When I meet with people from large corporates, they’re often worried. And they should be. The tremendous growth in the innovation economy is partly driven by the opportunity VCs see for startups to eat the lunch of more established, stodgy companies. If you’re an executive at an established company, your job is to blow on the ice cube to delay melting as long as possible.
The challenge is how to disrupt yourself, or at least invest/buy the disruptors. I recently had a chance to interview Mari Joller, an expert on corporate innovation, on this topic.
Joller has been a serial intrapreneur for a large part of her career. Her past work includes heading Nokia’s location-based services business and app portfolio for emerging markets, which she built from a back-of-a-napkin idea to a 100-person organization with more than 10 million users. At Virgin Mobile USA, she led early initiatives in mobile commerce, social networking and advertising.
She is now building a new venture in human-machine interaction within the Samsung accelerator in New York, and which is currently in stealth mode. Most recently, she was co-founder and CEO of SNAZZ, a cloud-based event management platform.
Q: For a large corporate, what are the advantages and disadvantages of a dedicated fund (possibly with external investors) vs. a 100 percent on-balance sheet investor?
A: A lot of venture investing is done on the balance sheet, meaning there is no dedicated fund and investing is done more opportunistically. By contrast, dedicated funds are becoming more common.
Arguably a balance sheet investor has to be more mindful of her investment choices. A big investment that turns south or just takes a while to show momentum can set a negative tone for future deals. A standalone fund can arguably take more risk with a view to its portfolio’s overall performance.
In either case, corporations have to set up their investment vehicles so that the venture capital community sees them as serious players. This includes a consistent commitment to investing, a dedicated team and compensation like carry to attract top investment talent.
Q: How does a corporate VC fit into the overall VC landscape?
A: Corporate VCs participate in rounds with independent VCs and have to abide by the same rules. Some corporate funds lead rounds and take board seats, others don’t. A corporate investor can provide diversity on the board as someone who thinks differently from independent VCs.
Q: What are some of the benefits and constraints from the point of view of a founder?
A: Corporate venture funds are often referred to as strategic investors because of the unique benefits they bring to the table. Corporate VCs open the door to their parent companies and are well networked in their industries. Access to the corporate investor’s ecosystem can open up great opportunities from technology validation to customer and partner development.
However, founders shouldn’t take money from corporate VCs because of an exit expectation. Rohit Bodas, partner at American Express Ventures, says ‘Our investment strategy does not assume that Amex will want to be the acquirer for any of our portfolio companies. We never seek any rights to give Amex preferential treatment at the time of a potential acquisition. There is a possibility that Amex may explore acquisitions within the Amex Ventures portfolio, but those discussions will be on market terms similar to those with other potential acquirers.’
Q: How is the corporate VC model evolving?
A: Entrepreneurs today expect more than just capital from their investors. Urs Cete, the head of Bertelsmann Digital Media Investments, notes, ‘If you think you can provide just money, you will be disintermediated.’
Such expectations have spurred the growth of a new crop of independent venture funds, with notable examples like Andreessen Horowitz and First Round Capital. These funds provide their portfolio companies with a range of platform services like recruiting support and nurturing founder networks to support one another.
Corporate venture funds compete against their independent peers for the best deals by doubling down on their strategic benefits, mainly access to the operating units of their parent companies.
Corporate venture funds are also investing earlier today. They used to come in at Series B and later. Some corporate VCs even have seed funds. It comes as no surprise as technology today enables companies to prove product-market fit much earlier in their lifecycles.
Q: Entrepreneurs are asking more from their investors than just money. What do corporates offer entrepreneurs that independent VCs cannot?
A: Corporations have extensive resources that they can summon to support entrepreneurs. They have hundreds, if not thousands, of engineers, world-class design studios, subject matter experts from supply chain to manufacturing. Corporate venture groups are making it easier for startups to access this talent by setting up learning and co-working spaces on their premises. New York Times’ timeSpace is a good example. A large percentage of corporate venture funds’ portfolio companies end up having a commercial relationship with at least one of the corporation’s operating units.
Q: How do corporate VCs interact with the broader VC community?
A: Corporate VCs are at the table with all the other venture funds. They invest alongside financial VCs. Some corporate funds now lead rounds. Others follow independent financial lead investors and most require that independent investors be part of the syndicate. This sector has come a long way and matured a lot.
Q: What makes for a good vs. bad corporate venture investor?
A: Protecting one’s reputation is incredibly important for any investor, whether independent or corporate. In the past (and probably still today) there has been bias against corporate venture funds.
Two years ago, Fred Wilson of Union Square Ventures famously stated that he would never again invest alongside corporate VCs. He later clarified his statements and has done several deals with corporate venture funds since. Good corporate investors realize that a bias exists and avoid being a source of friction.
Good corporate venture investors don’t approach investments with a strategic investment mindset. They act in the interest of their portfolio companies like any investor would. This can mean protecting the portfolio company from their own parent company and the interests of operating divisions.
The term sheets of good corporate investors reflect the venture industry standards and don’t require special treatment like first right of refusal in case of a sale or operating agreements with their parent company’s divisions. No one wants terms that negatively impact the outcome.
The best corporate investors strive to move fast even in the face of more complex approval and due diligence processes imposed by their parent companies. Darcy Frisch, vice president at Hearst Ventures, says, ‘We are aware of the perception of our slowness. We have to respect the due diligence requirements of our parent company, but haven’t found it penalizing.’
Q: How do corporate venture funds help corporations innovate better?
A: Corporate venture funds are one of the most visible, but not the only mechanism to drive innovation at corporations. Internal R&D, labs, incubators, accelerators, corporate and business development, and M&A all play important roles in helping corporations innovate.
That said, corporate venture funds have a unique vantage point to facilitate knowledge transfer from the external innovation ecosystem to the parent company and its operating divisions. Corporate investors see a vast number of startups and deals, like any venture investor. They have deep insights into how technologies and markets are moving. They often get the first look into coming trends and disruptions.
That sets corporate venture funds up well to transfer knowledge to their parent companies.
This guest Q&A first appeared in affiliate magazine Venture Capital Journal, which is published by Buyouts Insider. Subscribers can read the full Q&A by clicking here. To subscribe to VCJ, click here for the Marketplace.
Photo illustration from Shutterstock.