, it’s the strategic element that have VC’s mudslinging, founders wondering, and CVCs scraping together qualifying offers. Joe Volpe, Managing Director of Merck Global Health Innovation, spoke to the challenge of aligning corporate strategy with smart investments, “It is difficult digging up innovative investments in our focus areas, as well as finding companies ready to invest, as well as those entities understanding our thesis or investing strategy, as well as aligning all parties’ timing, as well as mixing venture, growth equity and M&A.”
Aligning the investment moons is more difficult for venture arms who may have a reputation for self-serving, short-term partnerships with startups that need durable investors. Jack Young, Senior Director at Qualcomm Life Fund, addressed the overarching challenge in this year’s Rising Stars report from Global Corporate Venturing, “The venture capital industry is becoming increasingly sophisticated and competitive. Many major firms are retooling their businesses by offering value-added services that run the gamut from project design to executive recruiting. CVC needs to dig deeper to bring its own set of unique assets to the table, while not pursuing deals for short-term commercial interests.”
Investor relations aside, new venture arms are worried that the broader reputation in the community will cripple their program’s chances of signing the next industry unicorn. Many corporates have even renamed their venture arms to appear as standalone firms. The primary concern remains — are startups attracted to us?
Samsung is a noodle-turned-technology company with more patents than Apple or Google. They spend upwards of $14 billion per year on R&D, that’s $40 million per day. 70k engineers operate 36 R&D centers globally. They have an accelerator (VR, IoT, more) and investment teams in New York, Silicon Valley and Tel Aviv. Every member of their innovation ecosystem is responsible for understanding the current mission of each business leader in the organization so that they can connect a young company to the right person when they meet at Demo Days, in personal networks or through the Entrepreneur in Residence program. They invest at the Seed Stage, Series A, and Series B. They have over 300,000 employees, and they want to invest in you.
What’s holding you back?
For many startups, it’s a mix of not wanting to commit to one corporation, to feeling the company won’t provide proper support, to worrying that they’ll accept a lopsided deal wherein their passion is navigated towards corporate agenda.
Recently, we spoke with growing startups in the AI and FinTech spaces about their perception of corporations as long-term partners. Each of the teams we interviewed graduated from a corporate accelerator program in 2015.
We heard mostly positive feedback when we interviewed graduates of the Microsoft and Barclays Accelerators. All of the teams accomplished what they had set out to do before the program. The companies were generous with their time, money and connections. Relationships with corporate teams and fellow cohort members extended beyond the accelerator program, some developed into joint ventures.
But the startups also had recommendations for their hosts: Be more careful with our time. Train your employees to understand our urgency and priorities. Be more transparent when lining up corporate introductions for our team.
And we continue to hear and read more of the same in the venture space: corporations don’t understand a startup’s problems, and so you should avoid them as investors.
Clearly, there is some misunderstanding between corporate and startup teams that prevents the sides from always working together effectively. But, as we’ve seen at Capital One and Samsung, two companies that filled the ranks with startup founders and previous investors, that is a solvable problem, and the benefits to partnering with a CVC (assets, knowledge, connections) should still far outweigh this avoidable cost. One of the founders suggested the corporate teams “read a bunch of Paul Graham essays” before working with a startup. That could help employees visualize startup priorities during short-term projects, but investors are expected to guide the teams through long and trying times. Startups expect investors to have experience wading the downturns, and that’s where you’ll find the root of the schism that we’re hearing about. CVCs make the mistake of staffing their venture arms with business development and strategy people with no startup experience. Reputation problems ensue.
As Fred Wilson alluded to in this blog post, there are basically two kinds of CVCs: passive corporate VC arms and active strategic investments. Passive corporate VC arms are supportive, long-term, hands on investors. Active strategic investments are high on lip-service, low on follow-through. The difference, says Samsung’s Christina Bechold, is the makeup of the team. Do they have investment experience? Do they have startup experience?
“Often times they take people from corporate development or strategy side and repurpose them from venture investing, which is not the way we do it at Samsung. Our venture teams all come from an investing and operating background.” (Christina joined us on the I/O podcast to discuss CVCs vs. Traditional VCs, the rise of startups outside of the Valley and more).
Capital One, Neopost, Ericcson, Konika Minolta are all recent I/O guests that have recruited new staff with startup experience to manage corporate-startup relations. There are still questions that competing investors can plant: Do they have your best interest in mind? Will they support you in future rounds? But on the front lines, recruiting and staffing could be the key to a successful collaboration model.
Startups must be lightening up to CVC money, as corporate venture capital investors provided more than $7.5bn in funding over the course of 2015, the highest level since 2000. Plus, Citi Ventures Managing Director Vanessa Colella says, corporations have been hard at work improving their relationship capital: “Having commercialized the majority of our portfolio, we have deep experience guiding our startups in how to engage and interact inside a multinational enterprise — something they might otherwise have been hard-pressed to navigate — and pinpointing for them the areas in which they can potentially add value.” (see Global Corporate Venturing’s downloadable Rising Stars report for Vanessa’s quote.)
If the self-serving shops haven’t already stopped operating, they’re busy restructuring their models to copy the likes of Intel Capital, GV and other reputable firms. While corporations look for any way to connect with potential disruptors, and more startups launch in more places, startup-corporate collaboration models will continue to inform the structures and term sheets deployed by CVCs. It appears they’re already learning to get along just fine.
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