By Andrew Romans, General Partner at Rubicon Venture Capital
I am nearing the final stages of finishing my second book on the topic of venture capital – MASTERS OF CORPORATE VENTURE CAPITAL: Collective Wisdom from 50 VCs on How to Get Funded & the Playbook for Corporate Venturing to Access Startup Innovation, Create Winning CVCs & Avoid the Classic Mistakes (May 2016). I was partly motivated to finish this book now, because I have also been advising a large Chinese corporate on the formation of their corporate venturing program.
I first organized my own ideas for a comprehensive book on the topic into 10 chapters with detailed sub-headings. I then embarked on taking over 50 meetings and phone interviews with top corporate venture capital (CVC) practitioners including Intel Capital, IBM Ventures, Qualcomm Ventures, Teléfonica Ventures and many other usual suspects both old and new to the CVC scene. To be honest, before taking any of these interviews I foolishly felt as if I could just sit down and fill in each chapter based on my own experience of being a founder that raised over $27m in CVC funding for my own venture and then a decade of being an active angel and advisor helping 20+ startups raise VC funding and then running an angel group and finally my own VC fund – Rubicon Venture Capital. What I learned from these interviews was entirely humbling and enlightening.
Many of the interviews began the same way the the head of CVC saying something like, “We generate over $50 billion a year in revenue. For our CVC group to move the needle on our business we’d need to be bigger than half of Sand Hill Road’s VC funds combined. What we are really doing is searching for strategic value…”
In my opinion every CVC should make a list of their goals and put in writing why they are operating in the domain of corporate venturing to begin with. The board of directors and key senior management should all sign off on this document and maintain a list of reasons they are in CVC and what they are hoping to achieve. Then all decisions they need to make on how to structure and operate the CVC should tie into achieving these goals.
Every CVC needs to decide how to structure itself legally, how much capital they expect to deploy, investment pace, check size, stage, sector, strategic value investment thesis. Each corporate venturing group needs to decide how to manage decision making from a single individual making all decisions to elaborate investment committees for bigger investments as well as how to create the flow of information back and forth between the CVC group, senior management and key heads of business units. Other sticky issues need to be addressed such as generating better deal flow, ability to close into the most competitive fast moving deals and compensation to keep the CVC team working together for the long term and even compensation for heads of business units that partner with the startups pre and post investment. How CVC operates often becomes a debate over short-term results and long terms strategy. For some companies CVC becomes the pet project of the CEO and becomes part of the DNA and animal instincts of the business.
In my research I identified many parts of the CVC process that do not work well and worked with my 50+ colleagues that contributed to the book to try and come up with optimal solutions and new ideas to fix some of the many challenges that prevent CVC from reaching its maximum potential. One program we are pioneering at Rubicon Venture Capital to address some of these issues is an LP-in-Residence program.
I also break down the different options within corporate venturing and interacting with the greater startup ecosystem including:
- Operating their own accelerators or partnering with an existing franchise to operate their own corporate accelerator
- Investing in or mentoring at other accelerators
- Open innovation and alternative programs to interact with startups
- Making pre-seed and seed investments
- Making Series A and B investments
- Making later stage growth investments
- Investing in other VC funds and achieving objectives on the list with a FoF program and active interaction with the GPs at those funds
- How to structure the interplay between CVC and Corp Development groups
Here are some of the most common goals of why large and mid sized corporates are operating CVC programs:
- Access business intelligence and innovation understanding technologies, business models and trends that impact or operate around their core businesses and peripheral businesses. Many corporates call this technology scouting.
- Identify partnerships with technology startups where the corporate can become a customer of the startup or partner with the startup to put the startup’s products or services in the hands of the corporate’s sales force and find out if the customers of the corporates are interested in what the startup has to offer.
- Create a pipeline of investment opportunities for the corporate via their own existing or nascent corporate venturing program for direct investments. Highly filtered and vetted investment opportunities that present strategic and financial return value to the corporate.
- Create a pipeline of acquisitions for the corporate development group at the corporate with a long-term goal of creating new lines of business that will generate re-occurring revenue streams in the billions of dollars.
- Identify “hedge” investment opportunities into technologies and businesses that threaten the core or peripheral businesses of the corporate. These hedges can protect a corporate from declining business lines and protect the corporate from becoming obsolete.
- Create opportunities for the corporate to benefit from equity ownership in early stage and growth stage startups where the corporate will enable these companies to rapidly grow their sales and become very valuable companies. If the corporate will enable a company to grow to tens or hundreds of millions of dollars in revenue as a result of partnering with a corporate, that corporate may as well own a significant equity position and take part of the financial gain it helped to create.
- Bring entrepreneurial culture and dynamic energy in the startup and venture world back into the culture of the corporate.
- Develop new entrepreneurial skill sets with executives that can return to the corporate with an aim of intra-preneurship, commercializing internally developed technologies, spinouts and joining the internal CVC programs at the corporate.
When done right CVC should provide a win-win-win for the corporate, the startup and the independent VCs co-investing with the corporates, but for a lot of good reasons the path is not as straightforward as it may seem.
Romans expects to publish his second book on venture capital by May 2016. MASTERS OF CORPORATE VENTURE CAPITAL: Collective Wisdom from 50 VCs on How to Get Funded & the Playbook for Corporate Venturing to Access Startup Innovation, Create Winning CVCs & Avoid the Classic Mistakes (2016). You can find his first book here: The Entrepreneurial Bible to Venture Capital, Inside Secrets from the Leaders in the Startup Game (McGraw Hill, Machinery Industry Press [Chinese] & Alpina [Russian]).