Ever since the Netscape IPO in 1995, venture capital has taken on an almost mystical quality. The idea of investors in khakis backing a few kids in a garage to rival the world’s largest corporations has far more romantic appeal than fat-cat bankers chomping away at cigars in stuffy boardrooms.
Before long, corporate America wanted in on the action, with mixed results. Some early investors that set up venture capital arms, such as Intel, Microsoft, and Qualcomm, did well. But all too often, there was a culture clash between traditional executives and the venture capital world.
Today, however, corporate venture capital seems to be hitting its stride. From 2011 to 2016, the number of global active corporate investors has tripled to 965 and 75% of the Fortune 100 have an internal VC, To get a sense of what’s going on, I spoke to Scott Lenet. President of Touchdown Ventures, which manages funds for corporate stalwarts like Kellogg and Aramark.
Corporate venture capital has a surprisingly long and rich history, dating at least as far back as DuPont’s investment in General Motors in 1914. The move not only generated very attractive financial returns, it also helped grow the market for DuPont’s own products, such as artificial leather, plastics, and paints.
Still, many corporate venture investors come into the market poorly informed and ill-equipped to succeed. For example, some have a tendency to emphasize the strategic value of investments to such an extent that it can hinder financial returns. “Sometimes they come in not really knowing the rules and that can cause problems,” Lenet told me.
Participating in a venture deal is not like normal corporate activity. You are part of an investment team and, if you want to be included on future deals, you need to be a good partner to the other investors. Putting the needs of your organization above others on the team won’t win you any friends.
Other times, they are unable to adapt bureaucratic corporate procedures to the needs of the startup world. So if a startup needs a quick influx of capital, some corporate VC’s can have trouble making a timely decision or, even worse, make commitments and then find that they are overruled by higher-ups and unable to follow through.
Lenet recommends that corporations that want to enter the venture capital world recruit experienced investors who know the rules, either internally or through a firm like his. One badly managed deal can ruin a reputation for a long time.
Learning To Deliver Value
Despite some resistance to corporate venture programs among independent investors, Lenet points out that they can also provide enormous value that others cannot. Corporate investors bring more than just capital, but an enormous amount of expertise, assets and relationships.
For example, Kellogg, a Touchdown Ventures partner, may not equal the tech savvy of a Silicon Valley venture investor, but it has deep expertise in wholesale distribution and go-to-market strategies, which can be invaluable for a startup company. In other cases, a corporate venture partner may be able to license technology or help build supply chain relationships.
A corporate venture partner can also add a halo to a young company through the prestige of its brand. Going to potential partners is always a lot easier when you can say that you have the backing of an industry titan. In many cases, portfolio companies are invited to speak at company conferences, giving them much needed exposure to potential customers and partners.
Lenet recommends that firms that want to pursue a venture program think seriously about what value they can deliver over and above capital investments. The more value you can add, the more likely you are to get your choice of the best investment opportunities.
Building An Ecosystem
Lenet also points out that the benefits of building an investment program extend far beyond the actual investments that are made. A typical fund will evaluate hundreds of companies in any given year, but invest in just a few. During the process, fund managers come across a multitude of exciting technologies and smart people.
A well managed investment program can build important connections with a wide array of professionals, such as consulting companies, entrepreneurs and other investors. These can be built into valuable relationships that can benefit the core business of a company. Just because a particular target doesn’t become part of an investment portfolio, doesn’t mean that it can’t grow into a valuable partner.
Also, by building an ecosystem of relationships in the startup world, corporations can develop an important intelligence network to help them identify, evaluate and act on new trends that can affect their business. In fact, it is often a lack of visibility into what’s going on in the startup world that disrupts large, well established firms.
Creating A Window Into The Future
Today, disruption has become the norm. The average lifespan of a company on the S&P index continues to decrease, from more than 30 years in 1990 to less than 20 years today. Clearly, business models no longer last and being a successful, established company provides little protection. Nobody is immune to disruption anymore.
Yet a corporate venture program can provide a valuable window into the future. By immersing itself into the startup world, a large enterprise can achieve insights that would be hard to do otherwise. Perhaps even more importantly, a well thought out corporate venture program can help a company shape the future and put themselves in a better position to adapt.
For example, Intel has set up funds for startups that make use of new generations of processor technology, helping to seed the marketplace with firms that make use of new standards. More recently, IBM has made investments in startups that leverage Watson, its artificial intelligence platform.
Still, to achieve a truly successful corporate venture program you need to go in with your eyes open. You need to have a clear vision of what you expect to gain, a sound plan for how you will achieve those objectives and, perhaps most of all, a good understanding of what the rules are.