Years ago when I was first making the transition from entrepreneur to the other side of the table, I sought career advice from one of my mentors in venture capital. I told him about an opportunity I had to join a corporate venture team. His reaction was immediate but only became clear in retrospect. In “Corporate Venture Capital,” the first word makes all of the difference.
From 2013 to 2018, corporate investments in startups have grown over 500% to $53B annually. In the same period, corporates making their first investment have grown 400% and the number of deals with their participation grew 270%. All of this is happening for a very specific reason.
Increasingly, large companies across the world are realizing that technology development in almost every industry has the potential to disrupt their business. It doesn’t matter if they are high tech or old world. They can’t move fast enough internally to beat them so they join them. They do this by creating much-hyped corporate innovation programs, usually consisting of various marketing activities in order to get close to the cool kids building fast-growing startups and VCs with track records of funding them.
The startup ecosystem is social and fun. Tech conferences have become a perverse, new form of corporate tourism. The majority of corporate innovation programs end up being mall cop operations where the output is measured in internal PowerPoint presentations instead of deals done and exits made. It is incredibly easy to fall victim to the startup hype machine but not all things that glitter are gold.
Corporate innovation activities generally fall into two categories: Low and High ROI. As in everything, in order to be effective long-term, you need to be purposeful and precise in creating that perfect mix.
Events (Low ROI)
Committing marketing dollars in support of the innovation ecosystem can provide practical benefits; from the ability to attract top talent at a lower cost to selling products in a new segment to developing customer loyalty. Ongoing market presence can prove to be valuable over time but can be forgotten or replaced just as fast. Ultimately, tangible results require a more substantial effort. Sponsoring events or putting on your own is meaningless unless you have a way to turn that marketing activity into high-quality deals.
Incubators (Low ROI)
Incubation is the process of developing a new business within the protective cocoon of a bigger organization. If successful, it either becomes a discrete unit inside the parent or spins out into a new company. Though value can be created, successful projects by definition are spun out of the main business. This can be taxing on resources or even lead to losing some of the best talent. At the end of the day, it’s a veggie burger, a salad masquerading as BBQ.
Corporate Accelerators (Low ROI)
Corporate accelerators allow sponsoring organizations to incentivize very early stage entrepreneurs to focus on problems relevant to their priority areas. They hope to generate relevant companies to eventually partner with, invest in, or acquire. In practice, this is an expensive and time-consuming activity that can produce only a few second-tier startups in a relevant field. Even then, it will usually take them a couple of years to be mature or stable enough to truly engage with a corporation.
Partnerships (High ROI)
Partnering with startups allows corporations to work alongside cutting-edge innovators they would not usually be able to hire. In addition, take advantage of the most forward-looking technologies without taking on internal risk. A great way to influence and efficiently test multiple theses with fast-growing innovators developing technologies that are proprietary or otherwise cannot be generated in-house.
Venture Investments (High ROI)
By definition, startups are constantly trying to disrupt old business models. For corporations, investing in startups is a highly-effective defensive tool to assure relevance and create optionality for future business. This should be viewed as an opportunity to develop deep, strategic relationships with future leaders of categories important to the parent company in the medium-to-long term — with a focus on financial and strategic returns.
Acquisition (High ROI)
When it comes to filling gaps in corporate strategy and rapidly entering new markets; acquiring is the tried and true approach. Developing an ongoing strategy, allows companies to consistently leapfrog the competition. It is often the fastest and most effective way to expand the footprint in new business categories and markets to generate positive shareholder value.
When large corporations finally make the decision to get on the field, they will need to set a budget, build a specialized team and give it the room and support to execute the strategy. It sounds simple and straightforward. In practice, an independent and effective corporate innovation practice is rarer than a unicorn galloping down Sandhill Road. There are numerous challenges that have to be surmounted through the bureaucracy and politics involved.
Market Perception
In the pecking order of venture capital, corporates are often seen as slow, last resort investors. Your brand may be strong in your industry but venture capital is a completely different relationship business where seats at the table are earned based on a positive, long-term track record. You can spend millions sponsoring conferences all over the world to generate dealflow, just to blow it by being arrogant with founders, responding slowly because you have to get the buy-in from a business unit manager that doesn’t know how to spell startup, or asking for draconian terms.
Governance
Effective management of investments and partnerships with startups requires processes and skill sets that are not transferable from run-of-the-mill sales or business development functions. It is a highly specialized field where identifying and formalizing a relationship is only the beginning. Getting the most out of the relationship long-term requires a fine balance of supporting activities and board room responsibilities.
Team
Investment professionals hone their skills and network by being in the trenches as startup entrepreneurs or through years of apprenticeship in the industry. Incentives must be aligned to reward and retain the best team members long-term. With the breakneck growth speed of the corporate venture industry; finding and hiring experienced practitioners is becoming nearly impossible.
Deal Flow
Venture Capital is a relationship business that relies on personal endorsements both on the startup and investor side. The best entrepreneurs and investors will work with people they know and trust. Developing a pipeline of quality prospects is difficult under the best conditions but is nearly impossible without an earned, insider presence in top markets such as Silicon Valley.
If you are a founder, don’t get over eager when suits from the big companies start knocking on your door. Be wary before you get your hopes up and make sure you are not talking to the walking dead. See how many deals they’ve done, how long their process takes, and if they need an internal sponsor. Don’t give into any rights of first refusal or other provisions that may stifle your future business or exit opportunities with competitors. Be convinced that this partner will be there for you when you need them. Trust me, that day will come.
If you are an executive finding yourself seriously looking at partnering, investing, or acquiring startups, make sure you have the right set of experienced operators setting the strategy and give them the runway to get the job done.
Have a question or comment on the topic? I’d love to hear from you.
