Gil Beyda, a partner at Comcast Ventures, recently contributed this important article for TechCrunch detailing the myriad reasons why startups should consider taking capital from corporate venture capital.
Sure, he’s a corporate venture capitalist, so you would expect that viewpoint. But, the venture capital fund that I co-founded, GrowthX, is traditional venture capital (not corporate) and I completely agree with Gil. Though, not for the same reasons he wrote about.
“Yes, and…” (instead of “Yes, but…”)
Gil focused his article on the choice between strategically versus financially focused corporate venture capital. He advocates for CVC if it’s “financial” CVC. In reality, few CVC units are established purely as one versus the other.
Any startup considering an investment from a corporation should first understand that blend and what a strategic “win” and financial “win” looks like from their perspective. If their answer emphasizes strategic, ask about the resources dedicated to portfolio development.
Is a relatively small team of investment professionals also responsible for the time-consuming task of helping portfolio companies navigate conversations with relevant business units inside of the parent company?
One highly regarded and successful CVC unit operates two separate teams: one making financial investments (based everywhere except inside of Corporate HQ) and one dedicated exclusively to delivering strategic value (based at Corporate HQ).
It’s also important to remember that what gets measured, gets done. Gil makes this point when he emphasizes that certain CVC units reward their partners for making profitable investments. I contend that this is more a sign of best-practice than it is a distinction between strategic versus financial.
Companies have learned that it’s hard to attract and retain top venture investing talent without the upside opportunity enjoyed by traditional venture capital fund partners. That’s why there is a trend towards companies with balance sheet funds offering their CVC unit phantom carry and other mechanisms to tie compensation to the performance of the investment fund.
Regardless of financial or strategic, there is a trend among all CVC units towards dedicated strategic resources for portfolio development and incentive structures that promote better alignment with founders (and co-funders).
More Upside; No Downside
Gil writes that “financially focused corporate venture capital firms have all the benefits of a typical venture firm plus exclusive proprietary insights — without the potential downside of strategically driven corporate venture capital firms.”
Proprietary Insights are not Proprietary to Financial CVCs
I agree that one of the benefits of working with a CVC unit is the proprietary insight that they bring to the relationship. These proprietary insights might be exclusive but the benefit is not exclusive to working with financial CVCs.
CVCs are winning greater freedoms from their parent companies to more broadly define what is strategic. Even purely strategic CVCs are investing beyond what they might buy later. That affords them the opportunity to develop proprietary insights that will benefit a startup.
The Sins of our Fathers
Gil references the potential downside of working with a strategic corporate venture capitalist versus financial venture capital. That distinction is disappearing and it’s corporate venture capital, generally, that struggles with a bad reputation.
Bad behavior is bad behavior – regardless of financial or strategic objectives and partner compensation structures. The real question that founders should be researching before taking corporate venture capital is whether the investor has sufficient experience with the venture capital asset class.
Venture Capital is defined by a set of non-obvious characteristics and expected behaviors that do not become obvious no matter how many years you’ve spent as an investment banker and regardless of how many businesses you’ve helped your company acquire.
Historically, a company formed a CVC unit to help their M&A team effectively “buy” an early option to acquire a startup and/or to help the strategy team gather market intelligence. This led to misalignment with founders and traditional venture funds.
In 2017, 186 new CVCs made their first investment. That represents a 66% year-over-year increase. Overwhelmingly, this new generation of CVCs knows that access to the best founders and co-funders is their oxygen and non-market terms and other misaligned behaviors will strangle their financial and strategic objectives. As one CVC told me, “If we do our job well, founders will be interested in talking with our corporate parent.”
The global startup community is awash with venture capital. Too much of it is undifferentiated and too often it’s spent on product development and not market development.
Done well, corporate venture capital differentiates itself in the most needed way: helping founders find fit with a market need.
The corporate venture capital landscape is shifting and the lines between financial and strategic are blurring. At the same time, best practices are developing helping to fuel corporate innovation, maximize financial returns and deliver strategic benefits.
I agree with Gil: it’s time to reconsider corporate venture capital. That goes for founders, co-funders and companies considering launching (or re-launching) a venture unit.
(Andrew has been advising, co-investing with and working alongside of corporate venture capitalists for over twenty years. He spent the last two years as a Kauffman Fellow focused on corporate venture capital – including conducting dozens of in-depth CVC interviews.)