By William Kilmer
Recently I have received several calls from start-up CEOs asking me for advice about taking an investment from a corporate venture investor. It’s no surprise that these calls are more common as Corporate Venture Capital (CVC) participation is at a 15-year high, with corporate investors in almost 24% of deals, and data shows that corporates are now investing more than ever in earlier stage deals.
Often, one of the questions CEOs ask is about what to expect with respect to the differences between a corporate VC and a traditional financial VC. While I might have answered the question with a direct comparison years ago, I recently came to the conclusion that we need to stop comparing CVCs to VCs and accept the fact that they are both very different, but important components to financing innovation, much to the benefit of start-ups.
However, Corporate Venture Capital (CVC) investors now have the ability to create tremendous competitive advantage compared to traditional venture investors. With more than 4,000 active venture capital or private equity funds in existence today, that differentiation is not only good, it is needed.
So how does a CVC create a sustainable competitive advantage? In A.G. Lafley’s book, Playing to Win, the former Procter and Gamble CEO introduces the concept of strategic advantage in three questions: Where will you play? How will you win?, and What capabilities are required to win? Corporate VCs, unlike the vast majority of financial VCs, can likewise use these questions to carve out for themselves a unique advantage in a sea of venture funding options.
“Where will you play?” refers to a narrowing of your scope to limit your competition. Most corporate investors, just by nature of their brand, receive hundreds or thousands of investment pitches per year, many of which are not in their scope of interest. So for any CVC, defining the market in which you will play is key.
Every corporate VC seems have an office in Silicon Valley nowadays, but where to play has little to do with geographic location and more to do with the scope of deals you are looking at and competing for, both in terms of industry and stage. While other VCs are open-ended, looking at any deal based in their network, there has been a recent counter trend towards smaller funds focused on specific industries or themes. Like focused funds, corporate VCs should focus their deal search in markets they know well, building off of corporate expertise, contacts, and network to add value.
Too many corporate venture investors invest in a company in an industry they don’t know about, and then don’t add value. If CVC organizations want to invest beyond the scope of where their corporation benefits (and they should), they need to be prepared to create domain expertise as an investment organization to add value, or not venture so far from their core.
A great example of an organization that expanded their area of play to its advantage is Qualcomm. Determining that robotics was an area of strategic investment interest, the company partnered with TechStars to create The Robotics Accelerator, a mentoring program that has resulted in at least ten robotics investments for Qualcomm to date. This has allowed Qualcomm to build a competency around robotics as well as use TechStars to create increase their competency in accelerators.
“How to win?” is closely related to where to play and refers specifically to what you will focus on doing in order to have an advantage over others in your market. If it’s the choice between you as a CVC investor and another strategic or financial investor, what actions do you focus on that would make you the investor of choice?
One way to win is by leveraging corporate resources and expertise to develop more domain expertise, creating a natural competitive advantage. This is particularly helpful at the scouting, assessment and due diligence stages. Intel Capital heavily utilizes engineering, sales and marketing resources for every deal, as well as contacts with many of Intel’s customers and service providers to validate an investment hypothesis. That created an incredible advantage for us in looking at deals.
Other CVC investors have created a how to win strategic advantage by the way they source deals. Several CVC organizations, for example, leverage research labs and university affiliations to source early stage opportunities. Others partner or establish incubators and/or accelerators to broaden their field of vision and tap into earlier stage opportunities.
Corporate venture organizations can and do create “how to win” advantages in other ways that help their portfolio investments through developing customer relationships, providing business development dollars, or giving investments access to corporate technical or sales resources, early access to platforms, and more.
The final step for CVCs is to determine what capabilities they need to have in place to support their winning strategic focus. While this may seem straightforward, the key is to focus a few core capabilities that, when intertwined, will make you distinctly interesting to your potential investments and for VC investors. For example, if you are going to win by providing superior due diligence and assessment of investments, it requires structuring relationships within your business units to access resources such as engineers and giving them incentives to assist in assessing the technology of a company you are considering for investment.
Other CVC organizations have invested in creating pools of marketing resources for their portfolio companies, or developed a competency in customer introductions. Whatever the competencies you develop, even though they may not individually be that distinctive, together they can form a unique and sustainable advantage for your CVC organization.
More than financial VCs, CVC organizations have a tremendous opportunity to leverage unique advantages to create a distinct value proposition for their portfolio companies and fellow venture investors. By embracing it, they can also create a winning strategy for themselves and source and invest in better deals for their corporation.