VCs and Corporate Venture Groups: Oil And Water? Or Brad And Angelina? Will They Never Mix, Or Are They A Perfect Pair?

By Shellie Davis of Coca-Cola Company Venturing and Emerging Brands Unit and Tom Hawkins, Managing Partner of Forté Ventures

Venture capital funds have been investing consistently since 1946, while corporate venture funds have a history of starting and stopping.  Recent trends, however, show that corporate venture activity – number of corporates investing and the size and quantity of investments – has been steadily increasing since 2011 according to Global Corporate Venturing Analytics.  This trend means that CVGs are investing alongside VCs more and more.  Is this a good thing?  What have we learned about co-investing that can make this pair perfect?

There’s no arguing that VCs and CVGs are different.

  • VCs are financial investors, while CVGs tend to invest for both strategic and financial returns
  • VCs invest for a liquidating event or exit, while CVGs invest for access to disruptive innovation, access to innovative capabilities that support their core business, or a pipeline of possible acquisition targets while the exit event is often a secondary consideration
  • CVGs use capital from their core business to create a fund or invest off the balance sheet, while VCs raise money to create their fund
  • VCs tend to be more agile and flexible, while most CVGs suffer from being, well, corporations: bigger and slower
  • VCs can have a shorter investment horizon, while CVGs can be patient money.

These differences have contributed to a long list of reasons why investing alongside a CVG can be unattractive to a VC. Here are some common VC concerns with CVGs:

Decision Makers.

In some cases, the CVC member on the deal is not the decision maker on the deal which causes a number of problems.  If a new player(s) from the CVG shows up at the 11th hour with new issues or questions, closings may be delayed for the round.

Shifting corporate strategies that cause an investment to be stranded, or worse, sold on the secondary market.

Corporate strategies shift in unforeseen way; but if that happens, the investment should be viewed as financial one at that point, and the corporate needs to continue its efforts to make the investment a success.

The importance of, but often lack of definition around, strategic value for a CVG investment.

More often than not some level of strategic value is required as part of the deal value for a CVG, yet figuring out what is sufficient strategic value can be hard for the CVG to define.

CVG values the corporate group, not the individual.

Turnover in CVC groups is historically higher than in VCs.  But deals are often syndicated with people you trust, respect and like working with.  Rotating people into the CVG can cause problems for the portfolio companies and members of the investment syndicate.

Despite these concerns, there are plenty of compelling reasons that CVGs and VC can, and should, work together to collaborate and co-invest in a mutually beneficial manner.  Here are some of the key benefits of CVGs working with VC partners:

CVGs can enhance their corporate strategy execution and augment their visibility into the emerging technology landscape.

Corporate partners can leverage VCs to create strategic advantage by embracing Open Innovation and extending the reach of existing corporate development activities, deal flow and innovation programs. Some Corporates have even elected to strategically “outsource” corporate venture investing activity to an experienced and well-connected VC team in order to realize the benefits without the overhead costs associated with starting and maintaining a CVG team.

A relationship-based approach with strong partnership focus is critical.

Mutual respect and trust will foster the collaboration mentality and will enable a deeper understanding of the strategic priorities & white spaces of the Corporate that will make the VC more effective in working with (and for) the CVG. Strong collaborative relationships facilitate knowledge sharing, which is invaluable for effective deal sourcing and serves to augment the Corporate partner’s visibility into highly-qualified, geographically diversified deal flow (e.g. the VC is a willing “technology scout” for the CVG).

Corporations without an organized CVG team can still opportunistically co-invest alongside VCs as well as other more established CVGs.

With an open innovation mind set, any Corporation can confidently invest alongside respected, professional VC and CVG co-investors and opportunistically “size-up” its investment on select deals of high strategic importance. Further, doing so provides a checks & balances approach to leveraging both VC and CVG discipline & process, which mitigates the risk of overvaluing the strategic importance of any prospective portfolio company. Finally, by leveraging a VC partner in the correct way, the Corporate is able to maintain an arms length relationship with a portfolio company at all times.

Understanding these pros and cons helped Coca-Cola and Forté Ventures develop a productive business relationship.  Forté Ventures, located in Atlanta and Menlo Park, is a VC that actively collaborates and co-invests with a large group of CVGs to identify the most innovative and promising technology companies to invest in throughout North America.  This model provides its limited partners with a risk-mitigated investment model because it leverages its CVG partners for what they are very good at – technology validation and market access, while at the same time providing reciprocal value to the relationship by serving as a technology scout for Open Innovation and often leading (or co-leading) deals, setting valuation prices and taking Board seats when many CVGs prefer not to take fiduciary Board positions.

As an example, Coca-Cola recently looked at an interesting start-up company whose goal is to democratize stock ownership for the masses, by providing a low-cost service – through a gift card business model – to own shares of publically traded companies, even fractional shares.  Coca-Cola had seen a company like this before, and had passed on a commercial and investment opportunity at that time, so when this new start-up came to us, it was hesitant.  However, as a trusted collaboration partner, Forté Ventures served as a due diligence reference point on them, and believed in their market approach and differentiation enough to make an investment in the company.  When Coca-Cola reached out to Forté Ventures as part of its diligence for a commercial relationship, it was  able to confirm what had been heard from the founders, as well as better understand the risks and opportunities as seen through the VC lens of Forté Ventures.  Coca-Cola’s commercial relationship with this company has now been signed, and soon The Coca-Cola Company stock will be available to everyone in gift card denominations as low as $1.

Collaborating together, The Coca-Cola Company and Forté Ventures  leveraged each other’s strengths, and let the differences create a constructive tension that facilitated thoughtful discussions and led both parties to the right business decision.  Only time will tell if this investment pays off for Forté Ventures and Coca-Cola, but we both believe that this pair is perfect.